1. 1 Lecture 3: Conflict of Interest ( 利益衝突 ) Please refer to Chapter 5, “Ethics and the Conduct of Business” by John R. Boatright BBA 361 BBA 361 Business Ethics & Corporate Governance

2. 2 1. What is Conflict of Interest? - It is not only a clash between conflicting or competing interests. - It also occurs when a personal interest comes into conflict with an obligation to serve the interests of another. - It occurs when a personal interest interferes with a person’s acting so as to promote the interests of another when the person has an obligation to act in that other person’s interest.

3. 3 1. What is Conflict of Interest? - Obligation: describe an agency relation in which a person (agent) agrees to act on behalf of another (the principal) and to be subject to that person’s control. - That is why conflict of interest is most often encountered by professionals:lawyers, doctors, and accountants, etc. - Conflict of interest involves “having an interest” and “taking an interest(taking someone else interest)”

4. 4 2.Types of Conflicts of Interest 1. Exercising biased judgement 2. Engaging in direct competition 3. Misusing a position 4. Violating confidentiality

5. 5 2.Types of Conflicts of Interest 1. Exercising biased judgement I  always happen to professionals such as lawyers, accountants, who provide specialized knowledge and service to clients  Clients not only pay for their knowledge, but also for the confidence on the professional’s judgement  E.g: Purchasers have freedom in choosing suppliers of a given product. The judgement of purchasers should be used to make decisions that are in the best interests of the employing firm. A purchaser accept a bribe/kickback ( 回佣 ) in return for placing an order is a clear conflict of interest.  Bribes/kickbacks are intended to induce an employee to grant some favor for supplier at the expenses of employer.

6. 6 2.Types of Conflicts of Interest 1. Exercising biased judgement II  Whether there is a potential conflict of interests depends on: value of the gift, circumstances under which it is offered, the practice within the industry and whether the gift violates any law.  Code of Ethics of a large bank: “Employees should not accept gifts where the purpose is to “ exert influence in connection with a transaction either before or after that transaction is discussed or consummated.”

7. 7 2. Direct Competition  For an employee to engage in direct competition with his/her employer is a conflict of interest.  Because employees judgment may be affected by having another interest.  Also quality of the work might be reduced by the time and effort devoted to other activities. e.g. An employee working in a jewelry company also engages in jewelry trading family business. 2.Types of Conflicts of Interest

8. 8 3. Misuse of position  Such as extortion ( 敲詐 ), when a person with decision-making power for a company demands a payment from another party as a condition for making a decision favorable to that party.  E.g. extorting money from a supplier to a purchaser, although does not harm interests of a company, is still conflict of interest. 2.Types of Conflicts of Interest

9. 9 4. Violation of Confidentiality ( 違反保密 )  It constitutes, often, a conflict of interest, particularly to professionals such as lawyers, accountants.  E.g. use of information acquired in confidence from a client to advance personal interests, even the interests of the clients are unaffected. 2.Types of Conflicts of Interest

10. 10 Managing Conflict of Interest Code of Ethics / Compliance programs Many corporations have a section in their code of ethics which specifically addresses the problems and ensuring integrity throughout the company.

11. 11 Managing Conflict of Interest 1.Objectivity A commitment which serves to avoid being biased by an interest that might interfere with a person’s ability to serve another.2.Avoidance Avoid acquiring any interests that would bias one’s judegement. E.g, using alignment ( 校正 ), align CEO’s personal interests with that of shareholders by using pay- for-performance measures (stock options). 3.Disclosure information Whoever is potentially harmed by the conflict can disengage. Greater transparency, higher openness of information, less likely conflict of interest can occur.

12. 12 Managing Conflict of Interest 4.Competition Decision based on performance by competition rather than relationship is a powerful incentive to avoid conflict of interest. 5.Rules and Policies - Rules and policies may prohibit some conduct that would constitute a conflict. - avoid acquiring adverse interests by not accepting gifts, control on flow of information

13. 13 Managing Conflict of Interest 6.Independent Judgment - Problem of biased judgment can be corrected by utilizing a third independent party. - Companies usually require an executive with a conflict of interest to pass the decision to the next level. - Independent appraisers / advisory board 7.Structural changes - Using Compartmentalization ( 劃分 ) - Compartmentalization is the psychological term for placing two or more conflicting thoughts, values, beliefs or aspects of one’s life in separate mental boxes, and believing that they got nothing to do with each other. - Form separate creative teams for each account - Separate auditing and advisory service in accounting firm - Strengthen independence and integrity of department, etc.

14. 14 Managing Conflict of Interest 8.Removal - The best way to handle conflicts of interests is to avoid them entirely - For example, someone elected to political office might sell all corporate stocks that they own before taking office, and resign from all corporate boards. 9.Recusal ( 迴避 ) - Those with a conflict of interest are expected to recuse themselves from (i.e., abstain from) decisions where such a conflict exists. - For example, if the governing board of a government agency is considering hiring a consulting firm for some task, and one firm being considered has, as a partner, a close relative of one of the board's members, then that board member should not vote on which firm is to be selected.