A conflict of interest policy may be the last thing on your list if you’re in the midst of building a business from the ground up. But as your company develops and your staff numbers increase, so too does the risk of a conflict of interest arising, undermining your organisation, and putting its reputation at risk. Read on to discover why having a conflict of interest policy will benefit your business, and learn more about putting together a policy so that it becomes part and parcel of your employment law processes and protects you from any potential risk.
What constitutes a conflict of interest?
A conflict of interest is where an individual’s ability to apply judgement or act in one role is, or has the potential to be, impaired, biased, or influenced in some way by a competing interest. The perception that there are competing interests or undue influence can also be a conflict of interest.
A conflict of interests is often caused by an individual’s personal interests in a matter being opposed to their professional interests and can happen when an individual or organisation can exploit their role in return for a benefit.
Whistleblowing or being a member of a professional body or trade organisation are not a conflict of interest.
Are there different types of conflict of interest in a corporate setting?
Conflicts of interest can be split into categories:
- Personal relationships: If an individual has a close personal relationship with a person or people who engage with your business through another organisation, this is a conflict of interest.
- Pecuniary interest: Where an individual might receive a financial interest, or a commercial entity in which the individual holds an interest.
- Procurement interest: Where individuals have relationships with a company that has or may bid for work for your business. There can still be a conflict of interest even if the relationships are past ones, as there may still be bias.
- Gifts and hospitality: Some low value gifts as a token of appreciation for work carried out are acceptable and reasonable in the circumstances. However, if a gift appears to be overly generous (and particularly if mentioned prior to a decision being made) this may be considered a reward for an individual exercising their judgment in favour of that other person or organisation. It could also be considered an inducement to act in a certain way in their favour again in the future, creating a potential conflict of interest.
- Employment interest: If an individual is involved in recruitment, potential conflicts can arise if the staff member involved has additional, outside interests and their own agenda, which may not be in the best interests of the business. Recruitment must be transparent and objective and should preferably involve more than one individual.
How about directors and conflict of interests?
Directors are specifically regulated by the Companies Act 2006 in respect of conflicts of interest, and this is far wider than was the case in the past. Directors must avoid a situation where they have, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company.
In addition to this, directors have a duty to declare to the board the nature and extent of an interest the director has in a proposed transaction or arrangement, before the company enters into the transaction.
This is only if:
- The director is aware of his interest and the other directors are not.
- The director is aware of the company's transaction or arrangement before the company enters into it.
- And if the interest is likely to give rise to a conflict.
A director must also declare to the board the nature and extent of an interest in an existing transaction or arrangement as soon as is reasonably practicable. Failure to make a declaration under this section is also a criminal offence.
Directors must not accept a benefit from a third party which is offered either because he is a director or to influence him to do, or not do, something as a director. Director’s have a duty not to accept benefits from third parties unless this could not reasonably be seen as something likely to give rise to a conflict.
How to effectively manage and mitigate conflicts of interest
Whilst it may be difficult to prevent conflicts of interest from happening altogether, how these are dealt with if they do arise is critical. Here are some pointers for dealing with conflicts of interest in your business:
- Promote high ethical standards. It is a good idea to prioritise training in this area so that employees are clear that they must always act with the highest level of integrity and this is the culture of your business.
- Ensure that you have a clear, comprehensive yet precisely drafted conflict of interest policy. If you would like us to review or draft a conflict of interest policy, please contact our experts.
- Ensure that your staff have read and understood your business’ conflicts of interest policy and know how to identify and report conflicts, by talking to their line manager, or nominated staff in HR or compliance team, if applicable. Any evidence of criminal or unlawful activity, should be reported to the police or relevant regulatory authorities.
- Make the system for declaring conflicts and potential conflicts as well as registering gifts and benefits, easy. All staff should declare all private, personal, and financial interests relevant to decision-making, management of contracts and giving policy advice, regularly.
- Make sure that the conflict detection mechanisms are suitable and proportionate for your business. This might include whistleblowing arrangements, external audits, and regulator checks.
- Your business should also have proportionate and enforceable sanctions for non-compliance in respect of conflicts of interest.
What you need to know about putting together a conflict of interest policy
A clear conflict of interest policy set out in writing, as a standalone policy or as part of a staff handbook, is advisable in order to explain to employees what a conflict of interest is and the process to follow if a conflict occurs. This should, when complied with alongside other employment policies, protect your business from bribery and corruption.
When you are putting together a conflict of interest policy, you should make it easy to understand and where possible provide practical examples of the types of conflict which might arise in your specific business.
You should set out exactly what you expect from employees, so that there can be no misunderstanding at a later date. This should include stating that staff must maintain the highest possible standard of integrity, reject any business practice which might appear improper, never use authority or position for personal gain, and act with impartiality, independence and not breach these principles, meaning that a detriment to your business’ reputation might be the result.
Your conflict of interest policy should make clear when a disclosure is required, how to properly make a disclosure and to whom. If an employee requires any clarification about the conflict of interest policy, there should be a point of contact set out in the policy.
If the policy is not complied with you should advise in writing the consequences for employees. Failure to comply with such a policy is likely to result in disciplinary action and/or legal action being taken, depending on the circumstances.