Hey there, and welcome back to our newsletter on startup governance in India. Written by Abhishek and Madhuri.
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:
Financial: Putting personal financial interests over the interests of the organisation,
Professional: Awarding jobs and promotions based on preference rather than qualifications,
Personal: Often seen as nepotism, which entails making professional decisions to benefit family and friends, and
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:
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.,
Implementing a strong code of conduct and gift policies that outline the expected standards of conduct from the stakeholders of the company,
Formalising clauses such as confidentiality, conflict disclosure obligations, compliance with company policies, etc., as part of employment agreements,
Creating processes to encourage transparency and encouraging periodic disclosures from various stakeholders,
Conducting periodic audits to ascertain risks pertaining to conflicts of interest and document risk mitigation steps,
Seeking professional advice from independent professional advisors on how to manage existing conflicts,
Creating awareness and training programs across the company to ensure compliance at all levels, and
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.