Doing business with family - bench-marking of current practices

by Kris Dobie and Mary-Jane Ncube | Published on 27 August 2018 for The Ethics Institute monthly newsletter

 

Theoretically, conflicts of interest are an easy matter to deal with: one should not allow personal interests to interfere with professional responsibilities. Put differently, one should always be able to take unbiased decisions in the best interest of the organisation, or in line with one’s professional duties. This might sound relatively straightforward for an ethically sensitive individual to do but, in reality, managing conflicts of interest at an organisational level can get complicated.

An ethics approach would attempt to get employees to internalise the principles of conflicts of interest, and to raise, avoid, or manage potential conflicts responsibly. 

One cannot, however, always rely on the good faith and clear understanding of all employees, and the ethics approach should be supported by a structured management approach.  Many organisations have in place formal mechanisms to improve transparency and actively manage conflicts of interest. These interventions include, among others, conflict of interest policies, requirements for employees to disclose their personal interests, and gift registers.  To stay relevant, these policies are always evolving and adapting, which means that ongoing research is required to keep abreast of leading practice.

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A client recently approached The Ethics Institute to assist with benchmarking current conflict of interest practices in South African companies. They were particularly interested in how companies are managing the matter of employees and their family members doing business with the company.

To tackle the challenge, we contacted 10 companies, (mostly larger listed entities, including some multinationals) to discuss their policies and practices. Among other things, we probed the following:

  1. Do they follow a discretionary approach, or do they have a complete ban? Do they perhaps only ban some (high-risk/senior) employees?
  2. How are ‘family members’ defined?
  3. What processes are followed?
  4. Who makes these decisions?

This is what we found:

  1. Ban or discretion?

The majority of companies take a discretionary approach. In other words, they do not have an outright prohibition on family members doing business with the company, but will assess each case on its risks and merits.

Only one company has decided on a complete prohibition of family members doing business with the company. This is a new policy that is currently being implemented, so its workability still needs to be tested. Even with a complete ban, the company acknowledges that there may be a need for exceptions, but these will require executive committee sign-off. Existing contracts with family members will be allowed to run their course, but will not be renewed.

One company is exploring the possibility of prohibiting doing business with some employees’ family members. The ban might be limited to senior executives and those working in supply chain management. The thinking is that the more senior a person is, the greater the perception that they can influence decision-making. Those in supply chain management are viewed as high risk, as they engage with procurement on a daily basis. 

It is interesting to note that the South African Public Service does not ban family members from doing work for the state, although full disclosure is required to actively manage potential conflicts. However, section 13.c. of the Public Service Regulations, 2016, specifies that employees themselves “may not conduct business with any organ of state, or be a director of a public or private company conducting business with an organ of state…”  This is therefore a very broad ban on employees doing work with their employer, which sets a strong precedent. 

  1. How is family defined?

Where ‘family’ is defined, most companies opt for two degrees of consanguinity (blood relation) and affinity (relation through marriage). The following table illustrates the various degrees, and the dashed box highlights the common practice focus on the first two. So, an uncle or a sister-in-law are not considered family according to the procedural definition, but siblings, parents, spouses, children, grandparents, and in-laws are.

Nepotism chart

We would suggest that, should there be an outright ban on doing business with family members (even if just for some employees), this should not extend beyond the first degree. 

  1. What processes are followed?

Most policies specify a formal process for disclosing conflicts and obtaining approval, with some having online systems to do so. 

In general, there is a strong policy requirement for upfront disclosure of any potential conflicts, and a requirement that a written decision must be given on the matter. Such a decision would generally include a description of any controls to manage the risk of a conflict of interest, as well as restrictions that are placed on parties.

  1. Who makes the decision?

Responsibility for making the decision varies, and may include line and/or regional managers, ethics and/or compliance officers, or even the executive committee and the board.

We did find that, where line managers carry the responsibility, they generally want more policy clarity and would prefer not to make the final decision. This is understandable. In the current environment, with large-scale ethics failures (not to mention state capture) at the forefront of public awareness, managers would prefer to err on the side of caution and not carry sole responsibility. 

An emergent good practice seems to be that line and/or regional managers give their input and recommendation – and thereby contribute their specific knowledge of the context – but that the final decision is made by the ethics office. 

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Conflicts of interest are a difficult area to manage. In many instances, one is managing a risk of what one cannot see because it is happening behind the scenes. The conflict of interest policies which formed part of our research sample demonstrate companies’ attempts to raise transparency levels and get people to apply their minds to situations. It is a fine balancing act: trying to limit the financial and reputational risk to the company, while at the same time avoiding unfairly limiting people’s right to do business.

It should be pointed out, in closing, that conflicts of interest may extend beyond family members to friends or previous colleagues. One can only apply a ban so far, and for that reason it remains important to not only set strong policy guidelines, but to also get employees to internalise the ethical principle of avoiding illegitimate bias in their decisions. This responsibility remains with them. 

Source for chart: http://www.jsu.edu/hr/nepotism/index.html


Kris Circle

 

Kris Dobie is Manager: Organisational Ethics Development at The Ethics Institute. He holds a Master of Workplace Ethics from the University of Pretoria.

 

 

Mary Jane Circle

 

 Mary-Jane Ncube is an Ethics and Anti-Corruption Specialist at The Ethics Institute. She holds a Masters in International Development from the University of Birmingham, United Kingdom.