What is a 'Conflict of Interest'

A conflict of interest occurs when a corporation or person becomes unreliable because of a clash between personal and professional affairs. Such a conflict occurs when a company or individual has a vested interest, such as money, status, knowledge or reputation, which puts into question whether they can be unbiased in their decision-making. When such a situation arises, the party is usually asked to remove themselves, and it is often legally required of them.

An example of a conflict of interest would be a board member voting on the induction of lower premiums for companies with fleet vehicles when he is the owner of a truck company outside of the corporation. In relation to law, 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.

BREAKING DOWN '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 his employer or the company in which he is invested. A conflict of interest arises when a person chooses personal gain over the duties to an organization in which he is a stakeholder. For example, all board members have fiduciary duties and a duty of loyalty to the corporations they oversee. If one of the board members chooses to take an action that benefits him at the detriment of the firm, he is harming the company with a conflict of interest.

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 owning an unrelated truck company, he would simply remove himself from all decisions that could positively or negatively affect his personal business.

Common Conflicts of Interest

Self-dealing is the most common conflict of interest and occurs when a management-level professional accepts a transaction from another organization that benefits the manager and harms the company. Gift issuance is also a very common conflict of interest, for instance, when a corporate manager or officer accepts a gift from a client or similar type of person. Companies normally circumvent this issue by prohibiting gifts from clients.

Conflicts of interest can arise when confidential information is collected by a company. Any information of this type used for personal gain by an employee is a huge conflict of interest. Finally, the hiring of a relative or spouse can result in a potential conflict of interest, which is known as nepotism.

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