Board meeting to discuss conflict of interest policy.
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May 16, 2019
    Article highlights
  • How a written conflict of interest policy helps protect your organization.
  • Elements of an effective conflict of Interest policy.
  • Getting started.

You might see conflict of interest cases grabbing attention in the news with salacious headlines of wrongdoing.

But what does conflict of interest actually mean, and how does it negatively impact businesses and organizations?

Simply put, conflict of interest refers to situations where the personal interests of employees, board members, or even contractors might go against that of the organization they work for, putting the company at a disadvantage.

That means they might do something that somehow undermines your organization. With mutual trust as the foundation of the company-employee relationship, your organization should rightly expect employees to act in its best interest.

When conflict of interest does occur, it can erode public and internal trust, damage the organization’s reputation, hurt the business financially, and in some cases, even break the law.

This issue impacts organizations across the board – non-profits, public sector, and private sector.

While you might think conflict of interest applies only to people who serve on an organization’s board of directors, it really can occur at any level of the organization, including part-time and hourly employees and contractors.

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Types of Conflict of Interest

With a clearer definition of conflict of interest, it might help to see some concrete examples in action.

Scenario #1: Perhaps the most obvious type of conflict of interest occurs when a manager or supervisor has a relationship with a subordinate, whether it is a romantic relationship, family member, or close friend. When managers have the authority to give promotions, performance reviews, or even assignments, that personal relationship could impact their judgment and decision-making. This can also hold true for relationships with vendors, contractors, or other suppliers if managers or supervisors make the purchasing decisions.

Scenario #2: Another conflict of interest happens when an employee starts, works for, or even moonlights for a business that is a competitor or that serves a similar customer base.

Scenario #3: Sometimes conflict of interest comes into play regarding employees or board members hold investments in a competing company. Again, this might happen at the board level (perhaps someone who also owns another company), but it can also hold true for lower-level employees who simply own stock in competitors.

As you can imagine, the types of conflict of interest can show up in a variety of ways in organizations of all sizes.

How a Written Conflict of Interest Policy Helps Protect Your Organization

To address potential conflicts of interest, your company should create a policy that governs situations where employees, or others acting on behalf of your company, personally benefit from actions that contradict the company’s best interests.

When you think about the reason you have any written policy, you put it in place to help protect your company.

The same can be said for having a conflict of interest policy in writing. It creates clear expectations for everyone, including board members, employees, contractors, vendors, etc.

A conflict of interest policy also defines key terms to ensure nothing is left to interpretation. Finally, it also creates pre-defined procedures to follow in the event your organization does need to handle a conflict of interest that arises.

Before there is a problem

The best approach to avoiding conflict of interest lies in the prevention stage. Rather than waiting until a problem arises and dealing with it reactively, you should have a conflict of interest policy in place from the start.

From a risk-management perspective, when you inform an employee that your company prohibits a specific action, this gives you more leverage to act if and when the person violates the conflict of interest policy.

Plus, it helps avoid any potential embarrassment by taking a proactive approach and putting you more in control. This is especially true in the public/non-profit sector where trust is paramount.

Two employees look at their company's conflict of interest policy on their computer.

Signed by all employees

Simply having a company conflict of interest policy does not mean that employees see it on their first day and then never see it again.

Too much happens and too much changes throughout an employee’s career to leave this to a few pages in an orientation manual or employee handbook.

Your workers need to not only understand what the expectations are regarding potential conflicts of interest but they also need to agree to them in writing.

Clear remediation steps

From a risk management perspective, laying out these steps ahead of time (and getting employee agreement), covers a huge number of bases on the protection front.

Beyond clearly outlining expectations and prohibited activities, your employee conflict of interest policy must delineate the steps your company will take if the policy is violated.

That might mean a warning, a fine or penalty, or more severe disciplinary action, depending on the circumstances. But when you put the remediation steps in writing, it takes the guesswork and randomness out of the process. Moreover, it protects you from potential legal action by the employee.

Elements of an Effective Conflict of Interest Policy

Not sure what to include in a conflict of interest policy? Use this list of key elements as a guideline.

Definitions and prohibitions

While clearly outlining expectations, definitions, and prohibitions play a key role in every good policy, it is even more important when creating a conflict of interest policy. A one-size-fits-all template will not work here, as you need to clearly spell out whatever your specific company considers a conflict of interest.

You get to define what these activities are for your context (which proactively puts you in control), but you need to put them in writing. Compared to many of your other policies, this “definitions and prohibitions” section will likely be longer because you want to spell everything out as clearly and comprehensively as you can.

Specific examples, situations, and scope

To supporting the definitions and prohibitions, the policy should also include specific examples of what your company considers a conflict of interest and where the scope of the policy begins and ends. You can make this part of the definitions/prohibitions section or you can give it a separate section entirely.

The key? Providing real-world context so employees can visualize exactly the types of conflict of interest your policy addresses.

If you conduct any conflict of interest training, you will want to reinforce the concepts even more with relevant, specific examples so employees can picture what this means for them. Training to your policies is the way to go, as the examples you use should be specific to your company and your conflict of interest policy, not some generic situations or irrelevant examples.

Covered persons

Not every person is covered by every part of the policy, so it should clearly explain to whom it pertains. And remember, your policy can apply to employees, board members, independent contractors, freelancers, and anyone who acts on behalf of your organization.

For example, if only the Board of Directors cannot invest in a competitor, the policy should clearly state that. Similarly, is it just managers who cannot be in a relationship with a direct subordinate, or do you not even want two people on the same team or section in a relationship?

Do not leave employees guessing here with ambiguous phrasing. Spell out the specifics of which part of the conflict of interest policy covers which group of people.

Disclosure procedures

If you do not yet have a company conflict of interest policy, you need to provide an avenue for employees to self-disclose potential conflicts of interest, especially in the initial policy roll-out phase. During this time, these disclosures should (for the most part) be consequence free.

However, if employees disclose a major conflict of interest, like a controlling interest in a competitor or romantic relationship with a direct report, then you will likely need to take some action.

You should handle self-disclosures with less severe consequences (if they warrant any at all) since employees are making a forthright effort to be honest and transparent.

However, your conflict of interest policy (and accompanying procedures) should clearly explain how self-disclosures will be reviewed and handled. Again, leave nothing to surprise.

Procedures for handling discovered conflicts

When someone does not self-disclose a conflict of interest, the policy should clearly explain the process (and consequences) of concealing this information. If a conflict is discovered by someone else rather than through self-disclosure, then the consequences should likely be more severe.

You might want to include a separate whistleblower policy, now required by law for most companies. This policy covers how employees should report suspected conflicts of interest in others (especially their superiors).

Consequences

Whether self-disclosed or discovered by others, conflict of interest needs to have some kind of consequence. Ideally, the policy should outline escalation steps.

For example, a first-time violation yields a warning with 90 days to comply, a second offense yields a fine, and a third breach ends with suspension.

Clarity is your friend here, as the disciplinary action shouldn’t be subjective or arbitrary. Specify every consequence in the policy.

Oversight or review board

Because so many types of conflict of interest exist, they are rarely cut-and-dry situations. That is why your company needs some kind of oversight committee, person, or review board to make final decisions on the matter.

Your corporate conflict of interest policy should clearly define who that is, what their authority is, and when a matter will come to their review. While they still need to follow the prescribed consequences and procedures in the policy, they can help determine if, in fact, an action is a conflict.

Plus, they can decide if the person deserves some latitude in the severity of consequences, especially if the conflict was self-disclosed.

Employee reads his company's conflict of interest policy on a tablet.

Confidentiality and proprietary information

If you don’t already have a separate, dedicated policy that covers confidential information or intellectual property, your conflict of interest policy provides a good place to include this key area.

Namely, the policy should point out that employees cannot use company information, client lists, equipment, or other proprietary information outside the scope of their job.

For instance, they cannot take a client list to help them in their part-time job, or they cannot use the company’s marketing plan for other consulting work.

Where to Begin

Now that you understand what conflict of interest means, how a dedicated conflict of interest policy protects your organization, and the key elements to include, what next?

Creating and implementing this vital, risk-management document means you need a central location to store, distribute, and track your conflict of interest policy.

Using a solution like PowerDMS checks all those boxes. Our cloud-based software allows you to track electronic signatures on policies, as well as keep a detailed revision history if you ever need to prove that an employee has read/received this information.

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