What Is a Conflict of Interest?

A conflict of interest occurs when an entity or individual becomes unreliable because of a clash between personal (or self-serving) interests and professional duties or responsibilities. Such a conflict occurs when a company or person has a vested interest, such as money, status, knowledge, relationships, or reputation, which puts into question whether their actions, judgment, and/or decision-making can be unbiased. When such a situation arises, the party is usually asked to remove themselves, and it is often legally required of them.

Key Takeaways

  • A conflict of interest occurs when a person's or entity's vested interests raise a question of whether their actions, judgment, and/or decision-making can be unbiased.
  • In business, a conflict of interest arises when a person chooses personal gain over his duties to their employer, or to an organization in which they are a stakeholder, or exploits their position for personal gain in some way.
  • Conflicts of interest often have legal ramifications.

Understanding a Conflict of Interest

A conflict of interest in business normally refers to a situation in which an individual's personal interests conflict with the professional interests owed to their employer or the company in which they are invested. A conflict of interest arises when a person chooses personal gain over the duties to an organization in which they are a stakeholder, or exploits their position for personal gain in some way.

All corporate board members have fiduciary duties and a duty of loyalty to the corporations they oversee. If one of the directors chooses to take an action that benefits them at the detriment of the firm, they are harming the company with a conflict of interest. One example might be the board member of a property insurance company, who votes on the induction of lower premiums for companies with fleet vehicles—when they in fact own a truck company. Even if the institution of lower premiums isn't a bad business move for the insurer, it could still be considered a conflict of interest, because the board member has a special interest in the outcome.

In legal circles, representation by a lawyer or party with a vested interest in the outcome of the trial would be considered a conflict of interest, and the representation would not be allowed.

A conflict of interest may lead to legal ramifications as well as job loss. However, if there is a perceived conflict of interest and the person has not yet acted maliciously, it's possible to remove that person from the situation or decision in which a possible conflict of interest can arise. Using the prior example of a board member who owns a truck company, they could simply remove themselves from all decisions that could positively or negatively affect their personal business.

Common Types of Conflicts of Interest

Self-dealing is the most common type of conflict of interest in the business world. It occurs when a management-level professional accepts a transaction from another organization that benefits the manager and harms the company—or the company's clients.

Gift issuance is also a very common conflict of interest: It happens when a corporate manager or officer accepts a gift from a client or a similar type of person. Companies normally circumvent this issue by prohibiting gifts from customers to individual employees.

A financial advisor who knowingly advised her clients to purchase financial products that were not in their best interests (too expensive, too risky, or not in line with stated goals), but that did earn her a bigger commission, would be guilty of a conflict of interest.

Troublesome situations can also arise when, in the course of professional duties, an individual collects confidential information. Any information of this type used for personal gain by an employee is a huge conflict of interest, at least in the U.S.; the financial industry grapples with this type, in the shape of insider trading, constantly.

Finally, the hiring of, or showing favorable workplace treatment to, a relative or spouse— known as nepotism—can result in a potential conflict of interest.