Conflicts of interest and how to deal with them

There is seldom a case when conflicts of interest do not occur. These are situations in which an individual is involved in multiple interests, mostly a personal interest which does not align with his professional responsibilities.  Such a situation corrupts the actor’s decision making and arises in many fields such as politics and business. A high profile example of the last century is the Arthur Andersen – Enron story.  Or, a recent one is the accusation of Rajaratnam of insider trading, who made an illicit 63.8 million US dollars over the last years by trading on illegal insider tips.

The next example tells you that conflicts of interest arise in diverse contexts. Surgeons, having years of experience in their proper practice, are regarded as the best innovators in medical devices. And so they often engage in entrepreneurial activities and commercialise their own developed devices. Their reward: royalties on the amount of devices sold. Consequently this remuneration model encourages surgeons to sell as many of these devices as possible. Their personal gain of selling devices (royalties) conflicts with their interest as a surgeon, which exists in offering the best possible health solutions.

Conflicts of interest can be complex legal situations and, if handled incorrectly, they can have negative outcomes for the people involved. Companies have gained experience in coping with conflicts of interests and the following highlights practices to avoid or deal with conflicts of interest.

Avoidance of decision making

The best way to deal with a conflict of interest is removing them immediately once they are discovered. A recently elected politician might sell all his corporate stocks and resign from any corporate boards in order to remain neutral in his political judgement. This, however, is often easier said than done. A better way is to abstain oneself from making any decisions when one finds oneself in a situation of conflict of interest. A situation in which a manager does not participate in the decision-making of which legal advisory firm to hire because a family member of his is a senior member of a potential legal contractor, can be considered as way of avoiding such a situation of conflict.

Code of Ethics

Every company should have a Code of Ethics in which, among other sections, some important guidelines and imperatives of how a situation of conflict of interests should be addressed. This section should include topics such as the hiring and supervising of family members and in which way corporate gifts should be offered or accepted. Corporate gifts should be considered as a sign of commitment between two cooperating companies, not as a bribe. Therefore companies should offer these gifts publicly and with a broad audience.

Legal advice

When in doubt of how to act, companies can always seek legal advice, demonstrating transparency.

Corporate culture

The culture present in the company also plays an important role in how employees or board members act in a situation of conflict of interest. An open, transparant culture should be established which promotes individual responsibility and which is intolerant against conflicts of interest.

Over the course of the years companies have refined their social policies into a robust Corporate Social Responsibility, covering not only conflicts of interest but also environmental issues, health programs, community support etc. Even though some industries are more prone to conflicts of interest and companies will have their own emphasis on how to cope with them, the basic guidelines are in all present. “Prevention is better than Cure” is such one next to keeping things transparent and acting along one’s best intentions.

Toyota and its Responsibilities

In recent months, one event has overwhelmingly claimed headlines around the world - Toyota, which has become the largest automaker in the world, has had to recall more than 8.5 million vehicles worldwide due to unintended acceleration and breaking problems in various models. Clearly, the events of recent months will have an effect on the Toyota brand. There are several questions that arise from this episode, the two that I want to tackle here are (a) how badly will the Toyota brand be tarnished? and (b) do Toyota's responsibilities end once it's brand name's reputation is restored?

While it is too early to fully understand the effects that recalling 8.5 million cars will have on the Toyota brand, there are varying degrees of expectations. According to U.S. sales figures released on March 2, nearly all the major auto companies reported double-digit year-on-year percentage sales growth in February, except for Toyota, whose sales declined by almost 9 percent. These figures clearly show that Toyota has taken a major hit due to ongoing safety concerns. However, on the other side of the coin, there are also signs that Toyota's drop in sales will be short-lived - initial reports suggest that chat about Toyota on the social web is positive, relative to its competitors, implying that perhaps there indeed is no such thing as bad publicity. Furthermore, Toyota seems to feel that all it needs to do to lure consumers back is to lower its prices.

It may be too early to begin to assess the full impact of the recalls on Toyota's image but it is not too early to begin to discuss what Toyota's responsibilities are (if any) once it has restored its image and sales figures. The question is, does Toyota only have to worry about restoring its image or does it have a greater responsibility towards ensuring the safety of its cars, beyond what consumers may think they know. The common assumption is that the level of consumer confidence will reflect the perceived safety of the cars, implying that the only way to regain a positive image would be to comprehensively deal with the safety issue. What is often ignored is that it is the perceived safety of its cars that matters to Toyota's bottom line rather than their actual safety. So long as there is no difference between the two, there is nothing to debate. However, in this particular case, in which there are claims and counter-claims about the root cause of the safety issue while cars are still being sold (albeit at a decreased pace), it is evident that what matters most to Toyota is to maintain a positive image as possible rather than ensuring that all of its cars are safe. This case raises the larger issue of corporate social responsibility at large - are companies only responsible for their bottom line (a.k.a ensuring consumer satisfaction) or is there a greater good that they must seek to satisfy?