A conflict of interest arises when an organization or a person is involved in various interests, some of which have the potential to corrupt the motivation of an action. The conflict of interest exists only if a testimony or person is entrusted with some independence that requires a modicum of trust in an attempt to create some impartiality. The existence of a conflict of interest is not reliant on the execution of impropriety. Thus, a conflict of interest can be identified and defused voluntarily prior to the occurrence of corruption. (Davis, 2001)
In the case of ECG there are two situations where there is some conflict of interest;
Related party transactions
The first instance is in the intended acquisition of Government Allies, Inc. As the company completes due diligence on the acquisition candidate, it is discovered that a senior executive at ECG and her spouse have a previously undisclosed financial interest in Government Allies. This executive will notably profit from the acquisition because all investors in Government Allies will receive shares of ECG stock proportionate to their investment upon successful completion of the IPO and of the acquisition. This gives the spouse an opportunity to benefit unfairly from the IPO. The ECG executive had been a member of a task force charged with determining acquisition candidates, and she was a strong advocate for moving forward with the effort.
The case of the spouse can be categorized under the related party disclosure requirements. Under the ethical standards, a company is required by the federal security laws to disclose any related party transactions to the members of public that wish to invest in an initial public offer in periodic filings, proxy statements and in the footnotes of financial statements. According to the standards, ECG is required to disclose any transactions that are above $60,000 where by an executive officer or any other member of the board has material interest in the company. The name of that person should be indicated and the relationship which that individual has with the registrant, also the nature of interest by that person in the specific transaction(s), the exact amount of such transaction, and where possible, the specific amount that individual interests in the transaction.
The ethical standard also requires that the materiality of such interests in the company to be established on the principle of the importance of such information to the investor considering the circumstances of a particular case. The relationship of the participants in the given transaction, the significance of the interest to a particular individual having the interest and the amount in question are some of the important consideration in establishing the importance of information to the investors.
The leadership of ECG and the Ethics Review Committee should seek the assistance of auditors and professional advisors to investigate whether those transactions by the spouse of the senior executive qualify as related transactions and how or when to report these kinds of transactions. The professional advisors should be able to guide ECG on how this information will be released in the annual reports and specifically the aspects that are essential for the public understanding on the economic substance and business purpose of the transactions, there influence on the financial statements, and the contingencies or risks that can emerge from such kinds of transactions. Finally it is important for the committee to review how such information may affect the image of the company in the eyes of the public and the company that it intends to acquire, Government allies inc. depending on the amount the image of the company can be destroyed and the company might pull out of the acquisition.
Self dealing
This refers to the behavior of a corporate officer a trustee, an attorney or other fiduciary which involves use of that person’s position when dealing with a given transaction so as to gain financially or satisfy personal interest at the expense of the interest of share holders, the company or the clients. Self dealing entails the usurpation or misappropriation of opportunities or corporate assets. Where a person engages in self dealing, it results in the violation of fiduciary relationship. (McDonald, 2007)
In the case of ECG, it is participating in a competitive bid on a lucrative IT consulting contract for X TelCo, a key player in the communications industry. A team of industry and practice leaders is formed to develop the proposal and give the presentation to X TelCo. Securing the contract would boost sales and positively influence the IPO. One team member previously worked in the industry with two current executives at X TelCo who are among those to review bids. Initially unknown to the ECG team, this employee maintains occasional contact with the former coworkers. He recently contacted the executives, securing additional information about the bid process and promoting the firm’s capabilities.
The move even though will boost the sales and influence the IPO positively it is still unfair for the other competitors and would lead to the disqualification of the company if X TelCo was to realize what had been done. According to the ethical standards, self dealing includes an instance where a person or organization can profit from a transaction with another organization which may influence the decision of that other company, which in this case is through the award of the tender for the consulting services.
The standards also state that a conflict of interest will arise where an individual or organization is in a position of conflicting or divided loyalties where that person’s affiliation or relationship with another organization or entity, its directors, officers or employees are involved in a transaction may significantly bias or impact the organization’s decision with respect to the transaction. In the case of ECG uses the former coworkers, executives and industry expertise to promote ECG’s capabilities.
The standards also defines transactions as any deal that involves the provision of services, facilities or goods for consideration or the company enters into any kind of contract for consideration should avoid any for of self dealing. In the ECG situation, their attempt to present their consideration for the contract constitutes a possible transaction.
The leadership of ECG and the Ethics Review Committee should discourage further activities by that member because this has the potential of disqualify the company in its attempt to get the tender for supplying X Telco with its services. It is important for any company to compete for contracts without having to unduly influence or present a false image of the company. The image of a company is very important for the potential investor and the company should therefore fairly promote itself as being the firm of choice for IT solutions, supply chain management, customer relationship management, and strategic consulting without using unconventional means.
Reference:
Davis, Michael; Andrew S, (2001): Conflict of interest in the professions. Oxford University Press, Oxford.
McDonald, M. (2007): Ethics and conflict of interest. Retrieved on March 9, 2010 from http://web.archive.org/web/20071103060225/http://www.ethics.ubc.ca/people/mcdonald/conflict.htm
