Conflicts of Interest Need a Working Moral Compass to Navigate

Self-interest is in our DNA – as anyone who has had to separate bickering children can attest. Our instinct to maximize benefits applies not only to ourselves but also to our families, sport teams and communities.

The same is true in business. To an extent, capitalism is premised on parties seeking their own best interests. Gen­er­ally, it works well when all parties have equal access to good information and can lead to win-win out­comes. But power imbalances or unequal access to material infor­mation can create the potential for conflicts of interest and zero-sum games. Whether in ordinary purchases, transaction negotiations, raising capital or representation of one per­son by another as an agent or broker, what might be favorable to one party can come at the expense of the other – a win-lose outcome.

Conflicts of interest in business have drawn increased scrutiny in recent years as regu­latory authorities across industries strive to protect consumers, investors and other poten­tial victims of schemes hatched by those with faulty moral compasses. Technology has been two-edged: It both facili­tates bad behavior and helps track it effectively. Reg­ulators have worked diligently to develop rules to eliminate or at least reduce con­flicts of interest – or, at least, to enhance disclosures that create greater transparency. In the financial services industry, where I have spent my entire career, audits and regulatory exams frequently focus on activities with a high potential to create conflicts when soliciting business from customers.

For decision-makers running a business, a working ethical compass is vital. While rules and regulations can serve to guide behavior and decisions, business leaders need to take ultimate responsibility for outcomes that might have been influenced by economic interests that benefit one party at the expense of another. This can be much harder than it looks, as the competitive forces and com­plexities of business intensity and the appropriate incentives for growth attempt to work in lockstep.

Regulations cannot anticipate every possible opportunity for conflicts. So business leaders must be guided by ethical principles to fill any gaps and guide their colleagues to stay between the rails. Rewards for short-term results can have long-term consequences, so leaders with foresight need to help temper incentive programs to ensure that customers are neither deceived nor shortchanged.

Management must understand their organization’s business practices in enough detail to discern when compensation and incentive plans can create conflicts of interest. Creative minds will frequently find ways to circumvent rules and regulations, making constant oversight essential. Even initiatives that start honorably can devolve into something that can have dire consequences for a firm’s reputation. Successful businesses with outstanding brands built over decades have seen their reputation tarnished or destroyed in a matter of weeks or months as they succumbed to the temptation for short-term rewards that had long-term adverse consequences. Long-term organizational success and stability require long-term thinking – and frequent references to your moral compass.