Board Basics: Recognizing and Preventing Conflicts of Interest
1. What is a conflict of interest?A conflict of interest arises when outside or personal interests adversely affect an individual's ability to make an impartial decision.
EXAMPLE: A board member owns a landscaping company and wants their company to bid on the HOA's grounds contract. This is the starting point of a conflict of interest. If the association grants that landscaping company with the grounds contract, the board member has now completed the conflict of interest because they will benefit from this decision positively, despite how unethical the decision is.
2. Recognize what a conflict of interest looks like.When conflicts appear when making decisions as a member of the Board of Directors, it is time to step back and ask yourself a few questions.
- Does there seem to be outside or personal influences that could affect the transaction from other members?
- Do I have my potential self-interests that should be disclosed to my fellow board members?
- Do I have duties to outside interests that may affect my decision-making?
3. Understand your duties.As a board member, you have legal fiduciary obligations to fulfill on behalf of all association residents. The first is your duty of care, which requires you to provide stewardship as a reasonable duty. The second is your duty of loyalty, which requires you to hold the association with your top priority. While it may be difficult, over time, you should be able to exercise proper judgment and distinguish between both.
4. Privileged information can lead to conflict.When dealing with privileged information, it is crucial to look out for conflicts of interest. This is especially true if there are any finances involved since this privileged information can be exploited for personal gain.
EXAMPLE: A board member finds out that a homeowner has been struggling to pay assessment fees on time and thus wants to sell their home. After learning this information, the board member is now interested in purchasing their property. However, if the board has a legal first right of refusal and the board member does not disclose his or her interest in the purchase upfront, then a conflict of interest is created.
To put it differently, the board member has a personal interest in the board passing on the sale to benefit from this opportunity once it is available. To avoid this from occurring, individual Directors should first allow the board to make a decision that is free from any personal interests.
5. Everybody follows the same rules.The rules are the same for everybody, no matter what level or position someone has either as a resident or a board member. They are there for a reason. If board members can bend the rules for themselves (such as parking in restricted spaces or not abiding by the association's pet policies), it opens up all board members to potential liability.
6. Watch the budget.During the budgeting process (and beyond), beware of personal biases that influence behavior that is counter to the community's interests.
When the budget season comes along, and it's time to create and allocate funds, beware of personal biases that influence behaviours against the best interests of the community.
EXAMPLE: Board members campaign for election because they believe the assessments are too high and want to have them reduced. During the budgeting process, they decide that they will cut spending across the board for the next fiscal year, fulfilling their ultimate (and personal!) goal.
Cutting assessment fees is often thought of as a "positive" thing among the community; however, reducing costs will likely reduce the community services. Therefore, the association runs the risk of not meeting the community's standards and adversely affecting property values. These select board members have put their personal beliefs ahead of the community's overall well-being over a very long process, resulting in a conflict of interest.
7. Communicate and Be Transparent.Different states have specific laws on how board members should conduct themselves. Generally, dealing with conflict should involve revealing 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.
8. Managers are accountable too.Any reputable association management company should make this very clear. Still, all members of the association must realize that, to the association manager, the actual client is the association. Therefore, the association manager should be acting in the interest of the community association, not in the interest of specific board members.
It's also important that association managers refuse gifts or favors from board members. Those doing business with the association or seeking to do business with the association – such as vendors and contractors -should avoid self-dealing or acts that are self-beneficial and refuse to engage in activities that conflict with other clients. Further, if an association manager participates in a contract with an individual homeowner in the association, that relationship should be disclosed to the board.
Board members and association managers should always act ethically, openly and in the association's best interests. When this is accomplished, associations can avoid the possibility of a conflict of interest occurring and the damage control headaches that come with dealing with them.
Find out how to run an effective board meeting here. For more information on how to be the best board member you can be, contact FirstService Residential today.