Understanding Conflict of Interest for Board Members

This broad term is used frequently, but it can apply to numerous seemingly innocuous actions taken by HOA board members. Avoiding conflict of interest and act as a genuine steward of a given HOA takes conscientious effort and self-assessment.  A board that is able to operate independent of its executive committee’s personal interests is a sign of a well-functioning board.

Follow these guidelines to maintain personal integrity and the integrity of the HOA board and to avoid the appearance of impropriety or a lawsuit,

  1. What is a conflict of interests?

When a board member places his or her personal interest above the best interest of the HOA. For example, if a board member owns a catering company that bids on the HOA’s contract, he has a potential conflict of interest. If his catering company wins the contract, then an actual conflict exists. Any action taken by the board member owning the catering company that may have influenced the vote to approve his company’s contract represents a conflict of interest. In this case, the board member would need to follow certain steps to avoid liability before his contract is approved (See #4).

  1. What is expected of the board members?

Every board member has a fiduciary duty to the HOA, which means she will make the best possible financial decisions for the association. The fiduciary duty is always touted as the primary responsibility, yet the extended expectation of duty of loyalty to the HOA’s best interests is often overlooked.

  1. What might be a conflict?

It is important to be aware of potential conflicts and legal liability that can arise from these common sources.

 Alternate duties: An HOA board member may have duties on another board that impacts the HOA.  Competing loyalties may also be simply personal, where a proposed board decision competes with your personal best interest, but benefits the community as a whole. Board members appointed by the community developer may have competing loyalties with the developer’s interests. These competing loyalties should be disclosed to the board when they occur.

 Unequal application of rules: When board members become immune to certain HOA rules and regulations, the board is open to potential litigation. Equal enforcement of HOA covenants must prevail—including fines against board members (when applicable). Failure to treat board members on the same level as community members can cause serious harm to a board’s integrity.

Information: Information is power, and the board must act carefully with privileged information. This can range from knowledge of impending property sale to disclosing insider knowledge to a relative who is a bidding contractor.

Budget: Personal bias may come into play when planning the budget. Slashing budgets and cutting amenities for lowered HOA dues for personal budgetary reasons is a breach of fiduciary duty. Be aware of personal inclinations to save money as a potential conflict with the best interests of the association.

Non-conflict: A decision that benefits a board member is not always a conflict. A decision to add a pool to the community does not disproportionately benefit a board member over the rest of the community. Board members may benefit from their decisions, but not at the expense of the community.

  1. What to do when a conflict exists?

 When a potential conflict of interest exists, board members can avoid liability if they:

Fully disclose the conflict: The board member needs to make full disclosure of the conflict to the board, which then goes on record.

Recuse themselves and do not influence the vote: The interested board member should leave the room. Remaining board members should be able to discuss and vote on the issue without influence from the interested member.

Remember, if issues are voted through where a conflict exists (and is disclosed), the resulting transaction must be fair and reasonable. The board should not approve proposals for interested parties that would not otherwise reasonably be approved for a disinterested party.

Board members carry a great amount of responsibility for the wellbeing of an HOA. By understanding and disclosing areas where conflicts may exist, board members are better able to maintain trust with residents and protect themselves from personal liability.