Numerous cases of disputes arising from conflicts of interest involving employees make it essential for companies to strengthen and improve their compliance management in this area.
Conflicting interests in employment mainly refer to conflict between an employee’s personal interests and his or her job duties or position, where such conflict directly or indirectly causes harm to the company’s interests, or puts them at risk. Such conflicts can manifest in various forms.
This article provides operational recommendations for companies in managing and resolving conflicts of interest, with particular focus on conflicts of interest arising when an employee or their relatives hold shares or positions in a competitor or business partner, such as a company supplier or customer.
ESTABLISHING A SYSTEM
Building a management system is the first line of defence in effectively controlling conflicts of interest.
Companies can establish agreements related to conflicts of interest in labour contracts and other relevant agreements. Alternatively, they can formulate a separate conflict of interest system or provide a specific chapter on conflicts of interest in their rules and regulations.
However, given that a company’s chance of success in such dispute cases will pivot around the degree of clarity and detail of conflicts of interest management requirements set in advance, the authors recommend that companies provide detailed provisions in their regulations, in addition to principle-based or general provisions in employment contracts.
It is suggested that more detailed provisions cover the following specific content.
Enumerate as comprehensively as possible ways in which conflicts of interest arise. These include any manner of association between employees or their relatives and the company’s competitors or business partners (such as holding shares, employment, providing services or assistance, and exercising control) within the scope of circumstances and activities that could give rise to a conflict of interest.
Clarify employee disclosure obligations. This includes disclosure obligations before induction, and ongoing disclosure obligations during their tenure, and setting up a channel and procedure for disclosing conflicts of interest.
Establish a process for reviewing conflicts of interest clearly defining the company’s decision-making authority regarding review findings and corrective measures. Not all conflicts of interest will result in harm or threaten the company, and the company can retain the ultimate right to make judgements and decisions. Where extreme measures such as dismissal are unnecessary, the company may consider certain corrective or adjustment measures such as requiring the employee to divest from relevant companies or resign from their positions, or change their job responsibilities or reporting lines, excluding them from corresponding decision-making processes, and requiring employees to co-operate.
Setting disciplinary measures for violations. When an employee refuses to disclose, fails to make a truthful disclosure or co-operate in the company’s corrective or adjustment measures, the company can impose sanctions such as a warning, a serious warning or, in most extreme cases, termination of the employment contract.
To implement a conflicts of interest system, the authors suggest companies take the following steps in practical operations:
- Ensure that the formulation and revision of the system comply with requirements of the statutory procedure so that it can be effectively applied to and constrain employees;
- Provide training and optimise management of conflicts of interest disclosure procedure. It is recommended that companies offer management training to employees during onboarding and throughout their employment. Additionally, a company can regularly arrange to be apprised of conflicts of interest situations among employees by questionnaire. Questionnaire templates can be prepared in advance and continually updated and improved, explaining disclosure requirements before employees fill in the questionnaire, and reminding them of the consequences of non-disclosure or non-truthful disclosure. The company can also establish a conflict of interest query window for employees to inquire and confirm when they have questions about the system, or are unsure whether they are in conflicts of interest. It is best to document the relevant training and communication processes in writing; and
- Open diverse channels for complaining and reporting conflicts of interest, such as a hotline, dedicated email address or website, and set up and improve an acceptance and investigation mechanism.
Where an employee is suspected of violating conflicts of interest regulations, it is incumbent on the company to promptly launch an investigation to verify whether the employee has committed a breach of discipline or, more seriously, a violation of the law relating to conflicts of interest, and to determine the pertinent disposal measures.
In practice, a company can investigate and fix relevant facts and evidence through external lawyer assistance by querying internal and external file data and government public information, and conducting interviews with relevant personnel.
It is imperative for the company to pay attention to compliance when investigating. For example, a conflict of interest compliance investigation by a multinational corporation could involve cross-border transmission of the employee’s personal information.
Based on current personal information protection laws, if the company explicitly includes this situation in its effective rules and regulations as necessary for implementing human resources management, it is generally understood that separate consent from employees is not required.
However, given that application of relevant laws remains in flux, the company is recommended to inform the relevant employee and secure separate consent before cross-border transmission of data.
Based on the results of the investigation, the company may take corrective measures based on its rules and regulations, and impose appropriate disciplinary measures on the implicated employee.
If the employee is a senior executive who derived personal income or caused the company to incur an economic loss through conflicts of interest relationships, the company may additionally consider instituting legal action for harm to the company’s interests pursuant to the Company Law, demanding that the employee compensate for the loss or transfer his or her illegal income to the company.
The company needs to pay attention to establishing strict internal norms in advance for product and service procurement, and sale pricing authority and supplier selection, so the same can serve as a sound basis for substantiating violations of regulations by employees and holding them accountable.
Tracy Liu is a partner and Larry Lian is a counsel at Jingtian & Gongcheng
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