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An HOA board conflict of interest is something that most communities will encounter at least once. Because these conflicts can present a host of problems for the association, it is important that boards understand how to deal with them. Conflicts of interest can exist in several forms, though, so you should learn how to identify them when they come up.
WHAT IS A CONFLICT OF INTEREST FOR A BOARD MEMBER?
In many ways, homeowners associations work like corporations. These associations rely on a set of board members who make decisions for the community. Like conflicts of interest can exist in the workplace, though, they can also exist in HOAs.
An HOA board of directors conflict of interest is when an individual’s personal interests may influence their decisions or actions. For example, if an HOA is seeking to hire a new landscaper and considering a landscaping company that belongs to a board member’s relative, that is a conflict of interest. While it is best to steer clear from them, conflicts of interest are sometimes hard to avoid. This is usually the case for HOAs located in small towns where most people know each other.
It is important to remember that some states regulate conflicts of interest in HOA communities. In California, for instance, Civil Code Section 5350 prohibits a director or committee member from voting on certain matters that may directly or indirectly affect them. These matters include the discipline of the said director or committee member, an assessment against the director or committee member, and a request (architectural change or payment plan) put in by the director or committee member.
You may also find guidelines and procedures on how to handle conflicts of interest in your governing documents. Many communities already have policies in place that dictate how board members should tackle these issues when they arise.
WHAT ARE THE EXAMPLES OF CONFLICT OF INTEREST FOR BOARD MEMBERS?
To help you better understand what constitutes a conflict of interest, here are the most common examples that HOAs face.
Nepotism happens when a board or committee member has a say in hiring or supporting a relative. For instance, when a board member participates in a vote to hire their brother for a cleaning job for the HOA, that’s a conflict of interest. It can also happen if a board member votes for or supports a relative to join the board or benefit from the HOA in a different way.
2. BUSINESS CONTRACTS
HOA board members face another common conflict of interest when dealing with HAO contracts involving themselves or their friends. An HOA should not hire a board member’s company to perform any services for the association. This applies if the board member owns or is a partner in the company, regardless of whether or not they will be doing the work themself. If there is no other option, the board member involved must not participate in the vote.
Similarly, a conflict of interest occurs if the HOA enters a business agreement with a company involving a board member’s friend. In this case, the board member must also refrain from voting on the decision.
3. PAYMENTS AND REIMBURSEMENTS
Board members must never financially benefit from HOA activities. This includes payment for carrying out association matters, purchase reimbursements, and vendor kickbacks. The situation becomes even trickier if a board member assumes the role of a professional community manager for the association. In that case, an HOA board conflict of interest is bound to arise.
Board members must fulfill certain fiduciary duties, including managing the association’s finances in an appropriate manner. If a board member asks for a loan using HOA funds, that is a conflict of interest. It is also a conflict of interest for a board member to loan money to a member using the association’s funds. In these cases, the board member may even face legal issues.
5. PERSONAL INTEREST
When making a decision, board members must never put their own interests above the interest of the association. A conflict exists if a board member chooses to make a rule change based on personal benefit or interest. For example, if board members who wish to rent out their units vote to allow rentals in the community, they have likely prioritized their interests over the association.
HOW DO YOU DEAL WITH CONFLICT OF INTEREST IN A BOARD?
Conflicts of interest do happen, but there are certain steps an HOA can take to avoid or resolve them. Boards should develop an HOA conflict of interest policy to help guide board and committee members’ behavior.
The policy should include the following:
Full Disclosure. Board members should fully disclose conflicts of interest as soon as they discover the conflict exists. In doing so, disinterested board members can make a decision without the influence of the board member in a conflict.
Recusal. The next step should be recusal. This means the involved board member must not participate in the discussion or vote. In fact, it is better for the board member to leave the room altogether when the topic is brought up.
Code of Ethics. It’s a good idea to require all board and committee members to sign a Code of Ethics that includes a provision concerning conflicts of interest. This way, the association gains an advantage when acting against a member who breaches the code.
Strict Implementation. The conflict of interest policy must uniformly and consistently apply to all board and committee members. Making exceptions will only put the entire association at risk of legal liability.
Removal or Resignation. If a board member allows a conflict of interest to continue, they must either be removed from the board or asked to resign. In some cases, the association may also take legal action.
If your association currently doesn’t have a conflict of interest policy for board members, consider amending your governing documents to include one. Having a policy in place not only creates a standard for all members but also minimizes liability risk.
BOARD MEMBERS BE WARNED
An HOA board conflict of interest can have a negative impact on an association. It calls the board’s integrity into question, prompting owners to lose their trust in the board. It also casts doubt on the validity of the board’s decision. Thus, avoiding conflicts of interest remains integral to being a board member.
If you don't have a conflict of interest form, feel free to use this one!