International Journal of Knowledge-Based Organizations, 5(2), 1-18, April-June 2015 1

Conflict of Interest:
What It Is, Its Causes and Consequences
Yanli Zhang, Center for Enterprise Innovation and Development, Soochow University, China
& Management Department, Montclair State University, Upper Montclair, NJ, USA
Jeffrey Hsu, Department of Information Systems and Decision Sciences, Fairleigh Dickinson
University, Madison, NJ, USA
Ruben Xing, Information and Operations Department, Montclair State University, Upper
Montclair, NJ, USA
Wencang Zhou, Management Department, Montclair State University, Upper Montclair, NJ,
USA

ABSTRACT
Given the persistent prevalence of conflict of interest in our society, the authors ask the question: What ex-
actly is conflict of interest? Based on an extensive analysis of conflict of interest cases in the popular press,
the authors come up with a typology of conflict of interest: personal conflict of interest versus organizational
conflict of interest. Furthermore, the authors develop a model of the causes and reactions to conflict of inter-
est. The authors identify four antecedents to conflict of interest which include delegation of authority, guanxi
and guanxi practice, law and ethics code, and moral & values. At the same time, the authors find that the
characteristics of conflict of interest, which include network strength, exchange value, and transparency will
influence people’s reactions to the conflict of interest and perception of impaired judgment and decision making.

Keywords: CEO Compensation, Conflict of Interest, Corporate Governance, Ethics, Guanxi, Procedural
Justice, Social Networks

INTRODUCTION Merrill Lynch, Morgan Stanley and Citigroup

Ever since Enron’s case in October 2001,
there has been much more attention paid to
corporate scandals. One outstanding theme
that has emerged from the corporate scandals
is the conflict of interest issue. There are nu-
merous large and famous companies that have
been involved in conflict of interest issues,
for example, Arthur Andersen in accounting,
in investment banking, and Enron, WorldCom,
Tyco, and Global Crossing in other industries.
Not only is conflict of interest prominent
in the corporate world, it also has tainted
government and much of the world beyond.
People involved in conflict of interest charges
include former US secretaries of state Henry
Kissinger and George Shultz, former US CIA
director James Woolsey, Bush Administration’s
Iraq policy architect Richard Perle, and United

DOI: 10.4018/ijkbo.2015040101

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2 International Journal of Knowledge-Based Organizations, 5(2), 1-18, April-June 2015
States Olympic Committee (USOC) chief
executive Lloyd Ward.
The purpose of this study is three-fold.
First, we seek to understand the construct of
conflict of interest. What exactly is conflict of
interest? Is the concept as straightforward as it
sounds? Second, we will attempt to come up
with a typology of conflicts of interest. Third,
we will analyze the reports collected to find out
what factors cause or control the tendency to
engage in conflict of interest, and what people’s
reactions are to it.
The paper is organized as follows. The
first section defines and clarifies the concept
of conflict of interest. The second section
gives a typology of conflict of interest. The
third section develops a model of what are the
causes and reactions to conflict of interest and
its characteristics.
WHAT IS CONFLICT
OF INTEREST?
What do people refer to when they talk about
conflict of interest? The makeup of the term
makes conflict of interest seem a pretty straight-
forward concept to most people: which means
having interests that conflict. People’s ordinary
picture of a conflict of interest is one in which
some personal or financial relationship external
to one’s position makes it difficult for one to
perform the duties of one’s position (Carson,
1994). This is shown by the following examples
of conflict of interest as used by people in com-
mon discourse:
During the years, Wall Street firms wore a
number of conflicting hats for Enron, serving
as an underwriter on Enron stock and bond
deals, and often providing positive research on
the company’s stock. … Investigators want to
know if such conflicts of interest hindered Wall
Street’s ability to call attention to Enron’s prob-
lems sooner. (Gasparion & Hamburger, 2002)
During one hearing of the House committee on
financial services, legislators focused on the
conflicts of interest that riddle the credit rat-
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ings industry, not the least of which is the fact
that the main players receive the bulk of their
revenues by collecting ratings and consulting
fees from the very companies whose debt they
evaluate. (Revell, 2003)
‘I am concerned about recent press reports that
senior executives (at Premier and Novation,
two big hospital buying groups who serve as
purchasing agents for hospitals) have received
or obtained stock or stock options from product
suppliers, creating serious conflicts of interest,’
Orrin Hatch, Republican of Utah, said in a
statement at the hearing. (Meier & Walsh, 2002)
Charles Elsoon, director of the Center for
Corporate Governance at the University of
Delaware, said it is a conflict of interest for an
outside director to also serve as an investment
banker on a particular transaction, because
his personal interest in getting paid may not
coincide with the interests of Tyco shareholders.
(Maremont, 2002)
Although it seems that people have a pretty
good intuitive sense of conflict of interest, the
notion of conflict of interest is much more so-
phisticated. Therefore, we need to give a more
precise definition for conflict of interest. In
this article we adopt the definition of conflict
of interest given by (Davis & Stark, 2001):
A conflict of interest is a situation in which some
person (whether an individual or corporate
body) stands in a certain relation to one or
more decisions. On the standard view, P has a
conflict of interest if, and only if (1) P is in a
relationship with another requiring P to exercise
judgment in the other’s behalf and (2) P has a
(special) interest tending to interfere with the
proper exercise of judgment in that relationship.
In the above definition, it is important to
realize that the crucial terms are “situation”,
“decision”, and “relationship”. These are the
key elements that constitute conflict of interest:
1. Conflict of Interest is a Situation: A
conflict of interest refers to a situation that
 International Journal of Knowledge-Based Organizations, 5(2), 1-18, April-June 2015 3

there are conflicting interests in decision
making. Therefore, conflict of interest does
not necessarily involve impaired judgment
and biased decision, although it has such
potential.
2. Conflict of Interest Must Involve De-
cisions: To have interests that conflict
is not sufficient to constitute conflict of
interest. Conflict of interest does not refer
to any conflict but rather refers to having
conflict in decisions. For example, our
family obligation conflict with our work
obligation in terms of time allocation, but
since normally it doesn’t influence our
decision making at work it is not a conflict
of interest. This decision element marks
the distinction of conflict of interest from
corruption or scandal. Conflict of interest
is only a subset of government corruption
or corporate scandal (Rose-Ackerman,
1999). One example of government cor-
ruption or corporate scandal that does not
involve decision-making is embezzlement
of public or private funds.
3. Conflict of Interest Must Involve Rela-
tionships: In conflict of interest, first of all
there has to a primary relationship, which
requires the person to exercise judgment
on the behalf of others. Then there has
to be another relationship, which we call
secondary. The interest of the secondary
relationship tends to interfere with the
proper judgment in decision making on
behalf of represented party in the primary
relationship.
Here we also briefly recount how the term
of conflict of interest has evolved. The term
is used as an idiomatic expression nowadays,
although it is barely half a century old. The first
court case to use the term in something like the
definition given here was in 1949. The Index of
Legal Periodicals had no heading for “conflict of
interest” until 1967. No English dictionary had
an entry for “conflict of interest” before 1971.
The first philosophical discussions of the term
date from the early 1970s (Luebke, 1987). In
the late 1960s lawyers began to explicitly treat
the term as an idiomatic expression (McMuni-
gal, 1992). The term “conflict of interest” also
began to appear in code of ethics in the 1970s
(American Bar Association, 1970).
A TYPOLOGY OF CONFLICT
OF INTEREST
Based on the study of an extensive number of
conflict of interest cases searched from news-
papers, we come up with a typology for conflict
of interest and discuss some of the implications
of that typology.
This section is organized as follows: First
we discuss the methodology used in collecting
the conflict of interest cases. Then we propose
our typology based on the reading and analysis
of these cases. After that, we discuss the implica-
tions of this typology. Lastly, we demonstrate
how our typology can be used to categorize
some of the more prominent conflict of interest
cases we have collected.
The search for information about conflict of
interest cases was conducted on two newspaper
databases: Lexis-Nexis Academic and Dow
Jones Interactive. A huge volume of informa-
tion was identified. To make this information
manageable, we narrowed our searches to the
top five US daily newspapers including New
York Times, Wall Street Journal, USA Today,
Washington Post, and Chicago Tribune in a
time range of October 2001 to November 2003
(the after-Enron period). Because there is much
repetitive coverage, primary focus was given
to New York Times and Wall Street Journal.
Since there is still too much information, we
first did a quick read of the search results to
identify the conflict of interest cases, e.g. the
Arthur Anderson case. Then, we only focus on
those major cases and did more refined search
using both conflict of interest and the person
or company names of the cases as keywords.
Based on the reading of the cases, we come
up with a typology of conflict of interest that
divides it according to the different relationships
that cause the conflict of interest. We categorize
conflict of interest into two broad categories:

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4 International Journal of Knowledge-Based Organizations, 5(2), 1-18, April-June 2015
personal versus organizational conflict of inter-
est. Personal conflict of interest arises because
the person has other relationships that interfere
with the proper exercise of his responsibili-
ties. Organizational conflict of interest arises
because the organization is so designed that it
performs multiple services for different clients
whose interests may conflict. From this, it is
apparent that they are at two different levels,
one is at the individual level, and the other on
the organizational level.
Personal Conflict of Interest
Personal conflict of interest arises because the
person has other relationships that interfere
with the proper exercise of his responsibilities.
The personal type of conflict of interest can
either come from a person’s family or friend
relationship, or it can be that the person has
outside employment or activities whose interests
conflict with those of the first organization. It
can also be an ad hoc relationship induced by
an exchange of value (bribery).
Family and Friends
Conflict of interest can arise because the per-
son’s family member or friend is connected to
some interest which conflicts with the duty or
interest that the person represents. Spouse is the
most obvious example of this form of conflict
of interest. Virtually all jurisdictions require
officials to disclose assets held by spouses,
including spouses’ financial portfolios, jobs,
gifts, and other sources of remuneration. The
USOC case given below is another example of
this form of conflict of interest.
Outside Employment
Conflict of interest can also arise because the
person in authority is connected to some other
organization that may have conflicting interests
with the duties he performs. Based on the United
States Executive Order 12674 -- Principles
of Ethical Conduct for Government Officers
and Employees, employees shall not engage
in outside employment or activities, including
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seeking or negotiating for employment, that
conflict with official government duties and
responsibilities. Even more stringent, no em-
ployee who is appointed by the President to a
full-time non-career position in the executive
branch (including full-time non-career employ-
ees in the White House office, the Office of
Policy Development, and the Office of Cabinet
Affairs), shall receive any earned income from
any outside employment or activity performed
during presidential appointment. The Kissinger
case given below is such an example.
Exchange of Value
For this to constitute conflict of interest there
has to be an exchange of certain value. There is
actually a special term for this type of conflict
of interest. It is called “quid pro quo” or bribery
depending on the value of the exchange. They
are both situations where there is an exchange
of value between an officeholder and a citizen
(or group), in which the transfer made by one
to the other is prompted by the transfer from the
other to the one. The recipient’s personal finan-
cial interest in accepting the bribery payments
creates a conflict of interest in that it motivates
the recipient to do things that are incompatible
with the duties of one’s office, position, or role
(Carson, 1994). Financial relationships include
stock ownership, consulting fees, research
grants, and payments for speeches and travel.
The Citigroup case, etc. given below are such
examples.
Organizational Conflict of Interest
The organizational conflict of interest arise
when one organization performs duties for
at least two parties or clients who each have
conflicting goals or objectives (Perrow, 1961;
Poser, 1988). For example, conflict of interest
may arise when the corporate finance depart-
ment in an investment bank seeks to promote
its clients’ deals through favorable ratings,
while the stock analysts seek to rate companies
objectively and independently (Hayward &
Boeker, 1998). For another example, it can also
arise when institutional shareholders may have
 International Journal of Knowledge-Based Organizations, 5(2), 1-18, April-June 2015 5
current or potential business relationships with
their shareholding firm which makes them less
willing to curb management discretion actively
(Short & Keasey, 1996).
Particularly, professional firms that pro-
vide multiple services are likely to have this
organizational conflict of interest (Tomasic,
1991). These firms may perform services for
some clients that compromise their services
for others lawyers may be hired by one client
to provide advice that works against another
client (Tomasic, 1991). Consultants often need
to decide whether to work for a firm that com-
petes with an existing client (Lindsay, 1989).
Journalists may consider whether to publish a
story negative about an advertiser.
Common Characteristics
of Conflict of Interest
From this typology, we can derive some
common and distinct features among the two
categories, which have implications for the
reactions and solutions to conflict of interest.
Conflict of Interest Involve
Strong Connections
First, the personal and organizational conflicts
of interest both involve strong connections. It
seems that the strength of the tie is the critical
factor in both determining whether conflict
of interest exists and evaluating the severity
of the conflict of interest. By the definition
of conflict of interest, a conflict of interest
should tend to interfere with proper exercise
of judgment. Therefore, a weak tie is usually
considered as not interfering with judgment,
because a weak tie is mainly informational in
that it helps narrowing down alternatives due to
people’s bounded rationality. On the other hand,
a strong tie is usually considered as interfering
with judgment because it is emotional in that
the person involved will want to do good to
the other party.
One thing is worth mentioning, strong
connections and financial interests are almost
equivalent. Based on the conflict of interest
cases, we can see that financial interests and
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strong connections are actually inseparable.
The existence of either one will substitute for
the other, and justify the existence of conflict
of interest. For example, an exchange of value
(bribe) can be regarded as a substitute for a
strong connection. Because when people wants
to seek help from a person in authority but un-
fortunately does not have a strong relation with
the person, he or she has to use financial means
to build this strong tie. Therefore, exchange of
value has the same effect as a strong tie in that
it makes the person in authority beholden to
the gift sender.
These common features have significant
implications for managerial networking prac-
tice. It shows us what are considered conflict
of interest by people in organizations and what
are not. Because strong connections or financial
interests tend to generate conflict of interest,
managers should be particularly careful dealing
with strong connections or financial interests.
Weak connections, however, do not have such
harmful consequences. Therefore, it is com-
monly acceptable to utilize weak connections
to help managers reduce the amount of informa-
tion, e.g. referring a CV in recruiting efforts.
Different Solutions for Different
Conflicts of Interest
The distinction between the two types of conflict
of interest is about at what level the conflict of
interest arises. For the personal conflict of inter-
est, it arises at the individual level, while for the
organizational conflict of interest; it arises at the
organizational level. Personal conflict of interest
is the more recognized one. Most people, when
talked with conflict of interest, would think
of personal conflict of interest as an example.
However, in recent years, more and more atten-
tion is focusing on the organizational conflict
of interest. The recent increasingly serious
scandals in the accounting, investment banking
and mutual fund industries have significantly
transformed people’s understanding of conflict
of interest. Conflict of interest in people’s
impression used to be understood primarily in
terms of conflicts involving personal interests,
6 International Journal of Knowledge-Based Organizations, 5(2), 1-18, April-June 2015
the kind that would reach an individual from
outside his or her professional role. However,
these days more and more conflicts of interest
are originating inside an individual’s profes-
sional role (Stark, 2002).
The implication of this distinction between
the two types of conflict of interest is also
significant. Most importantly, it calls for dif-
ferent solutions for different types of conflict
of interest. For the personal conflict of inter-
est, we have more ready solutions. There are
three solutions: to escape, to disclose, and to
manage. To escape includes recusal, divesti-
ture, and resignation. All of these solutions
focus on the person, how to get him out of the
conflict of interest, or if the conflict of interest
is unavoidable, how to monitor and manage
his actions. For the organizational conflict of
interest, solutions are much scantier. The same
three solutions can still be applied, but it will
be much more difficult. For example, the audit-
ing industry has strongly resisted the proposed
regulation to prohibit them from engaging in
multiple services for clients.
The Cases
In categorizing the conflict of interest cases, we
have chosen to focus on the more prominent
cases. We have managed to categorize these
cases unequivocally into the two different types.
All together, there are twenty cases, which
include twelve cases in the personal category,
and eight cases in the organizational category.
Although the number of cases is not large, the
cases are quite representative of the different
natures and scopes of conflict of interest, with
the different social circumstances where con-
flicts of interest arise.
Personal Conflict of Interest Cases
USOC (United States Olympic Committee)’s
chief executive, Lloyd Ward, was accused of
abusing his position to try to secure a business
contract for his brother (Sandomir, 2003a).
Ward’s case ultimately triggered an overhaul
of USOC (Sandomir, 2003b).
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It is reported that at 420 of 2,000 major
public corporations, their CEO’s compensation
committees – the folks who determine CEO
pay – include relatives or individuals with ties
to the CEOs or to the company (Times, 2002).
Tyco International Ltd. paid a total of $20
million to one of its outside directors and to
a charity he controls, in return for his help in
brokering a major acquisition. It is a conflict of
interest for an outside director to also serve as
an investment banker on a transaction, because
his personal interest in getting paid may not
coincide with the interests of Tyco shareholders
(Maremont, 2002).
Former Secretary of State Henry A. Kiss-
inger was appointed by President Bush to lead
an independent investigation into the Sept. 11
attacks, while Mr. Kissinger’s consulting firm
has clients of major multinational corporations,
whose profitability can depend on maintain-
ing cordial ties with foreign governments and
Washington officials.
Mr. Richard Perle, an influential architect
of the Bush administration’s Iraq policy and war
plans, is alleged to represent a major telecom-
munications company that has a strong financial
interest in lobbying the Defense Department.
Former Secretary of State George Shultz
is on the board of directors of the Bechtel
Group, the largest contractor in the US, and
one of the finalists in the competition to land
a fat contract to help in the rebuilding of Iraq.
He is also the chairman of the advisory board
of the Committee for the Liberation of Iraq, a
fiercely pro-war group with close ties to the
White House.
Former CIA director James Woolsey is a
principal in the Paldin Capital Group, a venture
capital firm that is soliciting investment for
companies that specialize in domestic security.
Mr. Woolsey is also a member of the Committee
to Liberate Iraq and is reported to be in line to
play a role in the postwar occupation.
Citigroups’s brokerage firm, Salomon
Smith Barney, allocated a million shares of hot
new stock offerings to WorldCom executives.
Regulators are trying to determine whether those
allocations, which usually generate large, instant
 International Journal of Knowledge-Based Organizations, 5(2), 1-18, April-June 2015 7
and virtually risk-free profits, were given in
exchange for investment banking assignments
for the company (Morgenson, 2002).
Nearly 100 executives at Merrill Lynch &
Co. invested a total of more than $16 million
of their own money in one of Enron’s partner-
ships, known as LJM2 Co-Investment LP. This
partnership was one of the largest that allowed
Enron to keep assets off its balance sheet – es-
sentially sheltering the firm’s financial problems
before it was too late – as well as enriching
Enron executives. Investigators was looking at
whether such conflict of interest hindered Wall
Street’s ability to call attention to Enron’s prob-
lems sooner (Gasparion & Hamburger, 2002).
Many of FDA advisers hired to advise the
government on the safety and effectiveness
of medicine have financial relationships with
the pharmaceutical companies whose drug is
under consideration or to a company that sells
a competing drug.
Enron’s executives were operating under
conflict of interest when they set up a LJM2
partnership to keep debts and losses out of
company’s balance sheet and later profited from
selling of company stocks before they plunged.
Organizational Conflict
of Interest Cases
Stock analysts on Wall Street have been charged
with misleading investors by hyping stocks to
win investment banking businesses. Their ad-
vice is allegedly tainted by conflict of interest.
Major companies like Merrill Lynch, Morgan
Stanley, Citigroup, etc. are involved. Under the
investigation led by New York attorney general
Eliot Spitzer, a final settlement was reached
April 28, 2002. The settlement included a record
$1.4 billion in fined paid by 10 of the nation’s
largest securities firms, the lifetime ban of
two high-profile analysts and new rules to put
distance between analysts and their investment
banking colleagues (Morgenson & McGeehan,
2002; Knowledge@Wharton, 2003a; Smith,
Craig et al., 2003)
Recently there has been a surge of scandals
in the mutual fund industry, including the so-
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called late trading, market timing, self-dealing,
and excessive fees and compensation. All of
these scandals fall into the agency issues be-
cause the essence of all these scandals is a focus
on the interests of the mutual fund company
as opposed to the interests of the individual
shareholders. Late trading and market timing
give some favored investors special privileges,
which push up the costs and cut the value or-
dinary investor’s holdings; self-dealing is the
improper trading for personal profit by manag-
ers or senior employees of mutual funds at the
expense of ordinary individual investors; and
excessive fees and compensation enrich the
fund managers and directors and deduct the
value of common investors.
An auditor’s dual role of both auditing for
the company and advising top executives’ per-
sonal financials makes people questions whether
the auditing is compromise by auditor’s desire
to keep the executives happy.
Major credit-rating agencies like Moody’s
receive the bulk of their revenues by collect-
ing ratings and consulting fees from the very
companies whose debt they evaluate.
A House bill received criticism because
it allows banks to both administer 401(k) pro-
grams and sell investment advice to workers.
LVMH, a French luxury-goods group
raised conflict of interest charges with Morgan
Stanley. LVMH alleged that Morgan Stanley’s
London-based luxury-goods industry analyst,
Claire Kent, had gone out of her way to cast
LVHM in a bad light in her research reports
from 1999 to 2002 to curry favor with Morgan
Stanley investment-banking client Gucci Group
NV which were locked in an acrimonious
takeover battle with LVMH during most of
that period. LVMH’s allegations are based on
sentences plucked from the research reports
(Carreyrou, 2003).
It is a conflict of interest that the same
attorney represents many of the plaintiffs in
the June 24 crash in Terrell who are seeking
damages from a limited fund. In this case the
Judge rejects $5.6 million for church bus crash
victims due to conflicts of interest. There were
two conflicts pointed out in the settlement:
8 International Journal of Knowledge-Based Organizations, 5(2), 1-18, April-June 2015
many of the plaintiffs are represented by the
same attorney, and parents of the children killed
or injured in the June 24 crash are represented
by the same attorney. While the court may
determine ultimately that the agreement is in
the best interests of the minors, a conflict of
interest exists between parents who are seeking
damages from a limited fund both individually
and separate on behalf of their minor children.
(Newswire, 2003).
Hospitals in the New York area may be
overpaying millions for medical supplies be-
cause their trade group, the Greater New York
Hospital Association, promote a purchasing
agent, Premier Inc. with financial ties to the
group and at least one of its top executives.
A MODEL OF ANTECEDENTS
AND CONSEQUENCES
Antecedents to Conflict of Interest
After defining and categorizing conflict of
interest, we are now better equipped to look at
what are the causes and reactions to conflict of
interest. We argue that there are four antecedents
that affect the tendency for conflict of interest to
occur. They are delegation of authority, guanxi
and guanxi practice, law & code of ethics, and
moral & values. Not only do these antecedents
affect whether conflict of interest tends to occur
or not, they also affect the characteristics of that
conflict of interest.
Delegation of Authority
Conflict of interest is a typical problem that
arises from the principal agent relationship,
which is defined as “a contract under which one
or more persons (the principals) engage another
person (the agent) to perform some service on
their behalf which involves delegating some
decision-making authority to the agent” (Jensen
& Meckling, 1976). In a principal agent relation-
ship, because of the asymmetric information, the
principal cannot always observe agents’ actions.
On the contrary, the essence of that relationship
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in government and professions alike is often to
tap into and rely on the agents’ discretion and
expertise (Sharma, 1997).
Therefore, we can say that delegation of
authority and resources / agency relationship
has the potential to create a conflict of interest
between the agent and the principal: agents
may use their discretion as representatives to
enhance their own benefits associated with
their personal or some other professional or
financial network and deviate from wholly
fulfilling the contractual obligations to the
principal (Kosnik & Shapiro, 1997). That is
why conflict of interest is a major issue for
officials and professionals, who represent the
benefits of others. Reviews of agency theory
can be found in both the economics literature
(Fama, 1980; Jensen & Smith, 1985) and the
organization literature (Barney & Ouchi, 1986;
Perrow, 1986; Eisenhardt, 1989). We have the
following proposition:
Proposition 1: Delegation of authority tends
to generate conflict of interest.
Guanxi and Guanxi Practice
However, only delegation of authority is not
sufficient to lead to conflict of interest. As we
point out above, conflict of interest involves
relationships. For conflict of interest to hap-
pen, there have to exist another relationship
which also has an interest in the decision at
hand which tends to interfere with the proper
judgment in making that decision. In this sense,
guanxi and guanxi practice tend to generate
conflicts of interest.
In recent years, scholars have suggested the
legitimacy of guanxi as a theoretical construct
(King, 1991; Bian, 1997; Tsui & Farh, 1997;
Lin, 2001). Guanxi in general refers to a state
in which two or more entities are connected.
What is distinctive about guanxi from general
networks is that guanxi networks are more
likely to be structured in a dyadic fashion.
Most guanxi scholars view guanxi networks
as ego-centered webs of multiple dyads where
 International Journal of Knowledge-Based Organizations, 5(2), 1-18, April-June 2015 9
everybody else is connected to the self, rather
than networks with inter-connected nodes where
everybody is connected to everybody else (Chen
& Meindl, 2003; Fei, 1992/1947). This web of
dyadic personal or other relationship is often
the source of conflict of interest in organiza-
tions, for example, there might be the problem
of guanxi favoritism when supervisors give
preferential treatment to some subordinates on
the basis of personal relationships rather than
neutral criteria.
Not only does guanxi tends to be the source
of conflict of interest, the associated guanxi
practice also tends to further generate conflict
of interest. The difference between guanxi and
guanxi practice is that guanxi is the existence
of relationships while guanxi practice is the
building of guanxi through exchange of gifts,
favors (Yang, 1997; Guthrie, 1998). It has been
found that the way people go about building
Guanxi is mainly through exchanging favors
(Chen & Meindl, 2003; Hwang, 1984; Kipnis,
1997; Tsui & Farh, 1997; Bell, 2000). Guanxi
practice tends to generate conflict of inter-
est in organizations, since favor exchanges
bring about competing interests when making
decisions involving organizational resources.
Therefore, we have the proposition:
Proposition 2: Guanxi and guanxi practice tend
to generate conflict of interest.
Law and Code of Ethics
Over the years, certain governmental law &
organizational code of ethics have evolved
governing the conflict of interest. Law & code
of ethics stipulate what forms of conflict of
interest are to be prohibited, discouraged, or
disclosed. Therefore, they affect whether and
what conflicts of interest are likely to occur.
Although conflict of interest is not wrong
in itself, since it is impossible to assess whether
judgment is impaired or decision biased, United
States law has come to eschew the subjective
approach and adopt an objective one. In conflict
of interest law subjective intent is not important
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but rather the wrong kind of outside interest; the
governing principle is objective in a mechanical
way (Manning, 1964). Appendix 1 illustrates
some of the conflict-of-interest related United
States code regarding government officers and
employees.
Some large organizations have their own
code of ethics. In Appendix 2, we give the part
of code of ethics from USOC (United States
Olympic Committee) governing conflict of
interest. In Appendix 3, we give GE (General
Electric)’s policy regarding conflict of interest.
Proposition 3: The scope of law and ethics
code will affect the tendency to engage in
conflict of interest and characteristics of
the conflict of interest.
Moral and Values
Law and code of ethics can only cover a small
percentage of conflict of interest. For the vast
majority of conflict of interest, moral & values
come to a larger play. For example, bribes seem
to be less common in the United States, and
some of the reasons cited for that are people
in the United States have a healthy distaste for
that type of thing. Americans tend to engage in
more subtle types of conflict of interest than the
developing countries (Stark, 2000).
Currently there has been much meditation
on what have caused the recent corporate scan-
dals from the moral and values side. It seems
that the predominant moral & values of people
do play a role. There is a current trend that
people want to push business practices to the
limit of law and regulations. What is more, there
is a mentality among wealthy, high-positioned
people that they are such high performers that
they are entitled to just about anything and they
always feel underpaid. Therefore, we have the
following proposition:
Proposition 4: The moral & values will affect
the tendency to engage in conflict of inter-
10 International Journal of Knowledge-Based Organizations, 5(2), 1-18, April-June 2015
est and the characteristics of that conflict
of interest.
Consequences to
Conflict of Interest
We identify three characteristics of a conflict
of interest, and these are the network strength,
exchange value, and transparency of conflict.
These characteristics in turn affect the conse-
quences of conflict of interest, which we limit
in this study to people’s reactions to the conflict
of interest. Conflict of interest has consequences
for organizations in that it generates perceptions
that judgment is impaired and decision is biased.
Network Strength
Network strength has an important effect on
the potential for impaired judgment and biased
decision. It is found that people will perceive
decisions to be less fair when the decision is
favored for a family member than for a friend
or acquaintance (Chen et al., 2002).
Because of the importance of network
strength in determining the potential conse-
quences, conflict of interest law & code of ethics
distinguish clearly among different networks
and puts most emphasis on strong networks.
Conflict of interest law and ethics code is the
strictest for family members. Virtually all ju-
risdictions require officials to disclose assets
held by spouses – including spouses’ financial
portfolios, jobs, gifts, and other sources of
remuneration. Regarding relatives, everything
can be said of spouses applies, depending on the
particular conflict-of-interest regime, to minor
children and perhaps other close relatives (Stark,
2000). For friends, things are much different:
there are no such overwhelming disclosure
requirements and it is often dealt with on a
case-by-case manner when problems emerge.
Proposition 5: The network strength in a con-
flict of interest is positively related with
people’s perception of impaired judgment
and biased decision.
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Exchange Value
The value of exchange involved in a conflict
of interest has an effect on the potential for
impaired judgment and biased decision. In order
for the bribery offer to create a conflict of inter-
est, the offer must be sufficiently large to tempt
the officer to ignore his duties (Carson, 1994).
The following is an example that shows the
effect of exchange value on people’s percep-
tions. The New England Journal of Medicine is
loosening its longstanding conflict-of-interest
rules. Previous policy stated that the authors
of review articles and editorials “will not have
any financial interest in a company (or its com-
petitor) that makes a product discussed in the
article.” Now the policy has been changed to
read that the authors of these articles will not
have any “significant” financial ties to private
companies that might stand to gain from a
review article in the Journal.
Behind the decision is the understanding
that not all financial associations have the
same consequences. And the editors base their
definition of “significant financial interest” on
guidelines issued by the US National Institutes
of Health and the Association of American
Medical Colleges, which set the amount at
$10,000 in any given year.
Proposition 6: The exchange value in a con-
flict of interest is positively related with
people’s perception of impaired judgment
and biased decision.
Interaction Between Network
Strength and Exchange Value
Network strength moderates the effect of
exchange value on the reactions to conflict
of interest. For example, receiving gifts from
strangers is considered to make the gift recipi-
ent beholden to the gift sender while receiving
gifts from friends is not. When facing the al-
legations that her receiving help from Arkansas
attorney James Blair might impair Bill Clinton’s
judgment as Arkansas governor, one of Hillary
Clinton’s counterarguments is that James Blair
 International Journal of Knowledge-Based Organizations, 5(2), 1-18, April-June 2015 11
is their best friend and thus Bill Clinton won’t
be beholden to the gift sender. Therefore, we
have the following propositions (Stark, 2000),
and Figure 2 graphs the moderating effect of
network strength on exchange value.
Proposition 7a: When the network strength
in the conflict of interest is low, the ex-
change value has a large effect in affecting
whether people perceive the judgment to
be impaired and decision biased.
Proposition 7b: When the network strength in
the conflict of interest is high, exchange
value has little or no effect in affecting
whether people perceive the judgment to
be impaired and decision biased.
Transparency of Conflict
The transparency of the conflict of interest is an
important factor in affecting its consequences.
From procedural justice research, transparency
is a critical part of procedural justice. Transpar-
ency of the conflict of interest is believed to
prevent deception and gives those relying on
P’s judgment the opportunity to give informed
consent to the conflict of interest, to replace
P instead of continuing to rely on him, or to
adjust reliance in some less radical way (e.g.
by seeking a “second opinion”).
Proposition 8: The transparency of conflict in
a conflict of interest is positively related to
people’s perception of impaired judgment
and biased decision.
CONCLUSION
Conflict of interest is everywhere. A conflict
of interest is like dirt in a sensitive gauge. All
gauges contain some dirt, the omnipresent
particles that float in the air (Davis and Stark
2001). Therefore, it is impossible to solve the
problem by totally banning conflict of interest.
Therefore, we have to distinguish different
conflicts of interest and decide which solutions
to adopt: to avoid the conflict of interest, to
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disclose the conflict of interest, or to manage
the conflict of interest. In this article we have
defined and clarified the meaning of conflict
of interest, categorized it according to the
relationships that cause it, and come up with a
model of the causes and people’s reactions to
conflict of interest. This study also has practi-
cal implications.
To avoid the conflict of interest, we can
focus on controlling the identified antecedents
for conflict of interest, namely, delegation of
authority, guanxi and guanxi practice, law and
ethics code, and moral & values. However, given
that conflict of interest is often hard to avoid,
we may need to focus on manage the conflict
of interest. We have seen that there are three
factors that affect people’s reactions to a conflict
of interest: exchange value, network strength,
and transparency of conflict. These are the
things that we can aim to control for in order to
control the reactions to the conflict of interest.
Knowing the antecedents, the characteristics,
and the consequences of conflicts of interest
allow us to come up with more sophisticated
and practical control mechanisms.
The study of conflict of interest is an im-
portant topic yet has not been studied enough
in organization research. Studying conflict
of interest also contributes to several related
research streams of organizations including
social networks, procedural justice, ethics, and
corporate governance.
Conflict of interest is closely related to so-
cial networks. Social networks play an important
role in business, politics, and society, and it is
important to distinguish normal and productive
networking with the kind of networking that
leads to conflict of interest. Especially, conflict
of interest is closely associated with the dyadic
guanxi. As we have mentioned previously, it
is important to balance between the benefits
of networking and guanxi building with the
downside of the associated conflict of interest.
Conflict of interest is closely related to
procedural justice. Conflict of interest violates
procedural justice because neutrality is a key
component of procedural justice. In Leventhal’s
theory (Leventhal, Karuza et al., 1980; Lind &
12 International Journal of Knowledge-Based Organizations, 5(2), 1-18, April-June 2015
Tyler, 1988), in resource allocation and other
decisions, one of the six proposed procedural
justice rules is the bias suppression rule.
Conflict of interest is much related to cor-
porate governance since it inherently involves
different interests. Conflict of interest with
regards to board of directors’ bias towards the
CEO has been a serious and persistent issue
and has been reflected in many prominent is-
sues such as CEO compensation (Hall & Ko,
2014). After the deluge of corporate scandals
such as Enron, corporate governance has been
a focus of scholars and popular press alike.
This article contributes to the dialog on how
to improve corporate governance.
Last but not least, conflict of interest is also
an ethics issue. Ethics is a pretty broad domain
that is hard to regulate but can be influenced.
Within it, some conflicts of interest can be gov-
erned legally (discussions of conflict of interest
can be found in (York, 1960; Manning, 1964));
while the remaining conflicts of interest have
to depend on people’s moral sense and values.
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 International Journal of Knowledge-Based Organizations, 5(2), 1-18, April-June 2015 15

Yanli Zhang is currently an associate professor in the Management Department at Montclair State Uni-
versity. Her areas of research are in strategic management, international business, innovation and entre-
preneurship. She has won many awards including the Doug Nigh Most Innovative Paper Award and Best
Paper Award at the Academy of Management Annual Conference for her research that sheds light on how
firms use networks to gain knowledge and build innovative capabilities. She has published extensively in
academic journals and presented at many conferences. She was the Globalization Track Chair for IEEE
International Technology Management Conference in 2012. Dr. Zhang has a Ph.D. in Management and
MBA from Rutgers University, and BA in Economics from Beijing University. Before academia, she spent
several years working as a management consultant in Accenture, Beijing office, helping both multination-
als and domestic Chinese companies with their market and growth strategies. She had also worked at the
Ministry of Foreign Affairs US Division and Lenovo Strategic Planning department before that.
Jeffrey Hsu is a professor of information systems at the Silberman College of Business, Fairleigh Dick-
inson University. He is the author of numerous papers, chapters, and books, and has previous business
experience in the software, telecommunications, and financial industries. His research interests include
human-computer interaction, e-commerce, IS education, and mobile/ubiquitous computing. He is Editor
in Chief of the International Journal of Cyber Ethics in Education (IJCEE), and Co-Editor in Chief of
the International Journal of e-Business Research (IJEBR). Dr. Hsu also serves as Regional Editor-North
America for The Learning Organization (TLO), as Managing Editor of the International Journal of Data
Analysis and Information Systems (IJDAIS), and is on the editorial board of several other journals. Dr.
Hsu received his Ph.D. in Information Systems from Rutgers University, a M.S. in Computer Science from
the New Jersey Institute of Technology, and an M.B.A. from the Rutgers Graduate School of Management.
Ruben Xing is currently a professor at the department of Information and Operation Management, School
of Business, Montclair State University. Professor Xing received his PhD and the double Master degrees
from Columbia University, New York in 1992. Having worked for more than 15 years in Wall Street, Dr.
Xing has held senior IT management positions at several large financial conglomerates. He was a Vice
President at Global E-Strategy Department of Citigroup, Assistant Vice President at Merrill Lynch, a Senior
Information System Manager at Credit Suisse in metropolitan New York. He has been a topic speaker at
Wall Street Executives Strategic Development Forum for many years to date. Dr. Xing is also a lecturing
scholar and a keynote speaker for several international universities and conferences. He has been a listed
scholar by “Top 100 Leaders of US Business Magazine of 2012”, “US Who’s Who” since 2002. Dr. Xing’s
current research interests include Emerging Technology & Business Intelligence Development, Cloud and
Mobile Computing with Information Security, Supply Chain with Business Continuity and Disaster Recover
Planning, Green IT with Global Ecological and Social Issues.
Wencang Zhou is an assistant professor of management in the Department of Management at Montclair
State University. His primary research interests reside in the organizational behavior perspective of
entrepreneurship, groups and teams, cross cultural management as well as research methodology. Dr.
Zhou received his Ph.D. in Business from the City University of New York in 2012, with a concentration
in Organizational Behavior. Prior to joining the doctoral program at Baruch College, CUNY, he got his
Master in Management from Fudan University and B.S. degree from Peking University and worked in
banking industry for seven years.

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16 International Journal of Knowledge-Based Organizations, 5(2), 1-18, April-June 2015

APPENDIX 1

Excerpts Regarding Conflict of Interest

From United States Executive Order No. 12674
Principles of Ethical Conduct for Government Officers and Employees
…
Part I – Principles of Ethical Conduct
Section 101. Principles of Ethical Conduct
…
(b) Employees shall not hold financial interests that conflict with the conscientious performance
of duty.
(c) Employees shall not engage in financial transactions using nonpublic Government informa-
tion or allow the improper use of such information to further any private interest.
(d) An employee shall not, except pursuant o such reasonable exceptions as are provided by regu-
lation, solicit or accept any gift or other item of financial value from any person or entity seeking
official action from, doing business with or conducting activities regulated by the employee’s
agency, or whose interests may be substantially affected by the performance or nonperformance
of the employee’s duties.
…
(h) Employees shall act impartially and not give preferential treatment to any private organiza-
tion or individual.
…
(j) Employees shall not engage in outside employment or activities, including seeking or ne-
gotiating for employment, that conflict with official Government duties and responsibilities.
…
Section 102. Limitations on Outside Earned Income
(a) No employee who is appointed by the President to a full-time noncareer position in the ex-
ecutive branch (including full-time noncareer employees in the White House Office, the Office
of Policy Development, and the Office of Cabinet Affairs), shall receive any earned income fro
any outside employment or activity performed during that Presidential appointment.
…
Source: United States Code Annotated Title 5 Government Organization and Employees 7301
nt. (p. 170)

APPENDIX 2

USOC Code of Ethics Regarding Conflict of Interest

These principles provide a framework of integrity for interactions with or on behalf of the USOC.
However, given the unique makeup of the USOC family, more in depth questions may arise
regarding conflicts of interest. For this reason the following guidance is provided:
• The USOC defines a conflict of interest as any personal or financial relationship that could
influence or be perceived to influence your objectivity when representing or conducting business
for, or on behalf of the USOC.

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 International Journal of Knowledge-Based Organizations, 5(2), 1-18, April-June 2015 17

For example if (1) personal or financial interests exist with any person or concern with whom
the USOC has a business or other relationship and (2) the other relationship or interest could
influence or be perceived to influence the objectivity of your decisions, you must:
1. Disclose the interest to the Chief Compliance Officer, who shall have the authority to
either (a) approve the relationship, or (b) refer the matter to the Ethics Oversight Committee for
further consideration; and
2. Excuse yourself from any formal or informal discussions related to the relationship be-
tween the USOC and the person or concern; and
3. Abstain from voting and from seeking to influence the vote on any matter related to the
person or concern.
Inappropriate hospitality or gift giving between individuals can also create a conflict of interest.
• The USOC defines inappropriate hospitality as the offering or receiving of accommodations,
tours, event tickets, entertainment, meals or other similar personal benefits except as specifically
provided for by applicable policies.
Similarly, the USOC prohibits the receipt or giving of personal gifts except for items of
nominal value such as coffee mugs, hats, pins, etc. unless specifically provided for by applicable
policies.
Questions regarding the application of the USOC’s hospitality and gift policies must be
addressed to the Chief Compliance Officer.
Source: http://www.olympic-usa.org/about_us/documents/ethics.htm

APPENDIX 3

Excerpts from GE (General Electric) Integrity Policy

Regarding Conflict of Interest

Protecting GE assets
…
We have a fundamental obligation to make sound business decisions on behalf of our com-
pany that are undistorted by our individual family, financial or other interests.
Conflict of Interest Policy Overview
GE recognizes and respects that employees may take part in legitimate financial, business
and other activities outside their jobs. However, those activities must be lawful and free of con-
flicts with their responsibilities as GE employees.
Employees must not misuse GE resources or influence, or discredit GE’s good name and
reputation. The effectiveness of this policy depends in large part on the cooperation of all
employees in disclosing any situations that may be contrary to the intent of the policy and the
ethical standards that it expresses.

Core Requirements

• Disclose your outside activities, financial interests or relationships that may present a possible
conflict of interest or the appearance of a conflict. Make your disclosures in writing to your
manager as well as to company legal counsel or your business’ finance manager.
• In addition to complying with the law and GE policies, exercise your own good judgment
in all personal and business dealings outside your GE job.

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18 International Journal of Knowledge-Based Organizations, 5(2), 1-18, April-June 2015

• Avoid actions or relationships which might conflict or appear to conflict with your job
responsibilities or the interests of GE.
• Do not misuse GE resources, intellectual property, time or facilities (including office
equipment, e-mail, and computer applications).
• Obtain necessary approvals before accepting any position as an officer or director of an
outside business concern.
• Obtain the approval of your manager when accepting a board position with a not-for-
profit entity, when there may be a GE business relationship with the entity or an expectation of
financial or other support from GE.

What GE Employees Are Urged to Watch For

• Holding a financial interest in a company where you could personally affect GE business with
that company.
• Taking a part-time job where you may be tempted to spend time on that job during your
normal GE working hours or to use GE equipment or materials.
• Receiving gifts of greater than nominal value from suppliers, customers or competitors
while you are in a position to influence GE decisions that might affect or appear to affect the
outside concern.
• Receiving personal discounts or other benefits from suppliers, service providers or custom-
ers not available to the general public or similarly situated GE employees
• Accepting an offer to purchase “friends and family stock” in a company issuing shares
through an initial public offering (IPO) if you interface with that company in your GE business
activities.
• Directing business to a supplier that is owned or managed by a relative or close friend.
• Misusing GE resources, your position or influence to promote or assist an outside business
or not-for-profit activity.
• Preferential hiring of, direct supervision of, or making a promotion decision about a spouse,
relative or close personal friend.
• A romantic or other personal relationship that may create a conflict of interest with the
employee’s GE responsibilities or compromise company interests.
Source: GE Integrity Policy
http://www.ge.com/en/microsite/commitment/social/integrity/conflicts.htm

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