Suppose the board of directors is considering hiring a new landscape company. The owner of the landscape company happens to be the cousin of one of the board members. May the board consider hiring the landscape company? And does the board member who is related have to abstain from voting on the matter? Conflicts of interest often arise in community associations. In general, a conflict of interest arises when a board member has a self-interest (or will receive a financial benefit) from the outcome of the decision. Another way to describe a conflict of interest is: putting your own interests ahead of the best interests of the association and members.
There are two types of conflicts of interest—actual and potential. A potential conflict is one in which a board member has duties or interests that conceivably could be at odds at some point in the future. For example, a potential conflict exists every time the board establishes the association's budget. Board members generally have an obligation to propose and establish budgets that meet the financial needs for operating the community. However, the personal interest of most homeowners--including board members--is to pay less, rather than more. While this potential conflict exists, it rises to the level of an actual conflict of interest only when board members choose to disregard the actual needs of their community to minimize their personal expenses.
In contrast, an actual conflict of interest would occur if the board votes to hire a maintenance company which is owned by a member of the board. By hiring the maintenance company, the board member/owner is receiving a direct financial benefit from the hiring of the maintenance company.
In most cases a board may approve decisions, even if there is a conflict of interest with a board member, if:
- the board member discloses their interest or the benefit which will be received; and
- the board member with the conflict of interest abstains from the vote.
In some cases, the best company or vendor in town may have a relationship with a board member. That doesn’t mean the board must dismiss consideration of hiring the company or vendor. Here are some steps to follow when conflicts of interest may be present:
1) Disclose - Always disclose to the other board members and the owners any conflicts of interest. Explain exactly what the relationships are and whether a direct or indirect benefit will be received by a board member.
2) Document - Hiring any contractor or vendor should be documented in the board meeting minutes. Include the factors which the board relied upon in making its decision.
3) Bid - It’s always the best practice to solicit bids anytime a board begins the process of hiring or engaging professional services. The bids should be in response to a well-drafted request for bids so that the board may compare costs, services, and terms.
4) Vote - Once all the information has been considered, each board member should exercise their business judgment and vote in a manner which is in the best interests of the association. A board member with a direct or indirect interest in the outcome should abstain. The vote and abstention should be noted in the meeting minutes.
The board of directors should be sensitive to the potential for conflicts of interest to develop, the duty owed to the membership, and the steps required when a conflict arises. Liability is created not by facing a conflict of interest, but by failing to handle one properly.