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SCRC Article Library: Conflict of Interest – A Hot Topic!

Conflict of Interest – A Hot Topic!

Published on: Jul, 21, 2004

by: Rob Handfield

SCRC

With the increased focus on ethical behavior, more and more companies are examining their conflict of interest policies, especially as they relate to procurement. When an individual is hired by a company as an employee, officer, or member of the board of directors they enter into a fiduciary relationship with the company. A fiduciary relationship is defined as a relationship that exists when one party agrees to perform assigned tasks for the benefit of another. This relationship is founded on trust and confidence. Once engaged in a fiduciary relationship, the parties are governed by fiduciary duties. Fiduciary duties require individuals to place the interest of the company above their own personal interests, fully disclose potential conflicts of interest, and abstain from activities that may pose a conflict of interest (1).

In order to address the issue of fiduciary relationships, most companies include the topic of conflict of interest in its corporate code of ethics. These policies are customarily a part of the company’s overall ethics policy. The definition of conflict of interest varies slightly from company to company depending on the industry or industries the company operates in. A general definition for conflict of interest is the involvement in any activity that would create discord between an employee’s personal interests and the interests of their employer (2). It is also important that employees, directors and members of the board of directors avoid any activity that may be perceived as a conflict of interest even if a conflict of interest does not technically exist.

Potential conflicts of interest
Conflicts of interest can occur in many different areas of the business and can vary depending on the type of industry in which the company participates. The most common cases of conflict of interest occur when engaging in procurement decisions, consulting activities, and the use of company resources and services. There are numerous instances in which the potential for conflicts of interest exist. Several situations that pose potential conflicts of interest are listed below.

Giving/Receiving gifts- The giving and receiving of gifts has the possibility to be perceived as a conflict of interest. It is important that individuals who receive gifts that are outside of the boundaries set forth by the company to decline the gift.
Family/Personal Relationships- The issue of family and personal relationships typically arises as a potential conflict of interest in procurement activities. Questions are typically raised when a corporate buyer selects a family member as a supplier of a good or service for the corporations.
Investments- If an employee is a buyer for a corporation and is also an investor in a company who is a supplier for goods and services to that same corporation a potential conflict of interest arises. While this may not produce a direct conflict of interest, it is important that employees avoid any situations that may have the appearance of a conflict.
Use of company resources- In general, it is inappropriate to use company materials, equipment, or services for any non-business related activities.

The activities listed above are a selection of the primary situations where conflicts of interest typically occur. Each company must evaluate the environment in which they operate in order to determine industry specific situations that may arise.

Reporting procedures
In a recent study completed by MBA students in Fall 2003, the team discovered that companies are using a variety of means to police unethical behavior using reporting procedures. The companies we interviewed typically used three methods for reporting potential conflicts of interest:

Self-reporting: This is the preferred reporting method for all of the companies interviewed. This process relies on employees to report any potential conflicts of interest that they may face. This is typically a verbal notification system between an employee and his supervisor. Only one company that we spoke with had a written form that employees fill out when they perceive a potential conflict of interest. One company interviewed required employees to update their conflict of interest situation once per month. This provided them with up to date, reliable information from each of their employees.
Ethics hotline: The use of an ethics hotline was common practice among the companies that we spoke with. These hotlines allow employees to anonymously report when they observe fellow employees or management engaging in unethical behavior. These hotlines encompass all unethical behavior, not just potential conflicts of interest.
Internet/email: One company we interviewed had developed an anonymous reporting system vie email or internet submission. Employees have the ability to report conflicts of interest or any other unethical behavior to an email account, which allows the reporter to be anonymous. Reporting can also be performed via the ethics website.

Whatever the method, companies should periodically re-visit their conflict of interest policies, and update the means used to track adherence to these policies.

Sincerely,

Rob Handfield

References:

(1) Baumer and Poindexter. Legal Environment of Business in the Information Age. McGraw-Hill. 2004.

(2) “Principles and Standards of Ethical Supply Management.” Institute of Supply Management.

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