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Global Business Ethics

LESSON

3
ETHICS AND CONFLICTS OF INTERESTS

CONTENTS
3.0 Aims and Objectives
3.1 Introduction
3.2 Conflicts of Interest
3.2.1 Violation of Confidentiality
3.2.2 Biased Judgment
3.2.3 Direct Competition
3.2.4 Misuse Position
3.3 Managing Conflict of Interest
3.3.1 Ethics of Managing Conflicts of Interest
3.4 Ethical and Social Implication on Business
3.4.1 Benchmarking
3.4.2 Stake Holder’s Dialogue Approach
3.5 Let us Sum up
3.6 Lesson End Activity
3.7 Keywords
3.8 Questions for Discussion
3.9 Suggested Readings

3.0 AIMS AND OBJECTIVES

After studying this lesson, you should be able to understand:
z Conflicts of Interest
z Violation of Confidentiality
z Biased Judgment
z Direct Competition
z Misuse Position
z Managing conflicts of interest
z Ethical and Social Implications of Business
z Benchmarking
z Stake holder’s Dialogue approach
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Ethics and Conflicts of Interests
3.1 INTRODUCTION
The ‘conflict of interest’ is not merely a conflict between conflicting interests,
although conflicting interests are involved. The conflict occurs when a personal
interest comes into conflict with an obligation to serve the interests of another. More
precisely, we can say that a conflict of interest is a conflict that occurs when a
personal interest interferes with a person’s acting so as to promote the interest of
another when the person has an obligation to act in that persons interests. This
obligation is stronger than the obligation merely to avoid hamming a person and can
arise only when the persons in a special relation, such as employer and employee.

3.2 CONFLICTS OF INTEREST

Conflicts of interest concept is a tough one to study. It covers several distinct moral
failings that run together often. In order to fully understand regarding the definition
and as well as the reasons that is morally wrong for a person to be in a conflict of
interest situation, it is important to separate them. Four kinds of conflict of interest
found are as shown in the figure 3.1 below.

Violation of Exercising Biased

Confidentiality Judgment

Conflict of
interests’
types

Misusing a Position Engaging in Direct

competition

Figure 3.1: Conflicts of Interest Types

3.2.1 Violation of Confidentiality

z Confidential business information has been recognised from a long time as
property. Such a thing acquired or compiled by a company in the course and
conduct of its business is a species of property to which the company has the
exclusive right and benefit.
z Violation of confidentiality under certain circumstances is a conflict of interest.

3.2.2 Biased Judgment

z A characteristic of professionals, such as lawyers, accountants, engineers
(specialised knowledge used in the service of clients); professionals paid for using
the knowledge to make judgement for the benefit of others; also value of their
services lies in the confidence that can be placed in a professionals judgement
z Judgment is not exclusively a feature of professional work; Decisions to be used
in the best interests of the employing firm; But, outside business interests
influence the judgement of an employee. E.g. Potential conflict of interest in
accepting a gift from a supplier who expects favourable treatment in the future.

3.2.3 Direct Competition

An employee to engage indirect competition with his employer; an employee's
judgement is apt to be impaired for having another interest. E.g. A Director of a public
24 sector company in India had an interest in a private company where his son was
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working as a managing director. The private sector was competing with the PSU in
some areas. Majority of the services from that PSU was offered to the private
company (free of cost sometimes or at cost price many a times).

3.2.4 Misuse Position

z Holding a position in a company to gives a person powers and opportunities that
would not be available otherwise.
z An employee has an obligation not to use these powers and opportunities for
personal gain.
z It is not enough to be incorruptible and act with honest motives; It is equally
important to use good judgement and conduct one's outside activities so that no
one even raise the suspicion for having misused the position within the company.

Check Your Progress 1

1. What do you understand by conflicts of interest?

………………………………………………………………………………
………………………………………………………………………………
2. What are the different types of conflict of interest?
………………………………………………………………………………
………………………………………………………………………………

3.3 MANAGING CONFLICT OF INTEREST

Conflicts result from structural features of a profession or an organisation. These are
to be managed with carefully designed good systems. A person in a conflict of interest
(potential or actual) may be in the wrong. Conflicts usually occur to a person as a
member or a professional of an organisation. Conflict of interest is not merely a matter
of ethics. Certain professions are highly vulnerable to conflict of interest. Business
firms face conflicts more because of their need to provide many kinds of services to
different customers. In some cases, both professional and organisational factors are
involved.
Various means for managing conflict of interest exist. Many corporations in their
codes of ethics have mentioned in a separate section which addresses the problem.
However, the management of conflict of interest requires a variety of approaches to be
adopted by professional groups and business organisations.
To conclude, we can say that similar to whistle blowing, trade secrets and conflicts of
interest involve a delicate balancing of the rights and interests of:
z Employers
z Employees
z Public at large

3.3.1 Ethics of Managing Conflicts of Interest

1. Objectivity:
™ All professional codes require objectivity.
 ™ A commitment to be objective serves to avoid being biased by an interest that 25
Ethics and Conflicts of Interests
might interfere with a person's ability to serve another.
™ Identifies objectivity (the obligation to be impartial and intellectually honest)
with avoiding actual conflicts of interest and independence (avoiding relations
that would impair objectivity) with potential conflicts.
2. Avoidance:
Direct means of managing conflicts of interest is to avoid acquiring any interests
that would bias one's judgement or otherwise interfere with servicing others.
Avoidance is easier said than done. It is difficult to identify or anticipate a
conflicting interest; Acquiring conflict of interest may be unavoidable due to the
nature of business; when adverse interests cannot be avoided, they can be
countered by introducing new interests in a process known as alignment.
3. Disclosure:
™ Serves to manage conflict of interest primarily because whoever is potentially
harmed by the conflict has the opportunity to disengage or at least to be on
ground.
™ In legal ethics, there is no conflict of interest if the lawyer discloses the
conflict and is confident that the client will be unaffected and the client
accepts the lawyer’s service. Disclosure may include all types of information.
The greater the transparency (openness of information), the less opportunity is
for conflict of interest to occur.
4. Competition:
™ Stiff competition provides a powerful incentive to avoid conflicts of interest,
both actual and potential.
5. Rules and Policies:
™ Companies have policies regarding conflicts of interest. These need
employees to avoid acquiring adverse interests by not accepting gifts or
investing in potential suppliers.
™ Controls on flow of information that affect who has access to what
information are necessary; rules and policies in question also limit conflict of
interest.
™ Priority rules are useful means for managing conflicts of interest.
6. Independent Judgement:
Conflict of interest results in biased judgement; the problem can be corrected by
utilising a third party who is more independent. For example, in companies,
independent appraisers are used, similar to a judge in the courts of law.
7. Structural Changes:
™ Conflicts of interest arise from providing different services to different
customers or client; these can be reduced by compartmentalizing the services.
Sometimes there are dictated by law.
™ In multifunction institutions, conflicts can be reduced by strengthening the
independence and integrity of each unit.

3.4 ETHICAL AND SOCIAL IMPLICATION ON BUSINESS

Encourage the emergence of a professional approach with a framework of standards,
training and accreditation that will allow social and ethical accounting, auditing and
26 reporting to move beyond the experimental end of the corporate sector into the
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mainstream.
Independent attempts to design and implement methods of social and ethical
assessment emerged in the late 80s.The practices that emerged with this force are
benchmarking and stakeholders' dialogues.

3.4.1 Benchmarking
Benchmarking is comparison of the social and environmental performance of
companies by scoring them against another company's industry or sector averages or
societal norms. Corporate benchmarking is carried out in the following ways:
a) Through voluntary questionnaire based surveys in combination with research
through public records such as company's annual reports.
b) Questionnaires are sent to companies concerned and they answer the questions.
c) Specialist organizations also have particular aspects of corporate activity,
common wages and equal opportunity to staff members.
Benchmarking has many advantages:
a) It allows people (including external stockholders and other interest parties) to
compare the performance of companies and other organizations according to the
criteria relevant to them.
b) It provides cheap information about comparative financial performance of
companies.
c) It helps ethical investment and aids customers to make investment and
consumption decisions.
Some of its disadvantages are:
a) Selection of benchmarks for particular audience, i.e., group of people or a
particular area will exclude the other areas. For example, if environmental
benchmarking for a product is conducted in northern India then the interest group
and other areas will not be considered, and moreover, government rules and
regulations vary from state to state.
b) It is just not enough to tick a box 'we do' or a warning to prove an ethical
dimension of an organization. Fox example, a simple warning written on cigarette
boxes in India does not absolve the company of its social and ethical
responsibilities.
c) Relative cheapness is achieved at the cost of considerable simplification.

Check your progress 2

Fill in the blanks:
1. The conflict occurs when comes into conflict with an obligation to serve the
________ interests of another.
2. ________ of confidentiality under certain circumstances is a conflict of
interest.
3. All professional codes require ________.
4. ________ is comparison of the social and environmental performance of
companies by scoring them against another company's industry or sector
averages or societal norms.
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3.4.2 Stake Holder’s Dialogue Approach Ethics and Conflicts of Interests

Value, against which an organization should be assessed, reflects the values of

stakeholders groups. These groups should regularly assess the organisation’s
performance based on those values. This approach has been most systematically
applied through ethical accounting process development at Copenhagen Business
School and was first used Danish Regional Bank, SBN Bank in 1989.
a) The core values transcend mundane existence and provide the organisation with a
sense of well-being, pride and confidence.
b) The existence of such values in explicit form enables managers to take complex
value decisions.
The different advantages of stakeholder’s dialogue approach are:
a) Detailed study of situation which was not possible with benchmarking.
b) Dialogue could raise issues related to customer, staff satisfaction, supplier, etc.
c) Ability to underpin strategic processes unlike benchmarking.
The various disadvantages are:
a) Expensive and time consuming in comparison to benchmarking.
b) Offers little basics for comparison with other organisations or industry norms.

3.5 LET US SUM UP

The first most important understanding required to live in balance is the awareness
and realization that conflicts are unavoidable and even essential as a process of
growing up. It acts not only spice to business life but also leads to better
understanding of different interests in the business community.

3.6 LESSON END ACTIVITY

Visit some of the organisations you know. Find out and discuss the techniques they
use to manage conflicts in their organisation.

3.7 KEYWORDS
Benchmarking: It is comparison of the social and environmental performance of
companies.
Conflict: It differences in personal interests.

3.8 QUESTIONS FOR DISCUSSION

1. What is conflict of interest?
2. Elucidate ethics and conflicts of interest with a few examples.
3. Do conflicts arise? If yes. How it occurs and gives the means to manage the
conflicts?
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Global Business Ethics
Check Your Progress: Model Answers
CYP 1
1. We can say that a conflict of interest is a conflict that occurs when a
personal interest interferes with a person’s acting so as to promote the
interest of another when the person has an obligation to act in that persons
interests.
2. Types of conflicts:
a) Violation of Confidentiality
b) Biased Judgement
c) Direct competition
d) Misuse Position

CYP 2
1. Personal interest
2. Violation
3. Objectivity
4. Benchmarking

3.9 SUGGESTED READINGS

Manuel G. Velasquez, Business Ethics.
Laura P. Hart Man, Business Ethics.
John R. Boat Right, Ethics in Conduct of Business.
William A. Wines, Ethics Law and Business.