The importance of a Conflict of Interest Policy and why you need one

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Conflicts of interest are more common than you think and can create several unnecessary problems for your business. Conflicts of interest can be complex, and there are a variety of reasons one can occur.

This resource explains what a conflict of interest is, what can cause it and how to navigate it.  Most importantly, we’ll discuss how to create a conflict of interest policy so that you can protect your business and its interests.

What is a conflict of interest?

A conflict of interest is a situation in which a person or organisation is involved in multiple interests, financial or otherwise, and serving one interest could involve working against another. Conflicts of interest tend to affect the responsibility owed to make the right business decisions at the expense of another party.

A conflict of interest could arise from a new business deal, part-time employment, pursuing a new market or product offering, amongst several other possibilities. In other words, any new employment, a business transaction, or a business contract can lead to a conflict of interest, and such, it is essential you do your due diligence.

Interest is a commitment or a goal associated with a particular role or practice. On a personal level, when individuals occupy more than one role, a conflict of interest may arise. On a business level, conflicts may arise when businesses serve multiple clients that may be directly or indirectly competing with one another.

A conflict in its essence does not necessarily indicate unethical practice or illegal conduct; however, if not dealt with appropriately, it can spiral into complex issues for your business that may require legal intervention.

Levels of Conflict

Here is an example to help you understand the different levels of conflict:

Example:

Your business provides mentoring and coaching services to athletes. You work with various athletes across different sports to help them improve their performance and achieve their team goals.

Potential Conflict

A Potential conflict arises where there is no current and tangible conflict of interest, but someone anticipates it to happen in the near future.

Potential Conflict Scenario:

One of your clients plays for team A. Your business is contacted by team B to coach one of their athletes. Team A and Team B play in the same league and compete against each other. By working with both athletes/teams, you anticipate a potential conflict of interest because your work involves sharing sensitive information to your clients about how to deal with their competitors.

Actual Conflict

Actual conflict arises when the conflict of interest has materialised and is affecting your ability to serve both interests equally.

Actual Conflict Scenario:

Your assistant wasn’t aware of the potential conflict and has signed up with the athlete from team B. Now you are faced with the dilemma of having to coach and serve both clients. Eventually, you come to the conclusion that you to drop one of them.

Perceived Conflict

Perceived conflicts occur when there is no actual existing conflict or a potential conflict, but someone is under the impression that there is.

Perceived Conflict Scenario:

One of your employees is a friend of an athlete who competes with another athlete who is considering signing up with you. The prospective client is aware of that and is worried that your employee’s relationship with the other athlete might cause a conflict of interest.

Why is it important to have a conflict of interest policy?

Successful business relationships require mutual trust. If you’re unable to quickly identify and address potential conflicts, that trust can be lost, or at the very least, questioned.

One of the best ways to deal with conflicts is to create a Conflict of Interest Policy that clearly outlines how your business resolves these issues.

Benefit #1 – Increases Trust

A major benefit of having a Conflict of Interest Policy is that it gives your customers certainty that their interests will not be compromised if they do business with you. It’s essentially a commitment by your business towards your clients and helps you build trust and your reputation.

Benefit #2 – Removes Subjectivity and Streamlines Decision Making

Another benefit of creating a Conflict of Interest Policy is that it simplifies the resolution process in the event a conflict arises. At times, we can be subjective and influenced by external circumstances. Having a policy in place removes subjectivity and allows you to make the right decision in an objective manner.

Benefit #3 – Minimises Legal Risks

And finally, a Conflict of Interest Policy will ensure that your employees and key decision-makers in your business have a framework to adhere to when they are unsure how to navigate a conflict. This will help minimise your legal risks and protect your business.

How to create a conflict of interest policy?

Every business is different, and so, a conflict of interest policy is generally quite personalised and tailored to suit your needs. To create an effective conflict of interest policy, we recommend you follow these principles.

Define the objectives and goals

When creating such a policy, it’s important to start by defining what you aim to achieve. These could be:

  • To give employees and decision-makers guidelines on how to navigate conflicts
  • To guide HR teams on hiring and employment contracts
  • To protect existing clients and to ensure their interests are not compromised
  • To portray to prospective clients that your business is trustworthy

Make it simple and clear

It is essential that you clearly define and detail all areas of potential conflict so as to avoid any confusion. When possible, avoid complex jargon and terminology within the policy. This will ensure your policy is easily understood and followed across the organisation.

In addition, include examples and scenarios that elaborate on the rules and procedures outlined in the policy.

Outline processes and procedures

Your policy should outline the processes and procedures clearly so that when a potential (or otherwise), your employees know how to resolve it. 

Further, you should clearly outline the potential consequences and courses of action that your business will need to take should a conflict arise. For example, what will happen if one of your employees started a side business or a part-time job that resulted in a conflict with your business?

Takeaway

Conflicts can happen at any time and anywhere, often when you least expect them. That’s why you should always be prepared for conflicts in order to safeguard your business now and in the future. As has been discussed above, one of the best ways to mitigate conflicts is by creating and adhering to a conflict of interest policy.

If you require help creating a conflict of interest policy, our expert business lawyers are one call away. Get in touch or call us at 02 8644 6000, and we’ll be happy to discuss all your legal requirements.

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Mark Lazarus

Mark Lazarus

Mark Lazarus, the visionary behind the business and the fresh blood of the Lazarus Legal team, Mark (or Laz as he is often known) owes much of his success to his past experiences. And he’s made it his personal goal to bring that wisdom and formula to the firm.

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The importance of a Conflict of Interest Policy and why you need one