To effectively manage conflicts of interest, it is essential to first grasp how these conflicts arise. At the core of any conflict of interest lies the principle-agent relationship. The principle-agent relationship occurs when an agent acts on behalf, and importantly in the best interest of a principal.

A simple example to illustrate this would be the relationship between a client (the principal) and an attorney (the agent). The attorney has a duty, in executing the mandate of a client, to further the best interests of the client.

Accordingly, conflicts of interest may arise when an agent must choose between acting in the principal’s best interest or furthering their own private interests.

To further illustrate this concept, consider a situation in which a government official abuses their authority to ensure that their family or friends are awarded government tenders. Similarly, another example is when an employee of a company has a financial interest or directorship in a competitor’s company.

In both situations, agents will face a choice. They must choose between acting in the best interest of the principal or pursuing their own personal interests. This choice could potentially affect their objectivity and introduce bias when making decisions on behalf of their principal.

So, how does one effectively manage conflicts of interest within an organisation?

An organisation should establish suitable policies and procedures that state the organisation’s stance on conflicts of interest, outlining what is appropriate and what is not.

Broadly, these policies must include the requirement that agents should always act in good faith, highlight the importance of transparency, ensure that the agent objectively serves the principal’s best interests, and proactively mitigate and manage conflicts that may arise and negatively impact this objectivity.

To give effect to these policies, specific procedures should be established and may include:

  • General disclosures: Annual declarations of interests, encompassing not only potential conflicts but all interests. For example, board memberships, financial interests in businesses, paid or unpaid outside work, loans or sponsorships, and potential family or romantic relationships in the organisation.
  • Specific disclosures: Opposed to general disclosures, this procedure is designed to highlight specific interests which could pose a conflict of interest and most likely relate to an ongoing matter.
  • Due diligence: Performing checks on third parties, suppliers, and intermediaries is important to avoid engaging in business with employees or managing conflicts of interest. For example, this can include checking the company registration numbers of suppliers and potential new suppliers against those disclosed by employees.

These procedures aim to improve transparency regarding potential conflicts of interest. An organisation’s management will then be able to, due to the increased transparency, manage any such conflicts that may arise.

In summary, agents must prioritise the best interests of their principal over personal gains. Effective management of conflicts of interest within an organisation requires clear policies and procedures that emphasise transparency and proactive conflict mitigation.

For more information on managing conflicts of interest or if you are seeking assistance in handling such matters within your organisation, please feel free to reach out to us at info@dmlforensics.co.za

Source: The Ethics Institute, Conflict of Interest Handbook, Kris Dobie.