The Cost of Conflict of Interest

By Prof. Enrique N. Soriano

“Turning a blind eye to conflict of interest is the fastest way to destroy wealth and unity.”

The Philippine flood control scandal has revealed more than just kickbacks and padded contracts. Testimonies describe ghost projects—initiatives that exist only on paper, yet drain billions from public coffers. At the core is a simple truth: when people tasked with stewardship place self-interest above duty, the community pays the price.

This same pattern often emerges in family businesses. When conflict of interest goes unchecked, the business becomes a feeding ground for individuals rather than a legacy for generations. What appears to be “a small perk” or “just a family advantage” eventually corrodes trust, drains profits, and destroys unity.

The Family Business Parallel

In a well-run business, related-party transactions are scrutinized and regulated. But in many family enterprises, the lines blur. A sibling who controls operations may quietly direct contracts to his own companies. Another may use the family payroll to cover the salaries of personal staff. Others may push for acquisitions that benefit their branch, not the enterprise.

At first, these practices are tolerated. Family members rationalize them as harmless or part of the perks of leadership. But, like ghost projects in the flood control scandal, these “harmless” conflicts of interest pile up. Eventually, they hollow out both the finances and the moral foundation of the enterprise.

Case Study: The Sibling Procurement Dilemma 

Consider the case of the D family, a second-generation group running a mid-sized food and manufacturing business. The founder’s two sons and one daughter inherited equal shares. The eldest son, who became president, was in charge of procurement. Unknown to his siblings, he also owned a trading company run by his wife that supplied raw materials to the business.

Over the years, he ensured that all supply contracts flowed through his company. Prices were padded, and quality sometimes suffered. The factory absorbed the costs, and profitability steadily declined. While dividends shrank, the president’s trading company flourished.

When the siblings discovered the scheme—they felt deeply betrayed. Lawsuits were filed, and the case made headlines in their local business community. Not only had the enterprise lost millions, but the siblings’ trust in one another was shattered. They eventually sold the business to outsiders, ending what could have been a multi-generational legacy.

Why Conflict of Interest is So Damaging

Conflict of interest in the family business is not just a financial issue; it’s an ethical and relational one. Every amount misdirected through insider deals is income denied to other shareholders. Every backroom contract signals that personal gain matters more than fairness. Over time, resentment festers. The family divides into camps, with one branch defending the “offender” while others demand accountability.

The result is often irreparable: fractured relationships, forced exits, and businesses sold under duress. Just as ghost projects in government rob citizens of infrastructure, conflicts of interest in family firms rob the next generation of opportunity.

The Governance Tools That Prevent Abuse

The good news is that families can guard against these corrosive practices. As mentioned in my article last week, the following tools are non-negotiable for long-term survival:

• Shareholder Agreements: These documents define how related-party transactions are handled, ensuring transparency and fairness.
• Conflict-of-Interest Policies: Clear rules prohibit self-dealing unless disclosed and approved by the board.
• Independent Audits: External auditors act as watchdogs, verifying that contracts and finances align with market standards.
• Independent Directors: Non-family voices bring objectivity and ensure accountability at the board level.

These structures may feel rigid to families used to informality, but they are essential. They protect not only the business but also the relationships that bind the family.

A Call to Vigilance

The lesson from both government corruption and family businesses is stark: silence is complicity. Turning a blind eye to conflict of interest is the fastest way to destroy wealth and unity. Families must resist the temptation to excuse bad behavior simply because “he is family.”

If unchecked, conflict of interest grows like a hidden cancer—quietly eroding financial health until it’s too late to recover. But when families commit to transparency, fairness, and accountability, they transform self-interest into stewardship.

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