One of the governing principles of the employee/employer relationship is that employees have a fiduciary duty to act in their employer’s interests. An employee’s undisclosed conflict of interest can be a serious breach of this duty. In fact, when conflicts of interest exist, companies often suffer financial consequences.

Ignorance is not bliss

Here is a fictional example of a common conflict of interest: Matt is the manager of a manufacturing company’s purchasing department. He also is part owner of a business that sells supplies to the manufacturer — a fact Matt has not disclosed to his employer. And, in fact, Matt has personally profited from the business’ lucrative long-term contract with his employer.

What makes this scenario a conflict of interest is not so much that Matt has profited from his position but that his employer is ignorant of the relationship. When employers are informed about their workers’ outside business interests, they can act to exclude employees, vendors, and customers from participation in certain transactions. Or, they can allow parties to continue participating in a transaction — even if it runs contrary to ethical best practices. Ultimately, it is the employer’s, not the employee’s, decision to make.

Cut off at the pass

Sometimes employees simply neglect to inform their employers about possible conflicts of interest. In other cases, they go to great lengths to hide conflicts — usually because they are afraid it will jeopardize their jobs or they are financially benefiting from them. These latter cases can be difficult to detect, which is why your company might fare better by playing offense.

For example, develop conflict of interest policies and communicate them to all employees. Provide specific examples of conflicts and spell out exactly why you consider the activities depicted to be deceptive, unethical, and possibly illegal. Do not forget to state the consequences of nondisclosure of conflicts, such as immediate termination.

Disclosing all

You also might require workers to complete an annual disclosure statement where they list the names and addresses of their family members, their family’s employers and business interests, and whether the employees have an interest in those entities (or any others).

To help ensure accurate statements, provide employees with a hotline to call if they:

• Have general questions or concerns about the policy
• Do not understand how the policy relates to their unique circumstances
• Want to report someone who appears to have a conflict of interest

Also protect your business from conflicted vendors and customers. Before entering into a new agreement, compare the names and addresses on your employee disclosure statements with ownership information provided by prospective business partners.

Maintain standards

Conflicts of interest are not always clear cut because what one employer considers a serious conflict might seem negligible to another. But in general, the best way to promote your business’ success is by holding all stakeholders to the highest ethical standards.

The business advisors at KPM can assist you in navigating the, at times, complex matter of employee conflicts of interest. Contact us today to see how we can help you.