You’ve heard people say that “honesty is the best policy” before, but these types of colloquial phrases seldom provide you with practical advice. However, when it comes to disclosing potential conflicts to your condo or HOA board of interest, honesty really is the best policy.
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A conflict of interest can threaten a community’s integrity and reputation. It can also create legal troubles for the individual as well as for the corporation or association.
In this article, we will highlight some specific examples of conflicts of interest, as well as offer some suggestions on how to avoid them.
Table of contents
- What is a conflict of interest?
- Types of conflicts
- A real example of a conflict of interest
- Are conflicts of interest really that serious?
- A potential conflict does not automatically put an end to contracts
- Avoiding conflicts of interest
What is a conflict of interest?
A conflict of interest occurs when a company or person has a vested interest — including money, status, knowledge, relationships, or reputation — which puts into question whether their actions, judgment, and/or decision-making can be unbiased.
In regards to condos and HOAs, a board or staff member may face this situation when they are working on the annual budget, hiring a vendor or handling confidential information.
Types of conflicts
While conflicts of interest will vary depending on the particular facts of each case, condos and HOAs tend to experience issues that can fall into one of these categories:
This is where an individual makes decisions on behalf of the community that financially or materially benefits them, or their immediate family, directly as private citizens.
For example, a board member votes to hire an electrician who is also the member’s brother. The decision to vote for this service provider is only made based on the fact that they are related, and the board member did not disclose this information to the rest of the board.
A conflict may arise if an individual accepts substantial gifts, bribes, services, or other significant benefits that may be perceived by others to influence their decision making on official business.
If a resident gives a board member new outdoor furniture to persuade them to vote a certain way on an important issue, this would be considered a conflict.
Using confidential information for personal gain
If an individual uses confidential information acquired from their role as a staff member or community leader to their advantage, there’s potential for conflict.
Property managers can also get into trouble for conflicts of interest, and this would be one way to do it. In the next section, you will read about a real conflict of interest involving a property manager.
A real example of a conflict of interest
An Ontario regional condo manager was fined $8,000 for failing to comply with several sections of the Condominium Management Services Act’s Code of Ethics.
The regional manager worked for several condominium communities and supervised multiple property managers.
Her spouse was the sole officer and director of a contracting company, and provided services through another contracting company.
Furthermore, the manager allegedly had a close, personal relationship with a sole proprietor of a cleaning business, and/or the individual was a tenant of the manager.
Both companies used the manager’s private residence address for some portion of their business registration application.
It was alleged that the manager recommended the contracting services of her spouse and the cleaning business to the property managers of the corporations she cared for.
She disclosed her affiliation with her spouse’s company and the cleaning company to a number of the property managers to whom she recommended their services; there is no evidence that she ever pressured the property managers to select her preferred choices.
However, she did not disclose any of the conflicts of interest to the corporations or the management company she worked for.
The manager admitted to the accusations made against her, and was ordered to pay the fine within three months of the date on which the order was made.
Are conflicts of interest really that serious?
Yes. Conflicts of interest can have legal and financial ramifications (as demonstrated in the section above). Owners can sue the board for knowingly making decisions that solely benefit them.
Moreover, it becomes harder for members to trust community leaders when they know someone has acted unethically. The individual may be removed from the board, and may be treated by others as the “villain” of the building or neighborhood.
Conflicts of interest should be avoided at all costs, and in most cases, it’s not too difficult to steer clear of them. Communities may have a policy or code of ethics to help them successfully navigate potential issues, and some places, including California, have state laws that protect associations from the consequences of individuals who purposefully make decisions that only cater to their interests.
A potential conflict does not automatically mean the board can no longer pursue projects or contracts
Here’s where that honesty (and transparency) policy comes into play. Just because there is a potential conflict does not mean the board has to automatically abandon a project, budget, contract, etc.
A contract that was approved may become invalid if a conflict of interest exists unless the material facts of the conflict were fully disclosed at the time the contract was approved.
Not only would the rest of the board need to know all of the details of the conflict before the contract was approved, but the interested director or individual (the one with the conflict) would need to abstain from voting.
Alternatively, a board could approve or ratify the contract or transaction in good faith by a vote, excluding the vote of the interested director or individual.
All votes and actions must be documented in writing, just like any other official board business. Minutes will provide evidence that the board has done its due diligence in avoiding or resolving potential conflicts.
In short, if the individual with the conflict discloses the potential conflict of interest before any decision is made, and abstains from voting on the matter, then it is possible for a condo or HOA to move forward with the contract without issue.
This is also true for property managers. Sometimes, they might have a personal relationship with a vendor who also happens to be the most affordable and/or qualified to take the job. It is okay for the board to hire this person as long as they have been made aware of the personal relationship between the two parties and have determined that hiring the vendor would still serve the best interests of the community as a whole.
Avoiding conflicts of interest
In addition to being transparent and honest, communities can follow some of these steps in order to avoid conflicts of interest:
It is important to recognize a potential conflict of interest so that the board can make impartial, ethical decisions for the community. By having all the facts ahead of time, they can decide if something is too risky, or if there is a way to make an arrangement work.
Exemplary board members will also volunteer important information about potential conflicts well in advance.
Be thorough when hiring a new vendor
Ask candidates to include their parent companies when soliciting requests for proposals. Alternatively, you can ask potential vendors directly if they have affiliations with your management company.
Have a conflict of interest policy
A conflict of interest policy imposing board members to reveal potential conflicts of interest is a good way to get ahead of potential problems.
The policy should detail what qualifies as a conflict of interest, what to do if there is a potential conflict, and how to document the resolution of a conflict of interest. Don’t hesitate to consult with a lawyer
If an individual or board is not certain whether a conflict of interest exists, bring the matter to a lawyer.