Chinese Wall

A Chinese Wall is an ethical barrier between different divisions of a company to avoid conflict of interest.  This is typically existing in financial institutions and professional service firms.

For instance, in an investment bank, there is a Chinese Wall between the advisory area and the brokering department of a financial services firm to separate those giving corporate advice on takeovers from those advising clients about buying shares. The “wall” is thrown up to prevent leaks of corporate inside information, which could influence the advice given to clients making investments, and allow staff to take advantage of facts that are not yet known to the general public. Consulting firms also frequently set up internal Chinese Walls when competing firms are clients to the same consulting firm.

Maintaining client confidentiality is crucial to any firm, but particularly large multi-service businesses. Where firms are providing a wide range of services, clients must be able to trust that information about themselves will not be exploited for the benefit of other clients with different interests. And that means clients must be able to trust in Chinese Walls. Some Wall Street scandals in recent years, however, have made some people doubt the effectiveness of Chinese Walls, as well placed executives of respectable firms have traded illegally on inside information for their own benefit.  The Chinese Wall is meant as an assurance of corporate ethics.  However, at the end of the day, ethics come down to the individual and it is difficult to enforce ethics if the individual has loose morals.

Business frameworks like Chinese Wall are invaluable to evaluating and analyzing various business problems. You can download business frameworks developed by management consultants and other business professionals at Flevy here.

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Have you used Chinese Wall in your work? Please share your experiences and insights in the comments section below.

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