What is Conflict of Interest?

Simply put, a conflict of interest occurs when a person’s personal interests – family, friendships, financial, or social factors – conflict with their professional interests, either owed to employers or their business.

For example, would it amount to a conflict of interest if Abhishek, a CXO of a company, hires his relative Madhuri to head a team within the organisation? Well, it depends, the only way this appointment wouldn’t amount to a conflict of interest is (a) if Madhuri is qualified for the role, (b) the nature of their relationship is disclosed to the head of Human Resources and the Board, and (c) appropriate approvals are sought and documented regarding such an appointment.

In the course of running a business, we may run into conflicts of interest in various forms, and that in and of itself isn’t illegal or unethical, but failure to do the right thing when in a conflict of interest can be unethical, and sometimes have legal implications as well.

Is this a legal or ethical issue

While there will be different schools of thought opining differently based on the particulars of each instance, we can generalise that conflicts of interest by their very nature are an ethical issue, and unchecked conflicts or knowingly acting in bad faith in instances of conflict of interest could also lead to legal issues. For example, it is an ethical issue for a person to work as a full-time employee of a company and take on additional work in an unrelated field, however, it is a legal issue for a person to work as a full-time employee of a company and to use the confidential or proprietary information of the company for the benefit of themselves, competitors or other third parties. An ethical issue may be a risk call that the board may take, whereas a legal issue will most certainly lead to legal repercussions.

Types of Conflict of Interest

In any company (irrespective of the stage it is in), conflicts of interest exist in many forms and can be broadly classified as:

1. Financial: Putting personal financial interests over the interests of the organisation,

2. Professional: Awarding jobs and promotions based on preference rather than qualifications,

3. Personal: Often seen as nepotism, which entails making professional decisions to benefit family and friends, and

4. Contractual: undertaking activities that are contrary to the interests of the organisation.

Managing Conflict of Interest

The board of directors and executives has a fiduciary duty to the company and all its shareholders. This means that the board should introduce strategies to identify, disclose, and manage conflicts of interest across the company. This can be done in many ways: 

1. Implementing a conflict of interest policy, which lays down what a conflict is, how it needs to be disclosed, consequences of non-disclosure, the role of the management and leaders in the implementation of the policy, training, etc., 

2. Implementing a strong code of conduct and gift policies that outline the expected standards of conduct from the stakeholders of the company,

3. Formalising clauses such as confidentiality, conflict disclosure obligations, compliance with company policies, etc., as part of employment agreements,

4. Creating processes to encourage transparency and encouraging periodic disclosures from various stakeholders,

5. Conducting periodic audits to ascertain risks pertaining to conflicts of interest and document risk mitigation steps,

6. Seeking professional advice from independent professional advisors on how to manage existing conflicts,  

7. Creating awareness and training programs across the company to ensure compliance at all levels, and

8. Reporting requirements for notifying the board on instances of conflicts of interest.

Recent Trends:

While the last few years have seen exponential growth of startups, it has also seen cases involving promoter misconduct. Many high-profile unicorns such as FTX, Zilingo, Byjus, and BharatPe have fallen from grace due to poor corporate governance practices. In most, if not all of these cases, the issue at the heart of their undoing is not managing conflicts of interest ethically. Needless to say, in most of these cases, not only did the investors step in to take corrective action, including the ouster of superstar promoters, but regulators have also stepped in to scrutinise these cases. 

It's not farfetched for governments to step in if these trends continue in the startup ecosystem. Before the Indian government lays down regulations on startups, which would tremendously slow down the growth of the ecosystem, we propound that startups should consider taking proactive steps to self-govern and implement sound and ethical business practices.   

Summation 

The standard ethical advice concerning conflict of interest is that you should avoid conflicts of interest when you can, and when unavoidable, disclose the conflict and, in cases where possible, recuse yourself from the process. However, the more practical advice is to understand the nature and impact conflicts of interest would have on your business, put in place guardrails via policies and processes in the company, and build sustainable businesses.

Articles we liked on this subject: 

• Investopedia’s article on Conflict of Interest

• Business Today’s article on Bharatpe

• This LinkedIn post from Inc24

We would love to hear your thoughts on conflicts of interest, circumstances you have encountered at your company, and how you handled them. Please feel free to connect with us on LinkedIn or write us your feedback via this form.

We aim to make this space your ready repository of everything governance broken down into bite-size pieces. Whether you’re a wantrepreneur (thanks, Shak Tank), solopreneur, a young startup, a growing startup in the midst of fundraises and hypergrowth, or one at the cusp of an acquisition or an IPO, we aim for this to be your go-to place for all things governance. 

In the past few decades, we have seen Indian startups take centre stage. So many incredible companies started in humble garages and have become some of the biggest household names and industry leaders (we are looking at you, Infosys). So many fantastic products and services were launched that impacted India and the world, creating many jobs and an economy that continues to grow and thrive. All this is made possible in a regulatory and legal environment that has adapted itself to enable the growth and digital transformation of our Indian economy. 

As professionals in the startup ecosystem for over a decade and having witnessed some of the more unfortunate recent headlines, we understand that good governance in startups is the need of the hour, and that starts with creating awareness. Look at any great company, and you will find that it is built on a foundation of good governance and ethical practices that get set at the top and naturally become the ethos of how the company operates rather than just a check box or an afterthought. Governance is one of those unsung heroes in a company’s tale, often silently operating in the background by diligent leaders and percolating all through the company but rarely getting its due.  

In this newsletter, we will bring you different concepts from the vast ocean of governance and how they could relate to your startup (irrespective of the stage it is in), best practices from across the world that are worth adopting, success stories and what they did right (and cautionary tales and what went wrong), and everything in between. 

We hope to create a space where we can share and exchange ideas on how to develop best-in-class governance practices in a way that is practical and doesn’t come at the price of agility and growth. 

As Mr Amitabh Kant succinctly put it at the recent Startup 20 event, startups must self-regulate, and we couldn’t agree more. 

And that’s our first edition. Please feel free to connect with us on LinkedIn or write us your feedback via this form.