Avoiding Conflicts of Interest Servant of Two Masters

Although the position generally offers zero compensation aside from the satisfaction of a job well done, association board members are still in charge of running a business—a business with revenues, expenses, and assets that, depending on the size of the complex and whether it is a co-op or condo, are hardly insubstantial.

Unlike their counterparts at Fortune 500 companies, HOA board members are not usually career executives with resumes uniquely suited for running companies. The boards of residential buildings and associations are stocked with people from all walks of life. Some are attorneys, some dentists; some are real estate brokers, some plumbers. Whoever they are, their status as board member automatically exposes them to one of the perils of the lofty position: the potential for conflicts of interest.

Board members have enough to contemplate as they carry out their community’s administrative duties. Avoiding conflicts of interest—or even the appearance of them—is crucial. Nothing undermines a community’s faith in their leadership faster than impropriety and self-dealing amongst the board and management team. Conflicts of interest can be hard to avoid completely, but how they are handled is of the utmost importance.

But what is a conflict of interest, exactly? How do they come about? Why are board members especially at risk of such relationships? And most importantly, how can they be avoided? Let’s take a look.

What Counts as a Conflict?

Board members have a fiduciary responsibility to the resident owners of their association. This means, in simplest terms, that their loyalty cannot be divided. They cannot serve two masters. They must place the interests of the community above all other interests—including their own.

In legal terms, a conflict of interest is “a situation in which a public official or fiduciary who, contrary to the obligation and absolute duty to act for the benefit of the public or a designated individual, exploits the relationship for personal benefit—typically pecuniary,” explains David Byrne, an attorney and shareholder with the Lawrenceville office of Stark & Stark. “A member of a condominium, cooperative or HOA board is a ‘fiduciary’,” he says.

Viewed through the prism of a homeowners association, “Conflict of interest is a situation in which a board member cannot exercise independent judgment because they have a personal interest in the outcome of the decision,” says Ronald L. Perl, head of the community associations practice group at Hill Wallack, LLP, a Princeton-based law firm, and an adjunct professor at Seton Hall Law School.

The textbook example of conflict of interest is the kickback. Vendor X wants to get a service contract in your condo that’s worth a small fortune. Vendor X promises to give Board Member Z a suitcase full of unmarked twenties for the gig. Board Member Z makes sure Vendor X is retained.

Fortunately, most board members have a high enough code of ethics to not let the above scenario happen. Not in New Jersey, anyway.

“Those cases are somewhat few and far between,” says Paul Santoriello, the owner and president of Taylor Management in Cedar Knolls.

Common Conflicts

Many conflicts of interest begin innocently enough—with favors to friends or family members that, rightly or wrongly, are perceived as special treatment. The board president’s son has started his own lawn care company—would the board float him the business—that sort of thing. Nepotism rears its ugly head, and that smacks of impropriety.

“I have seen board members related to owners or principals of vendors or professionals servicing that association, or trying to service that association,” says Byrne.

“A board member could be related to a vendor,” says Santoriello. “That is a problem. Now that vendor might get preferential treatment.”

Or it might be even simpler: the board president himself might be the one in the lawn business.

“If a board member is a landscape contractor,” and submits a bid for a landscaping job at his own association, “that could be a conflict of interest,” says Perl, who saw a similar situation firsthand. “A board president was not only bringing in his son as a landscaper, but tried to negotiate a bid that was unreasonably favorable,” he says. “He kept from the board proposed changes to the contract. That’s as blatant as I’ve seen.”

Another potential conflict of interest involves employment. Let’s say the superintendent buys another unit in the complex, and is now part owner, part employee. What happens if that super runs for board president, wins, and gives himself a fat raise?

“I have also seen board members working for their associations, while being on the board,” says Byrne.

Conflicts are not always about vendors, contracts, and bids. Any board member is also a unit owner, and as any board member knows, unit owners sometimes have conflicts with the board. What if the unit owner with a grievance is also the board president, whose job it is to defend the board from such grievances?

Two examples come to mind: a board member, acting as the individual owner, sues the board. Or, a board member is delinquent in maintenance payments, assessments, or other fees—so much so that the board must take action against him. In these cases, the inherent responsibilities of board member and unit owner are at cross-purposes, creating a conflict.

Dealing with Potential Conflicts

The surest way to deal with conflicts of interest is to not let them happen in the first place.

“A board member essentially should never take a position adverse to the legal rights of his association, if that position will benefit him,” says Byrne. “There are exceptions to that, but that’s the general rule.”

That said, there are occasions when what might appear at first blush to be a conflict of interest might be good business, when the appearance of impropriety is just that—an appearance, nothing more.

Let’s say that Board President A has a brother-in-law, Vendor B, who happens to own the most respected landscaping company in town. Instead of exploiting the relationship for maximum profit, Vendor B presents the board with a bid at a discounted price. Must the board reject the bid—and the dollar savings that comes with it—just because Vendor B is married to Board President A’s sister?

Answer: No. But the terrain is tricky.

“Any potential conflict of interest must be disclosed,” says Perl, “and requires the board member to recuse him or herself.”

To use the above example, Board President A would announce to the rest of the board, “Here is a bid from my Vendor B. Although I personally have no financial stake in the outcome, Vendor B is owned by my brother-in-law, and I want to avoid the appearance of impropriety. I must recuse myself from the decision-making process. I’m going to leave the room while the rest of you decide which bid to accept. Give me a call when you’re done, and I’ll participate in the next agenda item.” Or something similar.

This way, Board President A has disclosed his involvement, recused himself from the process, and, even better, left the meeting while the bids were being weighed. If Vendor B were chosen, it would have nothing to do with his power as board president.

“Early and detailed disclosure can help a board member manage the issues, impressions of colleagues/owners and avoid problems,” says Byrne.

Conflicts of interest are not confined to the board. Managing agents can also have divided loyalties, Santoriello warns, and is often in charge of the bidding process on a given job. Some managing agencies have subsidiary companies that, say, do landscaping, and push for their sister company’s bids to be accepted.

“It’s a fertile environment for conflict of interest to exist,” says Santoriello. To avoid this problem, he recommends only using managing agencies that are certified by the Community Associations Institute (CAI).

What Legal Problems Can Arise?

Conflicts of interest are usually not dealt with in the laws governing the co-op or condo, but in higher governmental bodies.

“C of I’s are dealt with in New Jersey state law,” says Perl. One of the statutes in New Jersey law is that all board members are responsible if something goes awry.

“Sometimes, you have a dominant board member who becomes president and turns into a dictator,” says Perl.

“If board members go along” with a conflict of interest that would, for example, line the pockets of the dictatorial board president, “they would be equally liable. If they find out and let it happen anyway, they would be equally responsible.”

Greg Olear is a freelance writer, editor and a frequent contributor to The New Jersey Cooperator.

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9 Comments

  • What if a Board of Trustee makes what would be considered a "major material change" to the By-Laws (without a homeowner majority vote) by adding Siding Replacement to the Reserve Fund? Further, they already fund 3 buildings to be re-sided as a "maintenance" line item within the past two years? Does this not have the stench of impropriety? Siding replacement is supposed to be a "Limited Expense" item whereby the unit owner(s) who get the sole benefit, are supposed to pay the cost. What can homeowners do about it?
  • Can Board Members receive pecuniary benefits (free annual dues) for services rendered as a Board Member in a not-for-profit home owners association?
  • can a home owner be board's president in a home owner association and director in his master association? (The condo has a master association for ppal streets and club and 20 associations)
  • Our current painting contractor for the HOA, who owns a unit in the association, recently ran and won a seat on the Board of Directors. He did not disclose his ownership of the the business in the election data nor has it been brought up in meetings. The vast majority of owners are not aware of this potential conflict of interest situation. Is this a problem? If so, how should it be addressed?
  • We, in our subdivision have a "father" (Secretary for several yrs) on the Board and his recently appointed "daughter" as President, who has a different last name and owns a home here so according to her, she "has every right to serve on the Board". The issue here is she and her father are as one. She even calls him by his given name at meetings for those homeowners who are not aware of their relationship (or so they think). We see many of the behaviors mentioned in the "Conflicts of Interest" piece.
  • Is there a conflict of interest when a HOA Board Member is also a Planning Commissioner and participates in a public hearing of a property that is adjacent to the HOA property?
  • I am an active realtor in my community who would like to serve on our board. Would this be seen as a conflict of interest?
  • The condemning redevelopers are at the same time a board members. They are using open meetings to intimidate members and talk them into buying condominiums for 3-6 times less price than the best and highest value should be. I went on the board meeting, asked for minutes the day after, and never got a feedback. What do we do?
  • I was just informed that one of our Condo Association's Board of Directors just accepted a job with our Condo Association's Management Company. They are going to managing a different property in the area for them. Is that a conflict of interest? The biggest issue for me is that other board members have expressed dissatisfaction with the management company's general manager for our property specifically as it comes to the mismanagement of a renovation project, but the GM was supposedly "being protected" by 2 other board members that are friends -- one of which was given this job with the management company. What can we do?