22 Global Business Ethics LESSON ETHICS AND CONFLICTS OF INTERESTS CONTENTS 3.0 Aims and Objectives 3.1 Introduction 3.2 Conflicts of Interest 3.3 3.2.1 Violation of Confidentiality 3.2.2 Biased Judgment 3.2.3 Direct Competition 3.2.4 Misuse Position Managing Conflict of Interest 3.3.1 3.4 Ethics of Managing Conflicts of Interest Ethical and Social Implication on Business 3.4.1 Benchmarking 3.4.2 Stake Holder’s Dialogue Approach 3.5 Let us Sum up 3.6 Lesson End Activity 3.7 Keywords 3.8 Questions for Discussion 3.9 Suggested Readings 3.0 AIMS AND OBJECTIVES After studying this lesson, you should be able to understand: z Conflicts of Interest z Violation of Confidentiality z Biased Judgment z Direct Competition z Misuse Position z Managing conflicts of interest z Ethical and Social Implications of Business z Benchmarking z Stake holder’s Dialogue approach 23 Ethics and Conflicts of Interests 3.1 INTRODUCTION The ‘conflict of interest’ is not merely a conflict between conflicting interests, although conflicting interests are involved The conflict occurs when a personal interest comes into conflict with an obligation to serve the interests of another More precisely, we can say that a conflict of interest is a conflict that occurs when a personal interest interferes with a person’s acting so as to promote the interest of another when the person has an obligation to act in that persons interests This obligation is stronger than the obligation merely to avoid hamming a person and can arise only when the persons in a special relation, such as employer and employee 3.2 CONFLICTS OF INTEREST Conflicts of interest concept is a tough one to study It covers several distinct moral failings that run together often In order to fully understand regarding the definition and as well as the reasons that is morally wrong for a person to be in a conflict of interest situation, it is important to separate them Four kinds of conflict of interest found are as shown in the figure 3.1 below Violation of Confidentiality Exercising Biased Judgment Conflict of interests’ types Engaging in Direct competition Misusing a Position Figure 3.1: Conflicts of Interest Types 3.2.1 Violation of Confidentiality z Confidential business information has been recognised from a long time as property Such a thing acquired or compiled by a company in the course and conduct of its business is a species of property to which the company has the exclusive right and benefit z Violation of confidentiality under certain circumstances is a conflict of interest 3.2.2 Biased Judgment z A characteristic of professionals, such as lawyers, accountants, engineers (specialised knowledge used in the service of clients); professionals paid for using the knowledge to make judgement for the benefit of others; also value of their services lies in the confidence that can be placed in a professionals judgement z Judgment is not exclusively a feature of professional work; Decisions to be used in the best interests of the employing firm; But, outside business interests influence the judgement of an employee E.g Potential conflict of interest in accepting a gift from a supplier who expects favourable treatment in the future 3.2.3 Direct Competition An employee to engage indirect competition with his employer; an employee's judgement is apt to be impaired for having another interest E.g A Director of a public 24 Global Business Ethics sector company in India had an interest in a private company where his son was working as a managing director The private sector was competing with the PSU in some areas Majority of the services from that PSU was offered to the private company (free of cost sometimes or at cost price many a times) 3.2.4 Misuse Position z Holding a position in a company to gives a person powers and opportunities that would not be available otherwise z An employee has an obligation not to use these powers and opportunities for personal gain z It is not enough to be incorruptible and act with honest motives; It is equally important to use good judgement and conduct one's outside activities so that no one even raise the suspicion for having misused the position within the company Check Your Progress 1 What you understand by conflicts of interest? ……………………………………………………………………………… ……………………………………………………………………………… What are the different types of conflict of interest? ……………………………………………………………………………… ……………………………………………………………………………… 3.3 MANAGING CONFLICT OF INTEREST Conflicts result from structural features of a profession or an organisation These are to be managed with carefully designed good systems A person in a conflict of interest (potential or actual) may be in the wrong Conflicts usually occur to a person as a member or a professional of an organisation Conflict of interest is not merely a matter of ethics Certain professions are highly vulnerable to conflict of interest Business firms face conflicts more because of their need to provide many kinds of services to different customers In some cases, both professional and organisational factors are involved Various means for managing conflict of interest exist Many corporations in their codes of ethics have mentioned in a separate section which addresses the problem However, the management of conflict of interest requires a variety of approaches to be adopted by professional groups and business organisations To conclude, we can say that similar to whistle blowing, trade secrets and conflicts of interest involve a delicate balancing of the rights and interests of: z Employers z Employees z Public at large 3.3.1 Ethics of Managing Conflicts of Interest Objectivity: All professional codes require objectivity A commitment to be objective serves to avoid being biased by an interest that might interfere with a person's ability to serve another Identifies objectivity (the obligation to be impartial and intellectually honest) with avoiding actual conflicts of interest and independence (avoiding relations that would impair objectivity) with potential conflicts Avoidance: Direct means of managing conflicts of interest is to avoid acquiring any interests that would bias one's judgement or otherwise interfere with servicing others Avoidance is easier said than done It is difficult to identify or anticipate a conflicting interest; Acquiring conflict of interest may be unavoidable due to the nature of business; when adverse interests cannot be avoided, they can be countered by introducing new interests in a process known as alignment Disclosure: Serves to manage conflict of interest primarily because whoever is potentially harmed by the conflict has the opportunity to disengage or at least to be on ground In legal ethics, there is no conflict of interest if the lawyer discloses the conflict and is confident that the client will be unaffected and the client accepts the lawyer’s service Disclosure may include all types of information The greater the transparency (openness of information), the less opportunity is for conflict of interest to occur Competition: Stiff competition provides a powerful incentive to avoid conflicts of interest, both actual and potential Rules and Policies: Companies have policies regarding conflicts of interest These need employees to avoid acquiring adverse interests by not accepting gifts or investing in potential suppliers Controls on flow of information that affect who has access to what information are necessary; rules and policies in question also limit conflict of interest Priority rules are useful means for managing conflicts of interest Independent Judgement: Conflict of interest results in biased judgement; the problem can be corrected by utilising a third party who is more independent For example, in companies, independent appraisers are used, similar to a judge in the courts of law Structural Changes: Conflicts of interest arise from providing different services to different customers or client; these can be reduced by compartmentalizing the services Sometimes there are dictated by law In multifunction institutions, conflicts can be reduced by strengthening the independence and integrity of each unit 3.4 ETHICAL AND SOCIAL IMPLICATION ON BUSINESS Encourage the emergence of a professional approach with a framework of standards, training and accreditation that will allow social and ethical accounting, auditing and 25 Ethics and Conflicts of Interests 26 Global Business Ethics reporting to move beyond the experimental end of the corporate sector into the mainstream Independent attempts to design and implement methods of social and ethical assessment emerged in the late 80s.The practices that emerged with this force are benchmarking and stakeholders' dialogues 3.4.1 Benchmarking Benchmarking is comparison of the social and environmental performance of companies by scoring them against another company's industry or sector averages or societal norms Corporate benchmarking is carried out in the following ways: a) Through voluntary questionnaire based surveys in combination with research through public records such as company's annual reports b) Questionnaires are sent to companies concerned and they answer the questions c) Specialist organizations also have particular aspects of corporate activity, common wages and equal opportunity to staff members Benchmarking has many advantages: a) It allows people (including external stockholders and other interest parties) to compare the performance of companies and other organizations according to the criteria relevant to them b) It provides cheap information about comparative financial performance of companies c) It helps ethical investment and aids customers to make investment and consumption decisions Some of its disadvantages are: a) Selection of benchmarks for particular audience, i.e., group of people or a particular area will exclude the other areas For example, if environmental benchmarking for a product is conducted in northern India then the interest group and other areas will not be considered, and moreover, government rules and regulations vary from state to state b) It is just not enough to tick a box 'we do' or a warning to prove an ethical dimension of an organization Fox example, a simple warning written on cigarette boxes in India does not absolve the company of its social and ethical responsibilities c) Relative cheapness is achieved at the cost of considerable simplification Check your progress Fill in the blanks: The conflict occurs when comes into conflict with an obligation to serve the interests of another of confidentiality under certain circumstances is a conflict of interest All professional codes require is comparison of the social and environmental performance of companies by scoring them against another company's industry or sector averages or societal norms 3.4.2 Stake Holder’s Dialogue Approach Value, against which an organization should be assessed, reflects the values of stakeholders groups These groups should regularly assess the organisation’s performance based on those values This approach has been most systematically applied through ethical accounting process development at Copenhagen Business School and was first used Danish Regional Bank, SBN Bank in 1989 a) The core values transcend mundane existence and provide the organisation with a sense of well-being, pride and confidence b) The existence of such values in explicit form enables managers to take complex value decisions The different advantages of stakeholder’s dialogue approach are: a) Detailed study of situation which was not possible with benchmarking b) Dialogue could raise issues related to customer, staff satisfaction, supplier, etc c) Ability to underpin strategic processes unlike benchmarking The various disadvantages are: a) Expensive and time consuming in comparison to benchmarking b) Offers little basics for comparison with other organisations or industry norms 3.5 LET US SUM UP The first most important understanding required to live in balance is the awareness and realization that conflicts are unavoidable and even essential as a process of growing up It acts not only spice to business life but also leads to better understanding of different interests in the business community 3.6 LESSON END ACTIVITY Visit some of the organisations you know Find out and discuss the techniques they use to manage conflicts in their organisation 3.7 KEYWORDS Benchmarking: It is comparison of the social and environmental performance of companies Conflict: It differences in personal interests 3.8 QUESTIONS FOR DISCUSSION What is conflict of interest? Elucidate ethics and conflicts of interest with a few examples Do conflicts arise? If yes How it occurs and gives the means to manage the conflicts? 27 Ethics and Conflicts of Interests 28 Global Business Ethics Check Your Progress: Model Answers CYP 1 We can say that a conflict of interest is a conflict that occurs when a personal interest interferes with a person’s acting so as to promote the interest of another when the person has an obligation to act in that persons interests Types of conflicts: a) Violation of Confidentiality b) Biased Judgement c) Direct competition d) Misuse Position CYP Personal interest Violation Objectivity Benchmarking 3.9 SUGGESTED READINGS Manuel G Velasquez, Business Ethics Laura P Hart Man, Business Ethics John R Boat Right, Ethics in Conduct of Business William A Wines, Ethics Law and Business ... SUGGESTED READINGS Manuel G Velasquez, Business Ethics Laura P Hart Man, Business Ethics John R Boat Right, Ethics in Conduct of Business William A Wines, Ethics Law and Business ... Elucidate ethics and conflicts of interest with a few examples Do conflicts arise? If yes How it occurs and gives the means to manage the conflicts? 27 Ethics and Conflicts of Interests 28 Global Business. .. process of growing up It acts not only spice to business life but also leads to better understanding of different interests in the business community 3.6 LESSON END ACTIVITY Visit some of the organisations