A conflict of interest in an HOA can threaten the association’s integrity and reputation. As a board member of a community association, you should understand how to recognize and avoid it. In this article, we will give you some tips on how to keep your community association free from possible conflicts of interest.
Defining a Conflict of Interest in an HOA
A conflict of interest occurs when a personal or outside interest affects you or another individual’s ability to make a fair decision. For example, if an HOA board member owns a construction company, hiring that business as a vendor is a conflict of interest since the board member in question is likely biased.
The good news is, you can easily avoid this type of HOA board of directors conflict of interest as well as other types. Here are some ways you can ensure your HOA runs free from any conflicts of interest:
1. Recognize Conflicts of Interest as They Arise
It is important to recognize a potential conflict of interest in an HOA so that your association’s board can make impartial, ethical decisions on behalf of your community. Potential and actual conflicts of interest are quite different.
Using the example we mentioned above, the fact that the board member owns a construction company is a potential conflict. If the association has business with the company, that’s an actual conflict of interest. Make sure to ask yourself if you might be affected by outside or personal influences.
Do you have duties to outside interests or entities that could affect your decisions? If you answer yes to this question, you are likely dealing with a potential conflict of interest.
2. Know Your Fiduciary Duties
As a board member, you have legal and fiduciary obligations to your association. You have the duty of care, which requires you to be a careful steward of your association’s resources. There’s the duty of loyalty, which requires you to be loyal to your association and its members. You also have the duty of good faith, which requires you to act in the best interest of your association and community members. To fulfill these fiduciary duties, you must avoid all conflicts of interest.
3. Keep the Budget Impartial
Biased budget preparation is one of the best examples of conflict of interest for board members. When it is time to make your association’s next yearly budget, make sure that you and your fellow board members keep personal interests out of the decision making.
Let’s say a couple of new board members are elected. These newcomers don’t like how high the community assessments are. Because of this view, they drastically cut the budget to a negligent level. They succeed in lowering the monthly fees but sacrifice the community’s well-being in the process.
There is a clear conflict of interest in this case because these board members favored their interests to the detriment of the community. Aside from possibly reducing curb appeal and decreasing property values, homeowners can sue the board over such a decision. An argument can be made against the board for knowingly putting the association in jeopardy. During the budget-making process, make sure to be aware of your personal biases so that you can avoid any conflicts of interest.
4. Avoid Exploiting Privileged Information for Personal Gain
In certain situations, boards have access to privileged and confidential information, often related to members of the community. If that information is exploited for personal financial gain, it represents a conflict of interest. The temptation will always exist. The important thing is to not allow yourself to give in to it. Remember your duty of good faith. Always act on behalf of the best interest of your community stakeholders. Never exploit privileged information for personal gain.
5. Survey Potential Vendors Thoroughly
Aside from issues with board members, an HOA management company conflict of interest can happen. Your HOA management company may give you advice that benefits them. They might urge you to hire a specific vendor, which, unbeknownst to you, is actually owned by them, as well.
An easy way to prevent this is to ask potential vendors to list down their parent companies. Include a portion asking for this detail in your request for proposal (RFP). Alternatively, you can ask potential vendors directly if they have affiliations with your HOA management company. It’s also a good idea to widen your range of candidates. Don’t solely rely on your HOA manager’s advice.
6. Have an HOA Conflict of Interest Policy
Consider creating a policy imposing board members to reveal potential conflicts of interest. Furthermore, the policy should urge the board member in question to recuse oneself from the decision-making process. To define recuse, it simply means to excuse yourself from the discussion or voting process.
If you have a stake in the decision, don’t allow yourself to stay involved. Let everyone know that a conflict of interest exists. Then, exclude yourself from even participating in the discussion and the following vote. This way, you can preserve your duty as a board member.
Some states even have laws in place concerning conflicts of interest. For instance, California law prohibits a director of an association to participate in matters which could result in personal gain. It also states that a partnership formed with a conflict of interest is voidable.
Stay Away from a Conflict of Interest in an HOA
Sometimes, conflicts of interest arise no matter how hard you try to prevent them. Such cases are more common within HOAs situated in small towns, where most people know each other. But, whether you’re a small-town HOA or a big-city HOA should be out of the question. A good board member should be proactive.
Transparency is key to resolving these conflicts before they even arise. Reveal all potential conflicts and remove yourself from situations that may force you to act inappropriately. Abstaining in the voting process is a good practice if you have conflicting interests.
If you’re having trouble navigating the confusing world of HOA management, consider partnering with us for help. Give us a call anytime.
RELATED ARTICLES:
- How Essential Is HOA Board Member Training For New Members
- HOA Financial Reports: What Every HOA Board Member Should Know
- Why Is It Important To Practice Budget Transparency In Your HOA?