How to Avoid a Board of Directors Conflict of Interest
Ahhh conflicts of interests…These tend to rear their ugly heads when someone is put in a position of power, be it intentional or not. If you are a board or committee member, it’s important to carefully weigh in on any of your decision to ensure they are in the best interest or the association, and not your own.
But how does one make sure that your community remains free of conflicts of interests? It takes a bit of awareness of a board’s part, but it can become easier each time a major decision is made if you keep the following in mind.
Conflicts of interest reflect poorly on your association and its proper stewardship, so it’s important to avoid putting your community in a potentially compromising position. Although it’s a term that gets tossed around quite often, it is truly a threatening situation to be in. It is important to fully understand what a conflict of interest really means and how to avoid them.
To better understand conflicts of interest and be an effective member of the Board of Directors, follow these nine essential tips. Not only will having this knowledge benefit you, it will help you avoid potential costly litigation and negative perceptions.
1. Be aware of your duties.As a board member, you legally have a fiduciary obligation to your association. This is exemplified as a duty of care and a duty of loyalty. You are required to act with integrity and make ethical decisions on behalf of the association. Be sure to always exercise proper judgment to distinguish between both.
2. Know the definition.A conflict of interest may occur when a person’s ability to make an impartial decision is influenced by outside or personal interests. Here is an example: If the President of the Board owns a roofing company and wants his or her company to bid on your association’s contract, that will certainly be characterized as a potential conflict of interest. Be aware that if the association actually employs the roofing company, then that’s an actual conflict of interest.
3. Be sure the rules apply to everyone.Everyone should be equally held accountable, even Board members. Be aware that if some Board members are allowed to live outside the covenants, it could be a potential liability to all Board members. Whether they are utilizing restricted parking spaces or are not abiding by the proper pet policies, you can expect others to surely follow suit. Lead by example and ensure the rules are being followed throughout your community.
4. Developer-appointed Board members are no exception.A great deal of pressure may come with being appointed to the Board by the developer. Oftentimes, your loyalty to the association may be questioned due to the relationship you have built with the developer. Be sure to stand firmly by your morals if you are ever asked to make any exceptions to possible unrealistic assessments. You will be faced with conflict and place yourself in an uncompromising position. Keeping the association’s best interests in mind should be your main focus.
5. Beware of the budget.Assessments are in place to continue to uphold the standards of the community. Consider this scenario: A new board has been elected and it feels that the assessments are too high. When time rolls around to propose next year’s budget, they elect to slash assessments to lower monthly fees. No one wins in this scenario; the standards of the community will not be able to be maintained properly. The fact of the matter is that the board members here do not have the best intentions of the community in mind. They are allowing their personal biases influence their behavior, which is a direct conflict of interest so far as the community is concerned.
6. Anticipate conflicts.It goes without saying conflicts are bound to occur. Direct your focus on what needs to be brought to light as issues are addressed. Do you have outside or personal interests that affect a contract, do you have information that should be disclosed, or are other factors influencing your decisions? If you did not answer “yes” to any of these questions, then it’s unlikely you have a present conflict.
7. Information can lead to conflict.At times, some members of the board have had access to private homeowner information. Once that privacy has been breached and manipulated for a personal gain, it becomes a conflict of interest.
Say for instance a homeowner has had trouble paying his or her assessments and wishes to sell their 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 we’re looking at a conflict. Meaning, the Board member has a personal interest in his or her peers passing on the sale so he or she can benefit from buying the property. This can also happen with foreclosures. The bottom line: individual directors must clear the way for Boards to make a decision that benefits the overall community, and in a way that’s unencumbered by personal interests.
8. Deal with conflict openly.Laws vary by state and also differ on how Board meetings should be handled. Keeping records of meeting minutes is imperative. The first step in dealing with potential conflicts is admitting they may exist. By keeping proper documentation, this eliminates any ambiguity. It is important board members evaluate bids openly and honestly, voting on all contracts only once the material has been reviewed.
9. Managers are held to the same high standards.Expectations should clearly be outlined and everyone should be held accountable for their actions. A good property management company will recognize this, but it’s important that all members of the association to realize that the property manager considers the association its client. It is up to the property manager to make ethical decisions and maintain the best interest of the association, not those of specific Board members.
Board members and managers can stay clear of any conflicts of interest by making decision with integrity and keeping the association’s best interests in mind. For more on successfully navigating conflicts, contact FirstService Residential.