Avoiding a Conflict of Interest

As a company grows larger, it acquires more assets, more employees, and a larger share of the market. However, that same increase in size also brings with it many additional complications, especially when it comes to the people who run the company. With many directors, officers and executives holding investments in other companies, or even positions in other companies, it’s very easy to wind up with a conflict of interest.

A conflict of interest in this sense is a situation where a person is positioned to benefit personally from actions taken by an entity in which he has an interest, and which may not be to the benefit of that entity. For example, if the CEO of Company A has stock in Company B, the CEO would personally benefit if Company A struck a business deal with Company B, because it would likely cause Company B’s stock price to increase, even in that deal may not be in Company A’s best interest. This conflict of interest would be bad because it incentivizes the CEO to seek a deal that is best for him and his stock portfolio, rather than seeking the deal that is best for his company.

There are many other ways a conflict of interest could manifest. For example, if a textile company is looking for a supplier for a certain fabric, a conflicted executive could steer the company towards a supplier her sister happens to own, rather than one of the other (potentially superior) competitors. A construction company could find itself subcontracting to a good friend of the construction site’s owner, rather than selecting a subcontractor based on price or quality of service. A director could find himself voting on a merger from both sides, because he is on the board of directors of both companies.

Conflicts of interest aren’t just issues for the company that loses out on business or gets a bad deal. They also present major legal problems for anyone found to have an undisclosed conflict of interest, since they can potentially lose their jobs and even face a lawsuit for the harm caused by the conflict. Failure to disclose a conflict of interest in a timely manner is a serious breach of ethics as well as the law.

The primary way of curing a conflict of interest issue is, first, to remove yourself from the situation that presents the conflict, followed by disclosure of the conflict to the owners or, if your business is incorporated, to the board of directors of the company you work for. The owners or board must then give express written consent waiving the conflict of interest issue if they wish you to work on the issue with which you have some conflict. If they do not, the conflicted person must remain removed from the matter indefinitely.

The attorneys of Blodnick, Fazio and Clark have a wealth of experience representing businesses on a variety of issues, including conflict of interest matters. If you require legal assistance concerning business startups, formation, corporate acquisitions and mergers, corporate restructuring, or another business matter, call (516) 280-7105 or fill out our contact form for a free consultation.

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