Explanation of conflict of interest

What is a conflict of interest?

Simply put, what is a conflict of interest definition — it is a situation where an employee's interests (e.g., financial or family) may conflict with the company's goals. Personal interests — family, friends, and financial — can influence their decisions, assessments, or actions in such cases. For example, if an employee becomes a member of a procurement committee and at the same time owns a stake in a supplier, their decisions will no longer be impartial. In general, a conflict of interest becomes apparent when personal motives “cause bias in decision-making.” That is, they potentially interfere with objectivity.

Conflict of interest vs. bias or favoritism

“Conflict of interest” has a contrary meaning that refers to something different from ordinary personal bias or favoritism. Conflict of interest is a formal possibility of bias due to the existence of other interests, while bias can arise subconsciously. A conflict of interest can be seen as a kind of “prejudice in advance” that is already present before any decision options are considered. Favoritism or nepotism are specific manifestations of a conflict of interest when, for example, a manager deliberately promotes their family or friends. In such cases, personal sympathies or connections become a “ballast” that influences decisions. For example, the well-known term “nepotism” means giving preference to family members, and this case is directly considered a conflict of interest. The company's operating model is disrupted when decisions are based not on merit but on family ties.

Why conflicts of interest are important in business ethics

Why is conflict of interest in business ethics such a hot topic? First, it undermines the fundamental principles of fairness and trust within an organization. One of the key ethical principles — fair treatment of all — is violated if someone is given unequal conditions due to personal connections. Second, the consequences of such a conflict can be extremely negative. Conflicts of interest “morally undermine the team” and can even lead to lawsuits. Imagine that employees see their friends being promoted in a non-transparent manner—this sharply reduces the motivation of the team and paves the way for internal corruption. That is why business ethics pays special attention to identifying and resolving conflicts of interest at an early stage. After all, the loss of trust due to a lack of transparency damages the company's reputation and can cost it more than the benefits to individuals.

Common types of conflicts of interest

Depending on the circumstances, there are several types of conflicts of interest. Here are the most common ones:

Personal gain and self-dealing

The classic type is when a person receives personal benefit to the detriment of the organization — this is called self-dealing. For example, a manager may impose a contract with a company in which he himself owns shares, even if it is not profitable for the employer.

Members of the board of directors are required to act in the best interests of the company, so any action that primarily benefits them personally is a conflict. This also includes market manipulation, such as using insider information for personal financial gain.

Outside employment and conflict of interest

Another common scenario is outside or secondary employment. When an employee simultaneously holds a position in another company—especially within the same industry—their focus and obligations become divided. This is often referred to as moonlighting.

For example, a clear conflict of interest arises when someone spends their primary work hours completing tasks for a competitor or running a business that directly undermines their employer’s interests. To protect against such risks, many companies explicitly regulate these situations in employment contracts and even require prior approval before outside work can be undertaken.

Employers are within their rights to step in whenever external employment creates a conflict of interest, disrupts job performance, or violates company policy. This also covers scenarios where a side job leaves the employee too exhausted to fulfill their main responsibilities effectively.

Family ties and nepotism

A special type of favoritism is nepotism, when instructions or advantages are given to relatives. If a boss is responsible for hiring and promotion and hires his brother or sister, even if they are objectively talented people, this immediately raises suspicions. Any lenient attitude towards relatives is a potential conflict of interest. Essentially, when family relationships play a role in decision-making, it undermines the integrity of the selection process and can lead to inefficiency within the company.

Conflict of interest in business and organizations

Workplace situations and examples

Let's look at a few typical examples of conflicts of interest in organizations. For example, an employee may leave work early to get to their second job, and if they fail to meet their daily quota because of this, they have a conflict between their personal life and their job responsibilities. Another case: a manager organizes fundraising or charity work among employees in the workplace—this is noble, but if he secures “likes” within the team, it can also be seen as biased. And the most striking example is when a young manager gets a job in the same company where his father-in-law becomes the boss. Formally, there may be no violations, but employees see this as a conflict of interest in the organization: the situation looks as if the manager has taken care of his family outside the office regulations. 

Board members and fiduciary duties

In the context of business, there is often talk of the fiduciary duties of managers and board members. This means that such people must act solely in the interests of the company or its shareholders. Conflict of interest examples: if a director enters into an agreement that is more beneficial to him personally, he violates his loyalty to the company. Imagine that a member of the board of directors of a large construction company is participating in a vote to select a contractor for a new large-scale project. Among the candidates is a firm where his wife is a co-owner. Formally, this firm's proposal may appear competitive, but the very fact of family ties already calls into question the impartiality of the decision. If the director supports this particular company, even without any direct benefit to himself, there is a real conflict of interest that could undermine shareholder confidence and lead to legal consequences. That is why corporate rules often require that, in such cases, the officer abstain from voting and leave the decision to other board members.

Frequently asked questions about conflicts of interest

What does conflict of interest at work mean?

A conflict of interest in the workplace means that an employee's personal goals may conflict with the company's goals. Simply put, when a conflict of interest arises at work, a person is in a situation of potential bias. For example, your hobby buddy is a supplier for the company—if you are involved in making decisions about him, the question of impartiality arises. In such cases, it is important to disclose the potential conflict and allow management to take action (e.g., assign the decision to another person). After all, it is important to act transparently: regardless of whether your interest has caused harm or not, disclosing it will help avoid suspicion and mistakes.

What are the 4 types of conflict of interest?

The most common classification is into four main types of conflict of interest, namely: 1) financial – when an employee's personal money or valuable resources are placed above the interests of the company (for example, when a manager owns shares in a supplier); 2) professional – when acquaintances, rather than the most deserving, are given preference in the distribution of positions, bonuses, or contracts (in fact, a manifestation of favoritism); 3) personal – when loyalty to friends or relatives determines decisions (this is essentially nepotism); 4) contractual – when an employee informally works for a competitor or enters into agreements on behalf of another organization. These categories may overlap. The main thing is to understand what specific interest is behind the action in order to respond appropriately.