Conflict of interest

A conflict of interest can arise in almost any business situation where the well-being of individuals and businesses may differ. In business a conflict of interest exists when an employee’s interests conflict with those of their employer, which may make the employee unable to represent the employer effectively. Employees are agents of the business they work for; implicitly or contractually, they are obligated to pursue the best interests of their employer. In a nonbusiness setting, the stereotypical example of a conflict of interest is the situation where a man or woman asks for advice about their loved one from a friend who is secretly in love with the same person. Business law addresses numerous types of potential conflicts of interest. Agents are not allowed to deal with themselves as buyers. For example, a manager for a company that has a fleet of cars cannot sell a company car to himself. Similarly, employees in a grocery store will purchase something to eat from another cashier rather than themselves. In some situations conflict-ofinterest rules extend to relatives of the agent, business associates, or other business organizations with which the agent is associated. If the employer consents to the sale, employees can sell company property to themselves. To avoid a potential conflict of interest, the employee must disclose all relevant information to the employer before dealing with the employer on his or her own behalf. Another potential conflict of interest exists when an employee competes with the employer while acting as an agent for the employer. For example, employees generally cannot purchase property for themselves if their employer still desires to purchase the property, nor should they solicit customers for a planned competing business while still employed their current firm. A third conflict-of-interest area exists when an employee acts on behalf of the other party to a transaction. Generally, an employee cannot act on behalf of the other party unless his or her employer knows about and consents to the action. As Mallor et al state, “Thus, one ordinarily cannot act as agent for both parties to a transaction without first disclosing the double role to, and obtaining the consent of, both principals.” The potential for conflict of interest exists in many business situations. The one most Americans encounter is in real-estate transactions. Only in the last decade have realtors been required to get signed acknowledgment from customers that they, the realtors, are agents of the seller. Also, in real-estate transactions it is common to have one closing attorney, acting on behalf of both the buyer and seller. In recent years, conflicts of interest have become more important and visible in American business. In 2002, investment-banking firms were fined for pressuring company investment analysts to give favorable ratings to companies the investment-banking company was soliciting other business from. Investment-banking giant Merrill Lynch agreed to a $100 million fine and to change how it monitors and pays stock analysts, without admitting any wrongdoing. Similarly, accounting firms that audit companies and also provide business-consulting services to the same company are open to a potential conflict of interest. Since the Enron-Arthur Andersen case, many accounting firms have divested themselves of their business-consulting services, and many CORPORATIONs have discontinued the use of consulting services from their AUDITING company. Part of the legal problems facing Enron Corporation involves company dealings with PARTNERSHIPs created and owned by company executives. These partnerships purchased ASSETS from the company and then sold them for significant profits for the partnership, not the company. Conflict of interest may also arise for members of a company’s BOARD OF DIRECTORS. Most boards include outside representatives, people who do not work for the company but are knowledgeable about the business and industry in which the company operates. Members of the board are not agents of the company and thus are not subject to the same conflict-of-interest rules. Under the MODEL BUSINESS CORPORATION ACT, board members can avoid conflict of interests when
• the transaction has been approved by a majority of the informed, disinterested directors
• the transaction has been approved by a majority of the shares held by informed, disinterested shareholders
• the transaction is fair to the corporation.