# What Is a Conflict of Interest?

> **Definition**
>
> A conflict of interest arises when personal interests or relationships cause bias in decision-making and affect job performance.

## What Is a Conflict of Interest?

A conflict of interest occurs when an entity or individual becomes unreliable because of a clash between personal interests and professional duties or responsibilities. The party with the conflict of interest is usually asked to remove themselves or can be legally required to recuse themselves when such a situation arises.

### Key Takeaways

*   A conflict of interest occurs when an individual's or entity's vested interests raise a question of whether their actions, judgment, and/or decision-making can be unbiased.
*   A conflict of interest arises in business when someone chooses personal gain over duties to their employer.
*   It can also arise when they choose personal gain over that of an organization in which they're a stakeholder.
*   Conflicts of interest often have legal ramifications.

![Conflict of Interest](https://www.investopedia.com/thmb/mkXHDRGmIej6NMYDbMgwyphsuao=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/CONFLICT-OF-INTEREST-41f6829452534327b66a43a51a670200.jpg)

*— Investopedia / Yurle Villegas*

## How Conflicts of Interest Work

A conflict of interest in business refers to a situation in which an individual's personal interests conflict with the professional interests they owe to their employer or to the company in which they're invested. A conflict of interest arises when someone chooses personal gain over their duties to an organization in which they're a [stakeholder](https://www.investopedia.com/terms/s/stakeholder.asp) or when they exploit their position for personal gain.

All corporate board members have [fiduciary](https://www.investopedia.com/terms/f/fiduciary.asp) duties and a [duty of loyalty](https://www.investopedia.com/terms/d/duty-loyalty.asp) to the corporations they oversee. They're harming the company with a conflict of interest if one of the directors chooses to take action that benefits them to the detriment of the firm.

A conflict of interest can lead to legal ramifications as well as job loss but it's possible to remove that person from the situation or decision in which a possible conflict of interest can arise if there's a perceived conflict of interest and the individual hasn't yet acted maliciously. They could simply remove themselves from all decisions that could positively or negatively affect their personal business.

## Examples of Conflict of Interest

One example of a conflict of interest might be the board member of a property insurance company who votes on the induction of lower premiums for companies with fleet vehicles when they own a truck company. It could be considered a conflict of interest because the [board member](https://www.investopedia.com/articles/financial-theory/11/become-board-member.asp) has a special interest in the outcome, even if the institution of lower premiums isn't a bad business move for the insurer.

Representation by a lawyer or party with a vested interest in the outcome of the trial would be considered a conflict of interest, and the representation would not be allowed. Judges who have a relationship with one of the parties involved in a case or lawsuit will recuse themselves from presiding over the case.

[Gift issuance](https://www.investopedia.com/politicians-and-the-rules-of-acceptable-gifts-11752305) is also a very common conflict of interest. It happens when a corporate manager or officer accepts a gift from a client. Companies normally circumvent this issue by prohibiting gifts from customers to individual employees.

Troublesome situations may also arise when an individual collects confidential information in the course of professional duties. Any information of this type that's used for personal gain by an employee is a huge conflict of interest in the United States. The financial industry constantly grapples with this type of conflict of interest in the form of [insider trading](https://www.investopedia.com/terms/i/insidertrading.asp).

The hiring of or showing favorable workplace treatment to a relative or spouse is known as nepotism. It can result in a potential conflict of interest.  

## Types of Conflict of Interest

Conflicts of interest can occur in several relationships.  

### Financial Conflicts of Interest

Financial conflicts of interest occur when an individual or organization stands to benefit financially from decisions or actions taken in their professional capacity. This type of conflict can arise when a financial advisor receives [kickbacks from institutions](https://www.investopedia.com/terms/k/kickback.asp) for recommending or selling certain financial products.

### Relational Conflicts of Interest

Relational conflicts of interest arise when personal relationships influence professional decisions. These relationships can include familial ties, friendships, or romantic liaisons. A manager might favor a friend or relative for a [promotion](https://www.investopedia.com/terms/p/promotion.asp) or a board member might advocate for a contract with a company owned by a family member.

### Professional Conflicts of Interest

Professional conflicts of interest occur when competing professional duties or allegiances interfere with impartiality. A lawyer representing two clients with opposing interests faces a professional conflict. A consultant working for competing firms might struggle to maintain objectivity and confidentiality when trying to serve both clients at the same time.

### Ideological Conflicts of Interest

Ideological conflicts of interest arise when personal beliefs or values clash with professional responsibilities. A researcher with strong environmental views might struggle to remain objective while conducting a study funded by an oil and gas corporation.

### Time-based Conflicts of Interest

Time-based conflicts of interest occur when an individual's commitments to multiple roles or projects lead to divided attention and compromised effectiveness. An employee working for two companies simultaneously might not be able to fully dedicate themselves to either role.  

### Organizational Conflicts of Interest

Organizational conflicts of interest occur when an entity’s interests conflict with those of its stakeholders or the public. A non-profit organization that receives funding from a corporation might face pressure to align its activities with the interests of the donor even if it conflicts with its mission.

## Disclosing Conflicts of Interest

You can sometimes simply disclose the conflict of interest rather than recuse yourself from a situation. Best practices for disclosing conflicts of interest involve identifying potential conflicts early and communicating them clearly to the right people.

You'll want to include detailed information when disclosing a conflict of interest including the nature of the conflict, the individuals or entities who are involved, and the potential impact on decision-making processes. Companies often have regular training and awareness programs to help individuals recognize and disclose conflicts of interest effectively.

Regulations surrounding the disclosure of conflicts of interest vary across industries and jurisdictions but they generally aim to promote transparency and accountability. Regulations in the financial services industry often require that advisors disclose any financial incentives that might influence their recommendations to clients.

Organizations can establish oversight committees or appoint [compliance officers](https://www.investopedia.com/terms/c/corporategovernance.asp) to review disclosures and ensure adherence to policies. A department that's perhaps within the risk department of an organization will review the disclosures to determine whether more severe action should be taken regarding the conflict.

> **Important**
>
> A conflict of interest doesn't mean you're in trouble. It simply means that you may be in a situation that could prevent you from being fair to all parties.

## Positive Aspects of Conflicts of Interest

Conflicts of interest are generally bad but there are reasons they arise and these reasons may give a company a good reason for the conflict. It might simply be a case where the conflict must be disclosed or monitored and the company could still find itself in the best situation.

Individuals with conflicts of interest may bring valuable expertise and knowledge to a situation in some cases. A board member with financial ties to a relevant industry might offer insights that enhance decision-making processes. They're bound to have conflicts that come along with their expertise if this expert is heavily tied to the community or industry.

Conflicts of interest often arise from existing relationships and networks. Leveraging these connections can lead to beneficial collaborations and partnerships. A business executive with personal relationships in the industry might facilitate strategic alliances or joint ventures that enhance organizational growth. A company might pursue someone who intentionally would have conflicts of interest because of their [large network](https://www.investopedia.com/terms/n/networking.asp) or relationships for this reason.

Financial conflicts of interest can stimulate innovation and investment when they're managed correctly. A researcher with financial interests in a startup might be more motivated to push the boundaries of innovation because they have more of a personal stake in the success of the company. Financial ties can create a positive incentive in this case although that also comes with some risk.

## Conflicts of Interest and the SEC

The [Securities and Exchange Commission](https://www.investopedia.com/articles/investing/112914/understanding-sec.asp) (SEC) has extensive rules that regulate conflicts of interest. The SEC adopted Rule 192 on Nov. 27, 2023 to implement Section 27B of the Securities Act of 1933. This rule prohibits "securitization participants" from engaging in transactions that could create material conflicts of interest with investors. These participants can include underwriters, placement agents, initial purchasers, and the sponsors of asset-backed securities.

The rule defines "securitization participants" broadly to include affiliates or subsidiaries who are acting in coordination with them. Prohibited transactions include short sales, purchasing credit default swaps, and other actions that could financially benefit the participant at the expense of the ABS investor. The rule also prohibits transactions that are designed to evade its prohibition even if they technically comply with the exceptions.  

> **Fast Fact**
>
> A financial advisor who knowingly advises clients to purchase financial products that are not in their best interests (too expensive, too risky, or not in line with stated goals), but which earn the advisor a bigger commission, would be guilty of conflict of interest.

## Real-World Example of Conflict of Interest

An [agency problem](https://www.investopedia.com/terms/a/agencyproblem.asp) refers to a type of conflict of interest in which agents don't fully represent the best interests of their principals in the financial industry. The [Enron scandal](https://www.investopedia.com/updates/enron-scandal-summary/) is an extreme example of an agency problem that led to the collapse of what was once one of the largest companies in the United States.

Enron Corporation declared bankruptcy in 2001 after it was revealed that the top leaders in the company had used [mark-to-market](https://www.investopedia.com/terms/m/marktomarket.asp) accounting and [special purpose vehicles (SPVs)](https://www.investopedia.com/terms/s/spv.asp) to hide financial losses. This made the company appear more profitable than it was.

Enron's executives had a legal responsibility to protect the interests of its shareholders but some executives engaged in illegal activities instead to camouflage the company's massive losses and debts. Several executives were indicted for their actions and eventually sent to prison.

## How Do I Identify a Conflict of Interest?

Identifying a conflict of interest involves recognizing situations in which personal interests or relationships might influence professional duties. This process requires a thorough assessment of one's financial ties, familial relationships, friendships, and any other personal connections that could impact decision-making.

## When Should a Conflict of Interest Be Disclosed?

A conflict of interest should be disclosed as soon as it's identified, ideally before any decisions or actions are taken that could be influenced by the conflict. Timely disclosure allows organizations and stakeholders to assess the potential impact and take appropriate measures to mitigate any bias or monitor associated risks.

## What Information Should Be Included in a Conflict of Interest Disclosure?

A conflict of interest disclosure should include detailed information about the nature of the conflict, the parties involved, and how the conflict could potentially influence professional duties. It should specify the financial interests, relationships, or other factors contributing to the conflict.

## How Often Should Conflicts of Interest Be Reviewed?

Conflicts of interest should be reviewed regularly to ensure that any changes in personal or professional circumstances are promptly identified and disclosed. Annual reviews are common practice.

## The Bottom Line

A conflict of interest arises when personal interests or relationships may or do affect professional duties and cause potential bias in decision-making. Companies will want to be sure to identify, disclose, and manage these conflicts appropriately to preserve transparency, trust, and ethical standards.

> **Article Sources**
>
> 1.  American Bar Association. "[Rule 1.7 Conflict of Interest: Current Clients - Comment](https://www.americanbar.org/groups/professional_responsibility/publications/model_rules_of_professional_conduct/rule_1_7_conflict_of_interest_current_clients/comment_on_rule_1_7/)."
>     
> 2.  United States Court. "[Code of Conduct for United States Judges](https://www.uscourts.gov/judges-judgeships/code-conduct-united-states-judges)."
>     
> 3.  U.S. Securities and Exchange Commission. "[Prohibition Against Conflicts of Interest in Certain Securitizations](https://www.sec.gov/about/divisions-offices/division-investment-management/prohibition-against-conflicts-interest-certain-securitizations)."
>     
> 4.  U.S. Government Publishing Office, govinfo. "[Role of the Financial Institutions in Enron's Collapse - Volume 1](https://www.govinfo.gov/content/pkg/CHRG-107shrg81313/html/CHRG-107shrg81313.htm)."