The Small Business’ Guide To Conflicts Of Interests

mariam-abu-hussein
Mariam Abu HusseinLegal Assessment Specialist @ Lawhive
Updated on 10th May 2024

For small businesses, it’s important to recognise and address conflicts of interest. If they aren’t managed effectively, it can lead to ethical dilemmas, legal issues, and damage to the company’s reputation. One way to do this is by developing and implementing a Conflict of Interest Policy. 

conflicts-of-interest-guide

In this article, we’ll explore conflicts of interest and how they relate to small businesses. In particular, we’ll also look at how to avoid and handle conflicts if they come up.

What is a conflict of interest?

A conflict of interest happens when someone or a company's reliability is compromised because their interests clash with their professional responsibilities. This could be because they have a personal stake, like money, status, relationships, or reputation, that might affect their ability to make fair decisions or judgments.

Conflicts of interest can either be active or probable, the latter meaning that there’s a chance a conflict of interest may arise later.

What are the four types of conflict of interest? 

There are four main types of conflicts of interest: 

Financial Interests 

This is when an individual’s financial interests could impact their professional judgment. For instance, a business owner investing in a competitor or holding shares in a company that the business deals with. 

Personal Relationships 

This is when personal relationships, such as friendships or family ties, influence business decisions, potentially compromising the organisation's interests. For example, hiring a friend or family member for a position they may not be qualified for.

Business Interests 

This is when an employee has a stake in another company that competes with or has a relationship with their employer, it can create a conflict of interest. This could include being a shareholder in a competitor company.

Gifts and Perks 

If individuals receive gifts, perks, or favors from parties with whom the business interacts, it can create a perceived conflict of interest. Even if no direct influence is exerted, accepting such gifts can undermine trust and raise questions about impartiality.

Examples of conflicts of interest 

Here are some examples of conflicts of interest:

  • A financial advisor recommending investment products from a company they have shares in, rather than the best option for their client.

  • A hiring manager favouring a friend or family member for a job, even if they're not the most qualified candidate.

  • A journalist writing a positive review about a friend's business without disclosing their relationship.

  • A lawyer representing both parties in a legal case, where their loyalty to one client could compromise their representation of the other.

  • An executive making decisions that benefit a company they have undisclosed ownership in.

What is a personal interest?

Personal interests concern a specific individual. They can be either financial, such as monetary gain, or non-financial, which could involve factors like personal relationships or professional opportunities.

What are the potential consequences of a conflict of interest?

Conflicts of interest can damage a company's reputation and cause legal issues, or financial losses (like missed opportunities or loss of clients).

Is a conflict of interest illegal in the UK? 

A conflict of interest is not automatically illegal in the UK. However, how it's handled and whether it leads to actions that breach laws or regulations can determine its legality.

Failing to disclose a conflict of interest or acting upon it in a way that violates laws or regulations, such as engaging in bribery or insider trading, could be illegal. 

What is a Conflict of Interest policy?

A Conflict of Interest Policy is a formal document that outlines how an organisation identifies, discloses, and manages conflicts of interest among its employees, directors, officers, and other stakeholders.

Does my business need a conflict of interest policy? 

Whether your business needs a conflict of interest policy depends on the size of your company, the industry you operate in, and the nature of your business activities.

However, having a COI Policy can help prevent conflicts from negatively impacting your business operations and reputation.

What should a conflict of interest policy include?

There are different types of COI policies, but they typically include: 

  • A definition of conflict of interest 

  • The process for employees and other stakeholders to disclose any potential conflicts of interest

  • How the company will assess and manage disclosed conflicts of interest to ensure they don't compromise the organisation's integrity or objectives.

  • Guidance and training in identifying and managing conflicts of interest effectively.

  • The repercussions for failing to disclose conflicts of interest or acting upon them inappropriately.

How to identify a conflict of interest

To effectively identify a conflict of interest, you should first have a clear idea of what is and is not a conflict of interest in your business. This definition should be accessible to everyone in the company, along with clear processes for disclosure of any conflicts that arise. 

Alongside this, small business owners should keep a close eye on interests and relationships, as well as situations that could cause a conflict of interest for employees.

If you aren’t sure if a relationship or personal interest is a conflict of interest, a small business lawyer can provide advice personalised to your situation to make sure you handle them effectively.

How to respond to a conflict of interest

If you identify a conflict of interest, or it is disclosed to you, the first step is to evaluate the potential impact of the conflict on the business and then put measures in place to mitigate these risks.

Risk mitigation in conflicts of interest might include pulling an employee from a project or stopping them from making key decisions.

Alternatively, it might mean appointing someone to keep a close eye on a relationship to make sure someone’s reliability isn’t compromised. As a last resort, it may lead to an employee being dismissed or legal action against them. 

In complex situations, it may be wise to speak to a solicitor about the conflict to understand what the appropriate response may be, particularly if it becomes evident that the stakes are high and it could cause significant damage to the business. 

How to avoid a conflict of interest 

As with most things, it’s best to be proactive in avoiding a conflict of interest if possible.

The absolute best way to do this is to foster a culture of openness and transparency, where employees understand what a conflict of interest is and the potential implications of it. 

A conflict of interest policy can go a long way to doing this, alongside regular training, guidance, and information for employees. 

Can an employee be fired for a conflict of interest?

An employee can be fired for a conflict of interest in certain circumstances, particularly if their actions or decisions stemming from the conflict of interest are deemed to harm the organisation or violate its policies.

Many companies have policies that require employees to disclose any conflicts of interest and refrain from engaging in activities that could compromise their impartiality or the organisation's integrity.

If an employee fails to disclose a conflict of interest, acts upon it in a way that harms the company, or violates company policies, they may face disciplinary action, including termination of employment. 

Conflicts of interest aren’t always cut-and-dried cases. Sometimes, small businesses may need support in unpicking a conflict of interest or understanding what action can be taken in response to a conflict of interest, especially where gross misconduct is involved. 

If you find yourself grappling with a conflict of interest and need to see the woods for the trees, our network of solicitors is on hand to help. 

Contact us today for a free case evaluation and quote for the services of a specialist lawyer.

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