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What is Conflict of Interest?

Working professionals in any organization have to contend with the organizational policies on Conflict of Interest. The term Conflict of Interest refers to the divided loyalties of the individual where he or she is violating the policy whenever he or she undertakes a parallel activity that is detrimental to their main employer.

In simple terms, if an employee or an individual is earning money from a parallel activity such as writing and consulting to external entities and is also employed by an organization to which such activities cause monetary and nonmonetary losses, then it is taken that the employee is violating the terms of employment.

Further, if an elected representative indulges in accommodating favors to people who are under investigation for misconduct or holds an office of profit, then he or she is termed to have a conflict of interest. Indeed, conflict of interest arises whenever the individual earns monetary and nonmonetary gains from an activity that causes monetary and nonmonetary losses to his or her chief employer.

Organizational Rules and Regulatory Crackdown

This is the reason many organizations have clearly laid down policies on conflict of interest specifying the types of parallel activities that the employees can and cannot indulge in. For instance, consultants who are executing an assignment for a client cannot take money from the client or ask or accommodate favors since the primary job of the consultant is with the firm that has engaged him or her.

In this case, consultants are duty bound to inform their employers whenever their clients ask favors from them or request them to indulge in a parallel activity that is in conflict with the main activity.

It needs to be mentioned that even gifts given by the client sometimes attract the provisions of conflict of interest and this is the reason why many organizations mandate disclosure of all gifts taken from the clients as well as prohibit gift taking without necessary permissions from the consultant’s superiors.

Insider Information

Further, consultants also face conflict of interest when they are privy to insider information such as the news about upcoming mergers and acquisitions which can be used for monetary gains such as trading on stocks of the companies that they have insider information about. In this instance, such conflicts of interest are viewed very seriously by the regulators who in recent years have not even hesitated in sending such violators when the individuals who have violated insider trading laws are found guilty.

In addition, consultants might be asked by their clients to fudge the financial statements or to approve fudged financial statements as well as to provide grossly overvalued figures about the company’s financial position. In all these cases, the consultants have to be wary of the true intentions of the clients in addition to being careful about not breaking the law.

How Consultants can Handle Conflicts of Interest

While it is human nature to succumb to temptation, the consultants must keep in mind that they are accountable to not only their organizations and the shareholders of the clients but also have a duty and responsibility towards the wider society. In other words, while the temptation to take gifts and other monetary and nonmonetary inducements is indeed high, ethics and ethical norms dictate that they behave according to the highest standards of corporate behavior.

In addition, as mentioned earlier, regulators in recent years have been cracking down hard on the violators and hence, consultants must be cognizant of the illegal nature of activities that entail conflict of interest. Moreover, many organizations in the aftermath of the 2008 financial crisis have tightened rules and regulations so that even minor violations are being dealt with harshly.

The Softest Pillow is a Clear Conscience

Finally, any profession has the potential for earning money through dubious means. In cases where professionals encounter conflict of interest, it is advisable to report the matter to their managers or to the compliance team anonymously if they feel that their managers are encouraging them to violate rules.

In addition, consultants must turn whistleblowers if their concerns are not being addressed in cases where there is systemic abuse and misuse and violation of rules. It is also the case that one’s conscience must dictate how one must act in these circumstances even if one’s job is on the line. After all, one can get hired elsewhere but the damage to the reputation as well as the fact that the lingering notions of wrong doing would haunt them. As the founder of Infosys, NR Narayana Murthy once remarked, The softest pillow is a clear conscience.

What the Code of Conduct Says

Consultants are expected to maintain professional and ethical standards when dealing with their clients. This can take the form of maintaining arm’s length relationships, not intervening in the internal affairs and politics of the client’s organizations, keeping confidential information away from interested parties looking for insider knowledge, and reporting any violations in the conduct (financial, operational, and behavioral) by the client’s organization to the regulators. This is the code of conduct that is usually prescribed for consulting firms whenever they take on work from client organizations.

Realities of Consultant-Client Relations

However, this is rarely followed in practice as evidenced by the large numbers of corporate scandals that have emerged in the last decade or so where the consultant was found to be aiding and even abetting the malfeasance conducted by the client. For instance, the Enron scandal manifested itself because the consulting firm was in cahoots with the client in cooking the books. Indeed, in this case, it was found that the consulting firm’s partners went beyond collaboration and were indeed one of the culprits.

Some Examples from the Corporate World

Similarly, the Satyam scandal in India was also found to be a case where the consultants (or some of them) knew about the goings-on in the company and were in breach of the code of conduct and even legal aspects since they did not report the matter to the regulators. However, the saving grace in this case was that when the malfeasance became too big and too hot to handle, it was the new consulting firm that had been roped in for another purpose that blew the whistle on the scam.

Consultants have to Walk a Thin Line between Professional and Personal Obligations

These examples indicate that the consultants have to walk a thin line between fulfilling professional obligations and reporting unethical behavior. Since the client is the one who pays them, it is often the case that the consultants are reluctant to report malfeasance to the regulators. Further, considering the extremely competitive nature of the market wherein there are several consulting firms competing for the same client, money talks and hence, consultants are often found to go along with the client. There are no easy answers when one considers all the aspects and it would be indeed a brave and conscientious consultant who would be the whistleblower.

Some Solutions Which Were Proposed

Having said that, there are some solutions that have emerged in recent years about the course of action to be taken by the consulting firms. For instance, after the Enron scandal, the SEC (Securities and Exchange Commission) and other regulators ensured that new rules separating consulting and investment banking so that the same consulting firm which was also advising the client in financial matters would now be two different firms. While this was intended to reduce the conflict of interest since it was thought that when consultants and investment bankers represent two firms they would automatically be in a position to wink at malfeasance, it is debatable as to how far this law succeeded given the Global Economic Crisis of 2008 wherein several case of malfeasance came to light.

Conflict of Interest is at the Heart of the Problem

Of course, as some experts have mentioned, the real issue here is of conflict of interest. How far would a consultant go in reporting unethical behavior to the regulators which is expected from him or her when such case involve the very clients who are giving them business. Further, the fact that many consultants often are embroiled in the internal politics of the client wherein they take sides in corporate and boardroom battles. This indicates the tricky nature of the problem of consultant client relations wherein the temptation to use confidential and insider information to one’s advantage is motivated by greed and power.

Conclusion

Finally, above everything the maintenance of normative consultant client relations depends on the institutional structures, the incentives for good behavior as well as the incentives for moral hazard, the role of the regulators and how strictly they enforce the law, and the individuals themselves considering that they are the ones who are either benefiting or losing out when the scandal breaks. It is also about human nature since it is hard to resist the temptations of money and power and at the same time be true to the professional obligations and the observance of the code of conduct.

What do Consultants Do?

To start with, management consultants are professionals who advise the corporates on restructuring, reorganization, rejuvenation, and revitalization of their companies. A simple question as to why cannot the organizations do this themselves by their own employees yields the answer that consultants bring to the table their deep expertise, wide experience, their familiarity with similar companies and industries, and above all, a perspective about how companies should be managed that is invaluable and indeed, worth the money that is paid to them. Mind you, the reason why consultants get paid astronomical sums in salaries and benefits is that their clients likewise do so for their services.

In addition, consultants are often called in when companies are going through a rough patch and their leadership wants an unbiased and objective analysis of the situation along with recommendations to improve their situation. In many cases, the internal resources often have vested interests in pushing for a particular strategy which means that more often than not, there is a need for a third party to evaluate what is wrong with the company.

Moreover, many employees who contribute to the feedback that consultants receive as part of their consultations and deliberations within the organizations find it easier to talk to someone from outside of the organization rather than open up to their peers in the organization. Therefore, this is one of the reasons why organizations prefer consultants to advise them when things are going wrong.

Having said that, it must be noted that consultants do not merely perform the role of objective observers. Because they are trained in the best business schools on management theory and practice, they have knowledge of the corporate world that other professionals do not have since the latter work in niches whereas the former straddle a wide spectrum of activities. Apart from this, consultants mature with age when they consult with a wide variety of organizations across industries and sectors and this experience provides them with the insights that they can use when consulting.

Consultants and Investment Bankers

A key point to note about the consulting profession is that they are in direct completion with the investment bankers since both these professionals are essentially aiming for the mind space of the senior leadership in the organizations. Having said that, it must be noted that whereas investment bankers are concerned about financial aspects, consultants encompass a broad swath as they deal with operational, strategic, and organizational aspects.

In short, investment bankers suggest the external components and the internal restructuring in financial terms whereas consultants take a broader view in addition to a deeper analysis. However, it must be noted that in recent years, consultants have specialized and branched out in niches according to the sector, the industry, area of management, span of control, and other aspects. This progression from being generalists to specialists within specialists has been mainly due to the increasingly complex internal and external environments in which organizations operate.

The Big Five Firms and How Professionals can Develop Consulting Skills

Finally, consultants such as those from the Big Five Firms, McKinsey, Booze Allen, Boston Consulting Group, Anderson Consulting, Price Waterhouse, and to some extent Deloitte are the pick of the lot among the entire consulting industry. It is no wonder that these firms form the Day Zero and the Day One in the placements seasons in business schools.

Before concluding this article, we would like to remind you that while there has been much criticism about consulting and consultants as well as much praise and adulation that they receive, the bottom line for any management graduate or professional is to develop a perspective on how the business world and in general, the world works and evolve as professionals who practice values, follow the industry trends, spot and anticipate future changes, and more importantly evolve as visionaries ought to make a difference to their clients as well as themselves.