A private company recently hired a consultant to get advice on upgrading its technology and improving its customer service. The consultant recommended that the company purchase additional systems to improve customer satisfaction. The company was so pleased with the consultant and its plan that it asked the consultant to a.) Submit a competitive proposal to compete for a contract to add the systems it recommended; and b.) Help the company evaluate the competing proposals, including its own. Concerned about the obvious potential conflict of interest, the consultant asks “Isn’t that illegal?” This month’s column explores the murky depths of such conflicts of interest in order to provide an answer.
What is a conflict of interest? Conflicts of interest arise in every type of business and we all deal with them every day. For example, when you ask a restaurant owner to recommend something from the menu, you know you are giving him a chance to push the slow-selling highest-priced dish to benefit the restaurant at your expense. If the owner does this, you probably will dine elsewhere in the future. Knowing this, a smart owner will not steer you wrong. Of course, you can avoid the conflict altogether by not asking for the owner’s advice. The drawback is that you will miss the advice of the person who has the most information about the restaurant.
Sometimes, people cannot even agree on the definition of a conflict of interest. Most definitions focus on at least two ingredients: 1.) a firm’s actual or potential financial interest in the outcome; and 2.) the actual or potential effect on the ability of that person or firm to render impartial advice. For example, those smartees at Harvard University define conflicts of interest affecting procurement by the University as follows: “[A]n individual is considered to have a conflict of interest when the individual, or any of his Family or Associates (i) has an existing or potential financial or other interest which impairs or might appear to impair the individual’s independence of judgment in the discharge of responsibilities to the University, or (ii) may receive a material, financial or other benefit from knowledge of information confidential to the University.” (On the World Wide Web at
The Federal Government has a similar definition, but it also wants to avoid giving one firm an undue competitive advantage over competing firms. Federal Acquisition Regulation (“FAR”) 9.501, concerning conflicts affecting an organization, has the following definition: “Organizational conflict of interest” means that because of other activities or relationships with other persons, a person is unable or potentially unable to render impartial assistance or advice to the Government, or the person’s objectivity in performing the contract work is or might be otherwise impaired, or a person has an unfair competitive advantage.” (See
As these examples show, most of us recognize that a financial interest in the outcome can affect the judgment of a person or firm, and it is well to have a policy to deal with this type of situation.
Dealing with Conflicts of Interest.
Managing conflicts of interest requires integrity and trust in your company’s personnel and policy. While many types of policies are possible, a good policy should at least include full disclosure and efforts to neutralize the conflict.
The mere existence of a potential conflict of interest should not automatically exclude a person or firm from participating in a particular business opportunity. Competition and quality might be impaired more by exclusion of a firm than by participation despite a conflict of interest.
The goals of a conflict of interest policy should be to identify potential conflicts of interest to senior management and to allow management to be mindful of the issue in making its decisions. The Harvard folks describe this situation this way: “If an individual believes that he or she may have a conflict of interest, the individual shall promptly and fully disclose the conflict to the Office of the General Counsel and shall refrain from participating in any way in the matter to which the conflict relates until the conflict question has been resolved. In some cases, it may be determined that, after full disclosure to those concerned, the University’s interests are best served by participation by the individual despite the conflict.” Similarly, the Federal Government requires the Contracting Officer to identify actual and potential conflicts of interest and to avoid, neutralize or mitigate the conflict. FAR 9.504(a). Mitigation efforts may include excluding a person or division of a company from further involvement in a procurement, or waiving the conflict where appropriate.
Thus, in our example, it was proper for the private company can allow its consultant to bid on a contract for equipment it recommended. The consultant did not get the work, though. It knew about more potential problems than other competitors, and so its price was much too high!
About the Author: Daniel J. Donohue specializes in government contracts and construction law. He is a shareholder in the Vienna, Virginia office of Wickwire Gavin, P.C. (703) 790-8750. Copyright Ó 1999, ESI International. This article was first published in ESI International’s November issue of ESI Horizons. (For more information on ESI see www.esi-intl.com)