A conflict of interest occurs when your judgment

The appearance of a conflict of interest—when a third party could think your judgment has been compromised—is generally considered just as damaging as an actual conflict.

A recent example of a conflict of interest likely contributed significantly to our financial crisis. Rating agencies such as Standard & Poor’s rated the complex mortgage- backed securities we described. A triple-A rating made investors feel secure about buying these securities. As Americans learned the hard way, however, many of these securities were not deserving of anything near such a high rating. Many factors contributed to the debacle (including the fact that rating agencies were using old methods to rate these newfangled products). A major contributor was a serious conflict of interest—the rating agencies are paid by the companies whose securities they rate, thus making it difficult or impossible to assign truly objective and unbiased ratings.

Another example might be of particular interest to college students. In 2007, the University of Texas fired its director of financial aid when it learned that he had financial ties to particular student loan companies that he then touted to students and peers. Students were not steered toward companies that provided the best loans or service, but toward those that provided gifts (including stock) to the director of financial aid.

If a customer offers to do a favor for you—or your daughter or another family member—here are some of the questions you’ll need to ask yourself: Would your customer’s offer influence your business relationship? Would someone think your business judgment had been compromised by accepting your customer’s offer? Is your relationship more than just a business one, so that accepting an offer could be interpreted as a simple act of friendship?

Some corporations have a policy that permits the acceptance of favors from customers or vendors if there’s also a ‘‘friendship’’ present; and these companies usually define friendship as a long-standing relationship that’s well known in the community. For example, in small towns where everyone knows everyone else, many of a business owner’s customers are also his or her friends; it’s unrealistic to expect anything else. Other organizations (including government agencies) would discourage accepting a favor like this one under any circumstances. Here are some things to consider when making your decision in this case: How long have you been friends with your customer? How well known is the relationship in your community? What is his knowledge of your daughter’s qualifications? Does your customer expect anything in return for his recommendation, or is the letter simply a gesture of friendship with no strings attached? How would others perceive his recommendation?

Almost every business situation can involve conflicts of interest. A conflict can occur when a vendor lavishly entertains you or when you entertain a customer—if the object is influence. Both situations could prompt an observer to think that a special deal or advantageous terms are part of the relationship. Conflicts of interest can occur when people who report to you observe that you have an especially close friendship with one of their coworkers. Conflicts can occur when you’re asked to judge the credit worthiness of your neighbor or if you perform consulting work for your employer’s competitor. They can involve accepting hand tooled cowboy boots from an advertising agency, being sponsored for membership in an exclusive private club by a consulting company, or allowing a supplier to give you a discount on equipment for your home when you place an order for your office.