Conflicts of Interest: What are they and how to spot them?
On September 12th, 2019, Silicon Valley giant Apple Inc. disclosed in a report to the SEC (Securities and Exchange Commission) the resignation of its director, Robert (“Bob”) Allen Iger. The reason? Bob Iger, while serving on Apple’s Board of Directors, was also CEO of The Walt Disney Group.
At first glance, Bob’s position in the two companies would not have been a cause for concern, as they both operated in different industries. However, within two months of his resignation, Apple would launch Apple TV+ and Disney would launch Disney+, both streaming services which would turn the companies into competitors.
As you can imagine, Bob’s position at the executive table of two giant companies on the same playing field would not have been ideal for either of the businesses — he would play conflicting roles. As Disney’s CEO, Bob’s interests could have been different than those from other Apple board members and vice versa. Additionally, while having access to strategic information about Mickey Mouse’s streaming platform, Bob would as well have access to equivalent information regarding Apple TV+.
Left with no choice, Bob resigned from his position at Apple on the day the launch date and price of the company’s streaming service was announced. This case is a relatively recent episode of what is known as “conflicts of interest”, which are fairly common in the corporate environment and are harmful to the health and integrity of anybody’s business. Fortunately, in the case presented, due measure was taken: Bob’s resignation from Apple’s board before the conflict materialized.
However, companies do not always act accordingly to prevent a conflict of interest from becoming an even greater problem for the company further ahead, as we’ll get to see in this article.
What is a conflict of interest?
It is essential to understand the term conflict of interest as the discussion around it has been increasingly intensified in the corporate environment. A conflict of interest is understood as a “situation where business, finance, families, political or personal interests may interfere with the judgment of people in the exercise of their obligations to an organization”.
In other words, conflict of interest occurs when the decision-making process fails to follow ethical standards and the pursuit of the company’s best interests and begins to prioritize the individual needs of an employee or even of third parties, be it for financial gain or other reason.
There can be several examples and types of conflicts of interest, such as:
- Employees who hire family members as suppliers or service providers for the company;
- Employees with a degree of kinship or intimate relationship under the same chain of command;
- Employees who accept gifts, gifts or hospitality from third parties during a negotiation or hiring process; and many others.
How common is a conflict of interest?
Talking about this topic is extremely important, as the conflict of interest may often not be understood by employees as something harmful to the company. According to a survey carried out by the Brazilian Behavioral Risk Research Institute (IPRC Brazil) in 2020, a significant number of professionals have a high to moderate risk of falling into situations of conflict of interest, such as receiving bribes or gifts for personal gain.
In the same survey, approximately 17% of respondents said they usually put their personal interests above the interests of the company where they work. Furthermore, in certain situations that are conflicting, such as hiring relatives as suppliers, 40% of the participants highlighted that they do not perceive the existence of a conflict of interest. Another important fact from this research shows that 45% of people would accept undue payment from suppliers in exchange for facilitating the hiring process or even access to the company.
Unquestionably, all the attitudes aforementioned are extremely harmful to the image and credibility of any company, as a company’s reputation is something very valuable. Further than that, we can look at extreme examples of conflicts of interest that have led to the demise of organizations, such as the agency problem that caused the Enron scandal in 2001. In other words, it is essential to mitigate and prevent unethical and conflicting conduct that could generate damage of different natures to an organization.
The case of IRB Brazil
In 2020, IRB, a company that operates in the reinsurance sector, faced several problems and losses, both financial and reputational, due to its involvement in an episode of conflict of interest related to the company’s corporate governance.
The case began when the asset manager Squadra Investments, which profits through short-selling operations (i.e. when share prices fall), published a letter pointing out accounting flaws and questioning certain IRB profits. IRB defended itself against speculation and accused Squadra of insider trading, that is, of using privileged information given that Squadra had invested in shares issued by IRB.
In addition to being involved in a possible fraud scandal, IRB, chose not to openly clarify the case to the market, preferring only to prove itself to its clients. This position compromised the transparency of information, an attitude that can be considered irresponsible in terms of company governance as it raised more questions about IRB’s integrity and ethics. Consequently, IRB’s share price fell, causing financial losses to the organization.
Furthermore, in the same year, leaders of the IRB organization stated that Berkshire Hathaway, a holding company that belongs to Warren Buffet, was a shareholder of the company. However, it was later disclosed by Berkshire Hathaway that this was a false premise. This episode further contributed to the fall in the share price and, later on, to the departure of relevant members of the organization.
In May 2020, the Brazilian Securities and Exchange Commission (CVM) opened an investigation into the IRB’s situation with regards to accusations of fraud, potential conflicts of interest and the lack of transparency in the disclosure of information. As a result of the scandals, the company faced difficult periods and suffered losses that led to it nearly going bankrupt.
How to identify a conflict of interest?
The need to understand and avoid any and all conflicts of interest is clear, as they can cause significant damage to any organization, no matter its size. For this reason, whenever you are faced with a potentially conflicting situation, critically analyze it by asking yourself:
- Did the decision-making process take place in a fair and transparent manner?
- Was the decision influenced by favoritism, nepotism or preferential treatment?
- What are the consequences of this decision for the company?
- Could the decision cause any harm to the company (e.g. reputational or financial)?
- Do I feel comfortable sharing the facts with everyone in the company?
- Is the decision in line with the company’s internal policies and regulations?
If the answer to any of the questions is suspicious, it is worth talking and exposing your questions to other areas or people in the organization, such as your Manager, the Human Resources or Compliance team. It is important that all decisions take place in a transparent and complete manner, in order to avoid unnecessary situations and risks and, consequently, losses to the organization.
Finally, by learning more about conflicts of interest and how to avoid them, we become true agents of change in the company, and thus help build and spread an ethical culture.