A conflict of interest is a situation in which someone in a position of trust, such as a lawyer, insurance adjuster, a politician, executive or director of a corporation or a medical research scientist or physician, has competing professional or personal interests. Such competing interests can make it difficult to fulfill his or her duties impartially. A conflict of interest exists even if no unethical or improper act results from it. A conflict of interest can create an appearance of impropriety that can undermine confidence in the person, profession, or court system. A conflict can be mitigated by third party verification or third party evaluation noted below—but it still exists.
However, conflicts of interest do not only apply to professionals. A conflict of interests arises when anyone has two duties which conflict. For example, an employee might have a duty to well and faithfully perform their work as purchasing manager, and might also have a familial duty to their sibling who happens to be tendering for the sale of widgets to the manager's employer. In this case the employee has a conflict of interests despite the fact that he is not a lawyer, doctor, politician, etc.
In the legal profession, the duty of loyalty owed to a client prohibits an attorney (or a law firm) from representing any other party with interests adverse to those of a current client. The few exceptions to this rule require informed written consent from all affected clients. In some circumstances, a conflict of interest can never be waived by a client. As perhaps the most common example encountered by the general public, the same firm will not represent both parties in a (divorce and or child custody) case.
A prohibited or undisclosed representation involving a Conflict Of Interests can subject an attorney to disciplinary hearings, the denial or disgorge of legal fees, or in some cases (such as the failure to make mandatory disclosure) criminal proceedings. In the USA, possible conflicting clients of a single attorney are deemed as possible conflicts for all lawyers associated with a law firm. Law firms often employ software in conjunction with their case management and accounting systems in order to meet their duties to monitor their Conflict Of Interest exposure, and obtain waivers when necessary or appropriate.
More generally, conflict of interests can be defined as any situation in which an individual or corporation (either private or governmental) is in a position to exploit a professional or official capacity in some way for their personal or corporate benefit.
Depending upon the law or rules related to a particular organization, the existence of a conflict of interest may not, in and of itself, be evidence of wrongdoing. In fact, for many professionals, it is virtually impossible to avoid having conflicts of interest from time to time. A conflict of interests can, however, become a legal matter for example when an individual tries (and/or succeeds in) influencing the outcome of a decision, for personal benefit. A director or executive of a corporation will be subject to legal liability if a conflict of interests breaches his Duty of Loyalty.
There often is confusion over these two situations. Someone accused of a conflict of interest may deny that a conflict exists because he/she did not act improperly. In fact, a conflict of interests can exist even if there are no improper acts as a result of it. (One way to understand this is to use the term "conflict of roles". A person with two roles—an individual who owns stock and is also a government official, for example—may experience situations where those two roles conflict. The conflict can be mitigated—see below—but it still exists. In and of itself, having two roles is not illegal, but the differing roles will certainly provide an incentive for improper acts in some circumstances.)
The following are the most common forms of conflicts of interests:
Other improper acts that are sometimes classified as conflicts of interests are probably better classified elsewise. Accepting bribes can be classified as corruption; almost everyone in a position of authority, particularly public authority, has the potential for such wrongdoing. Similarly, use of government or corporate property or assets for personal use is fraud, and classifying this as a conflict of interests does not improve the analysis of this problem. Nor should unauthorized distribution of confidential information, in itself, be considered conflict of interests. For these improper acts, there is no inherent conflict of roles (see above), unless being a (fallible) human being rather than (say) a robot in a position of power or authority is considered to be a conflict.
Short of avoiding conflicts of interests, the best way to deal with them are one or more of the following (mitigation) measures:
Commonly, politicians and high-ranking government officials are required to disclose financial information - assets such as stock, debts such as loans, and/or corporate positions held, typically annually. To protect privacy (to some extent), financial figures are often disclosed in ranges such as "$100,000 to $500,000" and "over $2,000,000".
Certain professionals are required either by rules related to their professional organization, or by statute, to disclose an actual or potential conflict of interests. In some instances, the failure to provide full disclosure is a crime.
Those with a conflict of interests are expected to recuse themselves from (i.e., abstain from) decisions where such a conflict exists. The imperative for recusal varies depending upon the circumstance and profession, either as common sense ethics, codified ethics, or by statute. For example, if the governing board of a government agency is considering hiring a consulting firm for some task, and one firm being considered has, as a partner, a close relative of one of the board's members, then that board member should not vote on which firm is to be selected. In fact, to minimize any conflict, the board member should not participate in any way in the decision, including discussions.
Judges are supposed to recuse themselves from cases when personal conflicts of interest may arise. For example, if a judge has participated in a case previously as some other judicial role he/she is not allowed to try that case. Recusal is also expected when one of the lawyers in a case might be a close personal friend, or when the outcome of the case might affect the judge directly, such as whether a car maker is obliged to recall a model that a judge drives. This is required by law under Continental civil law systems and by the Rome Statute, organic law of the International Criminal Court.
Consider a situation where the owner of a majority of a publicly held corporation decides to buy out the minority shareholders and take the corporation private. What is a fair price? Obviously it is improper (and, typically, illegal) for the majority owner to simply state a price and then have the (majority-controlled) board of directors approve that price. What is typically done is to hire an independent firm (a third party), well-qualified to evaluate such matters, to calculate a "fair price", which is then voted on by the minority shareholders.
Third-party evaluations can also be used as proof that transactions were, in fact, fair ("arm's-length"). For example, a corporation that leases an office building that is owned by the CEO might get an independent evaluation showing what the market rate is for such leases in the locale, to address the conflict of interests that exists between the fiduciary duty of the CEO (to the stockholders) and the personal interest of that CEO (to maximize the income that the CEO gets from owning that office building).
Codes of ethics help to minimize problems with conflicts of interests because they can spell out the extent to which such conflicts should be avoided, and what the parties should do where such conflicts are permitted by a code of ethics (disclosure, recusal, etc.). Thus, professionals cannot claim that they were unaware that their improper behavior was unethical. As importantly, the threat of disciplinary action (for example, a lawyer being disbarred) helps to minimize unacceptable conflicts or improper acts when a conflict is unavoidable.
As codes of ethics cannot cover all situations, some governments, e.g., Canada, have established an office of the ethics commissioner. Ethics commissioner should be appointed by the legislature and should report to the legislature.