A conflict of interest can pose a serious risk to a business. If an individual’s personal interests conflict with their professional obligations, a business’s success can be compromised. If a conflict of interest has affected your business, or if you have questions regarding whether something constitutes a conflict of interest, contact a Houston business litigation attorney at Feldman & Feldman for guidance.
What Constitutes a Conflict of Interest in Business
A conflict of interest occurs when a person’s personal interests conflict with or compromise their professional interests or duties. Such a conflict can impede their ability to carry out their professional obligations. A person who acts or refuses to act on their conflict of interest is a risk to the business.
Duties of Principals in Businesses
Individuals who act on behalf of a business have specific duties to the entity they serve. They have fiduciary duties and duties of loyalty to the company. If they fail to obey these duties, and instead take actions that benefit themselves at the expense of the company, a conflict of interest exists.
A fiduciary duty is a person’s legal responsibility to act in the best interest of another party. Examples of business relationships in which fiduciary duties arise include the relationships between companies and their stockholders, attorneys and their clients, financial advisors and their clients, and employees and their employers, among others. Fiduciary duties include duties of care, good faith, confidentiality, prudence, and to disclose.
A duty of loyalty is a company executive’s responsibility to act in the best interests of their company. In other words, they cannot seize business opportunities for their personal gain. They must also keep any confidential business information of which they have knowledge private.
Types of Conflicts of Interest in Business
Conflicts of interest in business generally fall into three categories, including financial, non-financial, and a conflict of roles. These types of conflicts of interest in business are explained more in-depth below.
Financial Conflict of Interest
Financial conflicts of interest in business involve actual or potential financial gains or losses and can include self-dealing and / or insider trading. Self-dealing occurs when individuals at the top of a business’s hierarchy conduct transactions for their personal benefit. Insider trading occurs when an employee or other party with confidential business information sells that information to people outside the company.
Non-Financial Conflict of Interest
Non-financial conflicts of interest in business typically stem from family or personal relationships and include nepotism and / or the giving or receiving gifts. Nepotism occurs when a company employee who holds a position of power gives an unfair advantage to someone with whom they share a personal relationship. Giving or receiving gifts can become a conflict of interest when it interferes with the employee’s professional responsibilities.
Conflict of Roles
A conflict of roles occurs when a business employee simultaneously works for another company with competing or conflicting functions. The decisions they make at one company can have ramifications for the other. In some instances, these ramifications can negatively affect the interests of one of the businesses.
Examples of Conflicts of Interest in Business
As discussed above, there are many ways a conflict of interest can arise in business. They can occur at all levels. Examples of conflicts of interest in business include the following:
- An executive or employee uses information learned in a company meeting to influence their personal investment decisions
- An employee owns or runs a competing company
- A company leader uses business connections to advance their personal business career
- A hiring manager offers an employment position to their relative or friend, despite the individual not being as qualified other applicants
- A financial advisor advises their clients to purchase a product that is not in their best interest simply to earn a larger commission
- A company director sells their shares in the company immediately prior to the publication of its quarterly report showing losses
- A company executive accepting gifts from a competitor’s employee
- An executive awarding a contract to a company in which they own stock
- An employee sharing confidential information with another party in exchange for payment
- A manager participating in a romantic relationship with a subordinate
- A bookkeeper using company funds for their personal use
What Should be Done When a Conflict of Interest Arises in Business
If a conflict of interest arises in your business, the person with the conflict should immediately reveal it to the proper parties. Then, that individual should be removed from any decision-making processes dealing with the particular issue to which the conflict of interest applies. Typically, the person with the conflict does not need to be removed from their role in the business completely, but rather they only need to be recused from making decisions regarding that particular issue.
Ways to Avoid Conflicts of Interest in Business
Conflicts of interest in business can cause many challenges for a company. In some instances, they can even lead to legal ramifications. It is important to avoid conflicts of interest, when possible, in the following ways:
- Identify any potential conflicts of interest as soon as possible.
- Avoid making business decisions because of an individual’s benefit.
- Conduct training for executives and employees regarding what constitutes conflicts of interest and how to avoid them.
- Create a clear corporate policy addressing conflicts of interest.
- Expand awareness regarding any circumstances that may raise a conflict of interest.
- Consider hiring an independent third party to make certain decisions on behalf of the company.
Avoiding conflicts of interest is important in protecting a company from increased risk, a toxic work environment, and potential legal action. However, sometimes conflicts of interest are not timely identified or avoided, and business executives must then determine how to best deal with potential consequences.
It may be in the best interest of your business to consult with a Houston commercial litigation attorney at Feldman & Feldman to discuss your options for avoiding or handling a conflict of interest in your business.
Consequences of Conflicts of Interest in Business
There are several risks and consequences that come along with a conflict of interest in business. These risks can range from minor to severe and can negatively impact a company. The following are common consequences of business conflicts of interest:
- Damaged reputation
- Loss of trust
- Financial losses
- Legal implications
As mentioned, some conflicts of interest can be illegal and result in legal repercussions. They can lead to civil lawsuits and even criminal charges. It is important that you have a skilled business litigation lawyer in Houston to help you deal with conflicts of interest in your business.
How a Business Litigation Attorney Can Help with Conflicts of Interest in Business
A commercial litigation lawyer at Feldman & Feldman can assist you in many ways when dealing with conflicts of interest in your business. We can help you identify any conflicts of interest prior to conducting business transactions. We can also help you determine the appropriate course of action if a conflict of interest has already surfaced.
Why You Need Feldman & Feldman to Help with A Business Conflict of Interest
Conflicts of interest in business can span a wide range of topics, including breach of contract, breach of fiduciary duty, and non-compete agreement disputes. Our team of commercial litigation attorneys is experienced in dealing with all of these potential conflicts of interest and more you may face in your business. Contact us to learn more about how we can help.