This is a story about your most delightful headache. Or perhaps your company's Achilles' heel. Why is the spectrum so wide? Because we're talking about the inner drive that made America great, and its consequences when it manifests itself in inappropriate places.
It's no hazard to say that in every business today, including yours, there are people at all levels running some sort of operation on the side. It may be the vice president creating sophisticated hedge fund ventures that siphon off or disguise revenues and losses, as apparently happened at Enron. It may be the assistant hosting a Tupperware party for fellow assistants during lunch hour. In either case, and all those case in between, you must find a balance.
This is not a one-size-fits-all discipline. Different industries have different standards for free-lancing; the type and scale of the enterprise, the level of the employee, and the possible effect on company cohesion and morale are all factors to be considered. The most difficult aspect for you, as the CEO or manager, is to keep informed of what is going without letting it distract you, while retaining your options to either tolerate or terminate the activities.