conflicts of interest

(noun)

A conflict of interest (COI) occurs when an individual or organization is involved in multiple interests, one of which could possibly corrupt the motivation for an act in the other.

Related Terms

Examples of conflicts of interest in the following topics:

  • Defining Agency Conflicts

    • Moral hazard and conflict of interest (COI) may thus arise .
    • Much of the contemporary interest in corporate governance is concerned with mitigation of the conflicts of interests between stakeholders.
    • A conflict of interest occurs when an individual or organization is involved in multiple interests that may lead to conflicts in their ability to act in the best interest of one party.
    • In addition to conflicts of interest between managers, shareholders, and bondholders, conflicts of interest can also occur among other stakeholders of a company, such as the board of directors, employees, government, suppliers, and customers.
    • COI is sometimes termed "competition of interest" rather than "conflict", emphasizing a connotation of natural competition between valid interests rather than violent conflict.

  • Conflicts of Interest Between Shareholders and Bondholders

    • The shareholders and bondholders have different rights and returns, leading to potential conflicts of interest.
    • The agency view of the corporation posits that the decision rights (control) of the corporation are entrusted to the manager (the agent) to act in the principals' interests.
    • The deviation from the principals' interests by the agent is called 'agency costs', which are often described as existing between managers and shareholders; but conflicts of interest can also exist between shareholders and bondholders.
    • Other conflicts of interest can stem from the fact that bonds often have a defined term, or maturity, after which the bond is redeemed, whereas stocks may be outstanding indefinitely but can also be sold at any point.
    • Describe the conflict of interest between a company's shareholders and its bondholders

  • Global Research Settlement

    • The Global Settlement was an enforcement agreement to address issues of conflict of interest within the SEC and other big investment companies.
    • The agreement was meant to address issues of conflict of interest within their businesses.
    • The central issue at hand that had previously been decided in court was the conflict of interest between the investment banking and analysis departments of ten of the largest investment firms in the United States.
    • A typical violation addressed by the settlement was the case of CSFB and Salomon Smith Barney, which were alleged to have engaged in inappropriate spinning of "hot" IPOs and issued fraudulent research reports in violation of various sections within the Securities Exchange Act of 1934.
    • Describe how the Global Research Settlement addressed conflicts of interest in the market

  • Conflicts Between Managers and Shareholders

    • The "agency view" of corporations argues that the decisions rights (or control) of a corporation should be entrusted to a manager, so that the manager can act in the interest of shareholders .
    • While attempting to benefit shareholders, managers often encounter conflicts of interest.
    • The chief goal of current corporate governance is to eliminate instances when shareholders have conflicts of interest with one another.
    • After the high-profile collapse of a number of large corporations in the past two decades, several of which involved accounting fraud, there has been a renewed public interest in how modern corporations practice governance, particularly regarding accounting.
    • Discuss different examples of a conflict of interest between managers and shareholders

  • Defining Corporate Governance

    • Much of the contemporary interest in corporate governance is concerned with mitigation of the conflicts of interests between stakeholders.
    • Ways of mitigating or preventing these conflicts of interests include the processes, customs, policies, laws, and institutions which have impact on the way a company is controlled.
    • An important theme of corporate governance is the nature and extent of accountability of people in the business.
    • In large firms where there is a separation of ownership and management and no controlling shareholder, the principal–agent issue arises between upper-management (the "agent") which may have very different interests, and by definition considerably more information, than shareholders (the "principals").
    • Corporate governance deals with the conflicts of interests in a company.

  • Sarbanes–Oxley Act of 2002

    • As a result of SOX, top management must now individually certify the accuracy of financial information.
    • SOX also increased the independence of the outside auditors who review the accuracy of corporate financial statements, and increased the oversight role of boards of directors.
    • Title II consists of nine sections and establishes standards for external auditor independence, to limit conflicts of interest.
    • It defines the codes of conduct for securities analysts and requires disclosure of knowable conflicts of interest.
    • Title X consists of one section.

  • Managers, Shareholders, and Bondholders

    • Three parties key to the corporation's functioning are managers, shareholders, and bondholders, each of which can have different interests.
    • The agency view of the corporation posits that the decision rights (control) of the corporation are entrusted to the manager to act in shareholders' and other stakeholders' interests.
    • The deviation from the principal's interest by the agent is called 'agency costs. ' Agency costs mainly arise due to contracting costs and the divergence of control, separation of ownership and control and the different objectives of the managers and other stakeholders.
    • Moral hazard and conflict of interest may arise.
    • While all three parties have an interest, whether direct or indirect, in the financial performance of the corporation, each of the three parties has different rights and rewards, for example voting rights and forms of financial return.

  • Multi-Period Investment

    • Suppose you make a deposit of $100 in the bank and earn 5% interest per year.
    • Since simple interest is paid only on your principal ($100), you earn 5% of $100, not 5% of $105.
    • The second way of accruing interest is called "compound interest. " In this case, interest is paid at the end of each period based on the balance in the account.
    • In the third year, you earn interest of 5% of your balance, or $110.25.
    • Simple interest earns you 5% of your principal each year, or $5 a year.

  • The Interest Rate Risk

    • Interest rates became volatile during the 1980s, forcing banks to become more concerned with interest-rate risk.
    • We show an example of a bank's balance sheet below:
    • Moreover, the cost of funds increases by $2.5 million (0.05 × $50 million = $2.5 million).
    • If the interest-rate sensitive liabilities equal the interest-rate sensitive assets, then fluctuating interest rates do not affect bank profits.
    • Third, the high volatility of interest rates during the 1980s contributed to the creation of new financial instrument, such as the floating-rate debt.

  • Calculating Present Value

    • Calculating the present value (PV) is a matter of plugging FV, the interest rate, and the number of periods into an equation.
    • Finding the present value (PV) of an amount of money is finding the amount of money today that is worth the same as an amount of money in the future, given a certain interest rate.
    • But first, you must determine whether the type of interest is simple or compound interest.
    • This is the percentage of interest paid each period.
    • One area where there is often a mistake is in defining the number of periods and the interest rate.