Conflict of interest

What it means

A conflict of interest arises when a person’s private or other side interest could influence a decision they are supposed to take for the benefit of a company, a client or an institution. Typical cases are a director signing a contract with another company of their own, a buyer choosing a supplier run by a relative, or an adviser earning commission from the product’s seller.

A conflict in itself is not a breach. The problem arises when it is concealed or when the person puts their own interest first. Conflicts are therefore handled mainly through transparency: disclose them, let someone else decide and document that the terms are at market level.

The Commercial Code requires directors and board members to act with due professional care and in the company’s interest, and it deals with some situations expressly, such as the statutory non-compete or general meeting consent to contracts with board members. A breach can bring personal liability for damage.

How it works in practice

In practice we most often see contracts between a company and its shareholder or director, such as renting property, a loan or services. We recommend concluding them in writing, on market terms and with the consent of the other shareholders, if there are any.

For tax, such relationships are transactions between related parties. Prices must match the usual market price under transfer pricing rules, and they are the first thing the tax office checks in an audit.

Larger companies deal with conflicts of interest in their code of ethics and within compliance: staff complete an annual declaration of outside activities and supplier relationships, and purchases are decided by more than one person.

What to watch out for

The most common mistake is a silent conflict the other shareholders know nothing about. When it later emerges that the director spent years buying at higher prices from a company close to them, a damages dispute follows and often the end of the partnership.

In accounting and advisory services, a conflict of interest is also a question of independence. Someone who keeps the books and also checks them cannot be independent. Audit and tax advice therefore have special rules limiting which services may be combined.