Nine Ways to Avoid HOA Conflict of Interest in Your Board
How can you make sure that you are not doing anything that could be seen as a conflict of interest? For starters, working with a knowledgeable HOA property management company can help you avert potentially sticky situations. Read the nine recommendations below for additional guidance.
1. Put your board duties first.As a board member, you are legally obligated to uphold your fiduciary duty to your HOA. You demonstrate this in two ways: through your duty of care and through your duty of loyalty. You must act with integrity, exercise good judgment and keep the association your top priority when making decisions.
2. Evaluate yourself.When performing your board duties, ask yourself:
- Are there any influences (personal or outside) that might impact how I handle a particular transaction?
- Do I have any relationships or knowledge that I should be disclosing?
- Do I have outside responsibilities that might be in conflict with my board duties?
If you can honestly answer “no” to these questions, then you probably are not facing any conflicts of interest.
3. Learn to recognize potential conflicts of interest.On the other hand, if any of your decisions are influenced by personal or outside interests, you are probably facing a conflict of interest. An example of this would be if you owned a landscaping company and bid on the HOA’s contract.
It’s important to recognize when a situation has the potential to become a conflict of interest. Being on the HOA board and owning a landscaping company is only a potential issue. An actual conflict of interest does not occur unless you take action by bidding on the contract.
4. Consider your motivations at budget time.Board members’ personal biases can sometimes come out during budget season. Board members may believe that they are working in the interest of the community when, in fact, it is their own interests that are motivating them. Let’s look at an example of how this might happen:
A newly elected board member thinks that the HOA’s assessments are too high. At budget time, the new member proposes a steep reduction. However, the reduction means that the budget no longer provides enough money for current operational costs. In this situation, the board member may have thought the proposal was best for the community, but it really wasn’t. The real motivation was self-interest: reducing the member’s own monthly fees.
5. Never exploit privileged board information.Board members sometimes have access to privileged information. You should never use that information for your own personal gain. Consider the following scenario:
A homeowner is having difficulty keeping up with assessments and approaches the board about selling the property. As is often the case with HOAs, the board has a legal first right of refusal. At the same time, however, one of the board members is interested in buying the property but does not disclose this. This is now a conflict of interest because the board member has a personal interest in the board declining to buy the property. A similar situation could occur if a home goes into foreclosures. The board member must reveal the interest up front and allow the board to make the best decision for the community.
6. Apply the rules equally.Board members are not above the rules, and actually, they should set an example by following them diligently. Ignoring parking or pet restrictions, for example, sends a message to other homeowners that it’s okay for them to ignore the rules, too. Even worse, it may create liability issues for the entire HOA.
7. Do the right thing—even if the developer appointed you.Board members who are appointed by the developer during a community’s development phase may feel split in their allegiances. However, if you are in this situation, you are still obligated to look out for the community’s interests, not the developer’s.
What happens if a developer wants assessments to be unrealistically low in order to attract buyers? Or what if the developer did not follow through on a payment or a contractual obligation? As a board member, you cannot side with the developer at the expense of the HOA. Apply a moral compass, and make your decisions with the HOA’s best interests in mind.
8. Be transparent.Being candid about potential conflicts of interest is key to avoiding them. Transparency should involve:
- Documenting those transactions that could benefit a board member
- Reviewing bids openly and honestly
- Voting on contracts only after careful evaluation of all materials
9. Hold your community managers to the same standards.Of course you should expect your community manager to be guided by strong ethics. Remember that you are the management company’s client. As an employee of the company, therefore, the community manager must put the HOA’s best interests ahead of the interest of any individual board members.
If the community manager has any business dealings with a homeowner, the board needs to be aware of it. Additionally, managers should refuse gifts or favors from board members or from anyone who does business with the HOA.
Conflicts of interest may seem difficult to navigate, but you can avoid them easily if you make the HOA’s best interests your priority and apply ethics, openness and integrity to all your decisions.
Learn more about successfully navigating conflicts of interest. Contact FirstService Residential, the leading HOA property management company in Missouri and Kansas.