Managing Conflicts of Interest in Investment Banking

How To Manage Conflicts of Interest in Investment Banking?

How to manage conflicts of interest in investment banking is an interesting question whose answers lie in the firms' ability to call for a proactive approach, including transparency, full disclosure, and handling potentially problematic situations proactively.

Enterprises will have business contacts with third-party institutions or personnel in production and operation activities.

A conflict of interest refers to a situation where there is a risk that personal interests interfere with or appear to interfere with legitimate business interests. Any conflict may present the appearance of impropriety, which may erode user confidence in the business.

Therefore, it is important to identify potential conflicts and deal with them effectively.

Companies should commit to proactively discovering and disclosing conflicts of interest and eliminating or mitigating them.

Out of various considerations, such as reducing costs and improving management efficiency, many companies outsource some business or functional needs. 

In the environment of stricter compliance regulation, the risks arising from the company's dealings with third parties are also increasing, and "conflict of interest" is one of the important ones.

What are Conflicts of Interest?

A conflict of interest in a business environment mainly refers to the relationship between an employee's formal identity within the enterprise and their external identity or interests.

Although the conflict itself does not constitute a direct negative event, it greatly increases the possibility that the relevant employees will take a certain action or decision in the company's capacity, obtain personal benefits in violation of regulations, and cause damage to the company. 

Therefore, in the face of conflicts of interest, we must adopt measures to minimize and eliminate the risks it brings. 

Example of conflicts of interest

Let's look at a case first:

A multinational group received a report that a local regional sales executive was suspected of being related to a regional distributor and suspected of an improper conflict of interest. 

According to the report's hints, the company independently searched the sales executive's information. Also, it examined the sales data of several areas under its purview and the performance of associated dealers. 

However, it could not discover any indications of unusual sales or unreasonable cost changes nor locate any proof of the sales executive's non-compliance behavior.

At the same time, the company's actions to retrieve and analyze a large amount of internal data and documents have attracted the attention of employees, which has caused many rumors and criticism, adverse effects, and doubts from the management…

It has become increasingly difficult for companies to initiate conflict of interest investigations directly internally. In this case, the failure of the investigation has already alerted the enemy and even caused rumors within the company to flourish.

So, why is it more and more difficult to investigate corporate conflicts of interest?

Why is Conflict of Interest Hard to Investigate?

The existence of a conflict of interest does not imply that the person or party involved participates in the conflict when they are required to act one way but may receive additional financial benefits from acting in another way that could be costly to the other party.

The concealment of conflicts of interest is often very strong. Therefore, obtaining valuable discoveries through traditional auditing methods may be difficult even if a report is received.

This manifests itself as the maturity of the social and business environment. However, from the perspective of companies conducting conflict investigations, it also means more constraints. 

For example, suppose the investigation work must comply with the regulations and fully comply with the law and necessary procedures. In that case, the enterprise may face the consequences such as labor arbitration or litigation.

In this regard, the solution to this example is to complete the investigation work prudently "from the outside in," under the premise of legal compliance.

External Research

The external investigation focuses on assessing whether there is a special relationship between the suspected employee involved and the third-party company.

This can be done through the investigation of legally obtained public information and careful industry investigation and inquiry, such as:

• Does the employee have an indirect interest in the third-party company through family members or friends?
• Does the third-party company only have business dealings with the company?
• Is the standard of living of the suspected employee consistent with their normal income level?

The likelihood of obtaining sufficient valid information through external professional research is high. 

When we learned about the client's dilemma, we strongly advised that they stop the internal review work causing the company's problems and instead concentrate on performing outside research to help them gather the data they needed to manage the incident appropriately.

I helped clients obtain sufficient information through external research. On the one hand, this helped the client regain management's approval internally.

On the other hand, the current information also clarifies the direction and focus of the next stage of work, making the review and research combined internally and externally more targeted, more efficient, and more efficient. There are also fewer side effects.

How to Avoid Conflicts of Interest

Failure to resolve a conflict may have serious implications. For example, it may lead to poor governance, reputational damage, and failure to act in the entity's best interests.

In addition, failing to resolve a conflict can lead to discord among management and directors, particularly when people are involved in a subject they are passionate about. If handled improperly, it may damage the board's collective confidence.

Unfortunately, workers don't always know how to spot or handle conflicts of interest at work. Frequently, the circumstance seems benign, or those involved are unaware that what is taking place violates the code of conduct.

There are several different approaches you may utilize to give staff enough conflict of interest policy examples and instruct them on what to do when a problem arises:

1. Establishing Business Standards: Your business should have a conflict of interest policy or code of conduct that covers ethical problems that employees might face. For example, it might cover topics including how staff members should react to bribery, data security, personal information, and social media concerns.
2. Corporate Ethics Education: When you define conflict of interest clearly in corporate ethics training, you reinforce your code of conduct to make the material easier for employees to remember. For example, during training, you might provide scenarios to help employees decide what to do in conflict of interest situations.
3. Official Reporting Protocols: Employees should be encouraged to declare conflicts of interest to your firm even if they are aware of them. Thanks to the establishment of formal reporting policies, employees can ask inquiries by having an open line of communication.

Conclusion

To prevent conflicts of interest, any business employee must remain vigilant and take appropriate actions in situations that may affect their ability to make objective business decisions.

Some of the decisions in particular:

1. External commitment
   • Work for or get paid for a company supplier or client.
   • Maintain a financial interest or relationship with a company's competitor, customer-supplier, or any third party with which the company does business.
   • Acquiring or possessing, directly or indirectly, any interest in property or assets for sale or lease to a company.
   • Requesting a personal benefit from a third party to influence a company to decide in favor of that third party.
   • Participating in outside activities is enough to question your ability to dedicate the proper time and attention to your responsibilities.
2. Personal relationship
   • Interact with relatives who work for or apply for jobs for a company, its competitors, suppliers, or customers.
   • Purchasing a product or service on behalf of a company from a relative or a company in which a relative has an interest.
3. Accept valuables: Receiving a gift may create a feeling of obligation to the recipient that may affect the objectivity of their decision-making. The gift may be considered a bribe for that person or other employees.

Specific implementation measures are necessary for preventing conflicts of interest, and these measures call for improving implementation mechanisms such as monitoring, assessment, reward and punishment, and recognition systems.

During the implementation process, it is necessary to form strong supervision of conflicts of interest, give a comprehensive and scientific evaluation of the status of the company's employees, and handle conflicts of interest.

At the same time, companies should fully realize the importance of preventing conflicts of interest and strengthening theoretical research and policy exploration in related areas.

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