Nine Essential Facts About Conflicts of Interest

“Conflict of interest” is a term that gets thrown around quite often, but that doesn’t mean it’s not a real threat to your association. Understanding what the term really means – and learning how to not only recognize but also avoid conflicts of interest – can go a long way toward ensuring the strength and stability of your community.

Here are nine essential things each Board member should know about conflicts of interest to avoid the perception of impropriety and, in some cases, potential litigation.

1. Know the definition.

Let’s start by defining the term conflict of interest. A conflict of interest arises when outside or personal interests adversely affect an individual’s ability to make an impartial decision. For example, if a Board member owns a pest control business and wants his or her company to bid on your association’s contract, that is a clear conflict of interest. When dealing with conflicts of interest, it’s important to know the difference between a potential conflict and an actual conflict. The fact that the Board member owns the company is a potential conflict. If the association engages with the company, then that is an actual conflict of interest and requires action.

2. Be aware of your duties.

When you join your association’s Board of Directors, legally, you have a fiduciary obligation to your association. This is demonstrated in two ways – as a duty of care and a duty of loyalty. This means you are required to act with integrity and hold the association as your top priority. To distinguish between both, be sure to exercise proper judgement.

3. Anticipate conflicts.

Conflicts are bound to occur, there’s no doubt about it. The key is to address them by asking yourself a few simple questions. Do you have outside or personal influences that affect a transaction? Do you have information that should be disclosed? Do you have duties to outside entities that conflict with your duties of care and loyalty to the association? If the answer to all of these questions is no, then it it’s unlikely there is a conflict of interest.

4. Beware of the budget.

Consider this scenario: a new Board member is elected and believes that assessments are a little too high. When budget time rolls around, he proposes to significantly reduce assessments so that monthly fees will be lowered. The lower budget is no longer enough to maintain the current standards of the building. It is clear that the Board member did not have the best interest of the community in mind when making this decision. He put his own personal finances ahead of the good of the community. The lesson to be learned from this scenario is that, during budget season and beyond, it is important to look for personal biases that may influence your behavior because they may present a conflict of interest so far as the community is concerned.

5. Information can lead to conflict.

In some instances, Boards have access to privileged information. When that information is exploited for personal gain, it becomes a conflict of interest. Let’s consider another scenario: a homeowner who has had trouble paying her assessments wishes to sell her property and approaches the Board about it. Approaching the Board about selling her property is not an issue. However, if the Board has, by law, a legal first right of refusal, and a Board member who wants to buy the property does not disclose his interest up front, then a clear conflict of interest exists. Meaning, the Board member has a personal interest in the Board passing on the sale so that he can have the purchase opportunity. The same can occur with foreclosures. The bottom line is this: members of the Board must allow the Board to make their decisions first and in a way that’s unencumbered by personal interests.

6. Make sure the rules apply to everyone.

Everyone should follow the rules, even Board members (actually, especially Board members). When Board members live outside of covenants, the potential for liability occurs. And you can rest assured that if a Board member bends the rules, such as parking in restricted areas or owning one too many pets, others are sure to follow suit. Board members should lead by example and ensure that the rules are being followed throughout your community.

7. Developer-appointed Board members are no exception.

If you were appointed to the Board by developers during the development phase, then chances are you are under a great deal of pressure. Ethically, your allegiance should be to the association, but you may feel pressured by your relationship with the developer. The conflict occurs when, for example, a developer wishes to place unrealistically low assessments to attract buyers or forego collection procedures against the developer. If this occurs, be sure to stand firmly by your morals and always keep the association’s best interest in mind.

8. Deal with conflict openly.

Different states have specific laws on how Board members should conduct themselves. However, generally speaking, dealing with potential conflicts should involve admitting that they exist, documenting all transactions where Board members could benefit, evaluating bids openly and honestly, and voting on contracts only after all the materials have been reviewed.

9. Managers are held to the same high standards.

It should go without saying, but everyone should be held accountable for his or her actions. A good property management company will recognize this, but it is critical that all members of the association realize that the property manager considers the association its client. And as such, it is up to the property manager to make ethical decisions and act in the best interest of the association, not in the interest of specific Board members.

If the property manager engages in business with an individual homeowner within the association, the relationship should be disclosed to the Board. Additionally, it is crucial that managers refuse any gifts or favors from members of the Board and/or those doing business with the association.

Dealing with conflicts of interest can seem daunting, but they are easily avoidable when you make decisions with integrity, act ethically and openly, and always keep the association’s best interests in mind. For more on successfully navigating conflicts of interest, contact FirstService Residential.