Monday January 26, 2015
It’s a term that gets tossed around quite a lot. But “conflict of interest” is a real and genuine threat to your association and its proper stewardship. Understanding what the term means – as well as how to recognize and avoid conflicts of interest– can go a long way toward ensuring the strength and stability of your community and eliminating many concerns.Here we’ll give you nine essential tips to better understand conflicts of interest in order to be an effective member of the Board of Directors – and avoid potential costly litigation or improper perception in the process.
Understanding HOA board member conflict of interest and how to avoid it
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Know the definition.
Put simply, a conflict of interest arises when outside or personal interests adversely affect an individual’s ability to make an impartial decision. For instance, if a board member owns a landscaping company and wants his or her company to bid on your association’s contract, that represents a definite conflict of interest. It’s important to remember that there are potential and actual conflicts of interest – the fact that the board member owns the company represents a potential conflict. If the association actually engages with the company, then that’s an actual conflict of interest necessitating that certain actions are taken.
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Be aware of your duties.
Legally, a board member has a fiduciary obligation to the association. This takes shape in two ways: as a duty of care, which requires you to provide stewardship as a reasonable person, and as a duty of loyalty, which requires you to hold the association as your top priority. Always exercise proper judgment to distinguish between both.
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Anticipate Conflicts.
Conflicts will arise, there’s no doubt about it. The key to addressing them is asking yourself if you have outside or personal influences that may affect a transaction, if you have outside or personal interests that should be disclosed, if you have duties to outside interests that may affect your decision-making, and, finally, if you have duties to outside entities that conflict with your duties of loyalty or care to the association. If you answer “no” to these questions, then it’s unlikely there’s a conflict.
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Beware of the budget.
Consider this scenario: a few board members become elected and it’s their personal view that assessments are too high. When it comes time to propose the next budget, they essentially gut it so that the monthly fees can be lowered. This deflated budget in most cases will no longer be adequate to maintain the standards of the community. The conflict here is clear: these board members have put their personal finances ahead of the good of the community. The lesson: during budgeting (and beyond), beware of personal biases that influence behavior counter to the interests of the community.
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Information can lead to conflict.
In some cases, boards may have access to privileged information. When that information is exploited for personal financial gain, it represents a conflict of interest. Say for instance a homeowner has had trouble paying his or her assessments and wishes to sell the property. Approaching the board members with this desire is not a problem. However, if the board has a legal first right of refusal and a board member who wishes to purchase the property does not disclose his or her interest in the purchase up front, then a conflict exists. That is, the board member has a personal interest in the board passing on the sale so he or she can benefit from the purchasing opportunity. This can also happen with foreclosures. The bottom line: individual directors must allow boards to make their decisions first and in a way that’s unencumbered by personal interests.
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Make the rules apply to everyone.
Even board members must follow the association rules. If some board members are allowed to live outside the covenants (such as parking in restricted spaces or owning too many pets), then it opens up all board members to potential liability. The rules are the rules – whether you’re a member of the board or not.
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Developer-appointed board members are no exception.
Board members appointed by developers during the development phase face real challenges. Ethically, they owe their allegiance to the association. Yet many of them are pressured by their relationship with the developer. As such, when a developer wishes to place assessments at an unrealistically low level to attract buyers or forego collection procedures against the developer, the board member is faced with a conflict. Courts have ruled that developer-appointed board members are held to even more scrutiny, so they should view the good of the association as paramount.
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Deal with conflict openly.
Different states have specific laws on how board members should conduct themselves. Generally, dealing with conflict should involve revealing the fact that a potential conflict exists, documenting all transactions where board members could benefit, evaluating bids openly and honestly, and voting on all contracts after reviewing all material. Document all activities in meeting minutes so that there is a written record of all activity. Abstention in the voting process by an interested director is generally good practice and may be required under governing law.
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Managers are held to the same high standards.
A good property management company will be clear on this but it’s important that all members of the association realize that, to the property manager, the actual client is the association as a whole. Therefore, it’s up to the property manager to act in the interest of the association, not in the interest of specific board members. Additionally, it’s critical that managers refuse gifts or favors from board members and those doing business with the association or seeking to do business with the association, avoid self-dealing or acts that are self-beneficial and refuse to engage in activities that conflict with other clients. Further, if a property manager engages in a contract with an individual homeowner within the association, that relationship should be disclosed to the board.