Conflict of Interest

On June 24, I received a written query, which was inspired by my posts about predators. I've edited it for inclusion here: "....ask the board of [a few] years ago about how...a member of the board's company [was involved in the sale of something to the association]. Always saying that his [product] was cheaper. Not a predator, but must say, "conflict of interest"."

"Conflict of interest" is an interesting term. But what does it mean? In the query above, it is assumed that board members cannot have any business dealings with an association. I'm not a lawyer, but I have this view. I had the opportunity to think about this quite a bit and to reflect on it, because of various other business dealings I've had over the years and also because of some extensive work I did in the past, as a volunteer. I've also had "one on one" meetings with attorneys, at my expense, to explore this issue. (Note 4).

The questions that should be asked include "what is a conflict of interest" for a board member in an HOA? What do the governing documents say, and how should the board responsibly deal with bona fide conflicts?"

To me the heart of the matter is the role of the board member as a fiduciary, and the governing documents. The governing documents including the Illinois condominium act, states what types of financial or business arrangements are prohibited. For example, board members cannot be paid for their service to the association. There are other types of activities or circumstances that could compromise the ability of a board member to act solely in the best interests of the entire association. Obviously, as owners, the board member first and foremost has to contend with that personal interest. I have been told that the best method is to always remember that a board member is to wear two hats. When fulfilling his or her duties on the board or acting in the role of a board member, he or she must "put on my fiduciary hat" and put his or her personal interests aside. Another bit of really good advice from a very experienced board member was to remain "aloof." The advice was specifically to maintain a distance from groups of owners for the purpose of maintaining impartiality and objectivity, thereby avoiding circumstances which could lead to a "conflict of interest." In other words, being a board member is a difficult job and it is necessary to maintain a focus on the association and avoid entanglements with specific owners or groups of owners.

The role as fiduciary carries certain responsibilities. A "conflict of interest" would be a situation which prevents or interferes with a board member fulfilling those fiduciary duties. "Fiduciary duties" I take as the ability of a board member to act impartially in matters affecting the association. That could include financial and budgetary issues, upholding the rules, fines, fees, owner disputes, hiring and firing, etc. (Note 6).

I think there are some checks and balances in place in our HOA to minimize these problems. It's that "synergy" between the board and management, and between the members of the board, that creates the checks and balances and strengthens the organization. First, we have a professional management firm specializing in large HOAs. A manager attends all association meetings and provides guidance to the board, and provides instruction and coaching to board members. Second, we have had a reasonably diverse board. Finally, a board member who is in a situation that might compromise their ability to act as a fiduciary, must be willing to communicate with the entire board and management on these issues, should they occur. They must also be willing to act in accordance with fiduciary instructions. "Willingness" is possibly the most important piece. Willingness to ask questions, willingness to observe, willingness put personal agendas aside, willingness to be uncomfortable, and willingness to state when there appears to be circumstances indicative of a conflict of interest or the potential for one.

Communications and training are critical components. Everyone assumes that board members will communicate "conflicts of interest" or possible circumstances should they occur. But do they? It's assumed each board member understands the role of fiduciary. That's another critical piece. But what if they don't? Or what if there are differing perspectives about this on an HOA board, or differing ideas about what's permissible for a fiduciary and what is not? What if a board is unwilling to discuss this as a single group? Of if any such discussions are perceived to be personal attacks?

Here's some interesting questions to ponder about HOA boards, that might be relevant to the question. What happens if a board is split on fundamental philosophical grounds? If the differences are extreme, how does or can the board function? One way is for the board to state it's differences and then use management as a mediator and get to some sort of consensus. Another way is to avoid the issues in which case the board can remain split and simply operate as two boards. However, if this were to occur in an HOA, do we then have members or subgroups of a board performing independent actions and activities? Is that appropriate for a board? In matters that require the approval of the entire board, the experts tell me that the board should work together as a whole. So my opinion is that in certain matters, the board must act as a group. Of course, I suppose the arguments and differences could be so severe that agreement could not even be reached on what, in fact, requires a consensus! However, the question remains, how to achieve a consensus when or if a severe rift occurs? Finally, a question I ponder is, can this lead to various conflicts and if subgroups of owners are prohibited in an association, then what about subgroups of boards? My final question is, what can management do about this if it is unaware of the situation? After all, if a board keeps management out of the communications loop, then management can't provide the necessary professional assistance. (Note 5.)

The way to resolve these situations is via communications. It may be necessary to make very specific requests, and to involve experts. The board of an HOA is comprised of volunteers and technically all are non-professionals and certainly are not paid professionals.

Is it possible to avoid these situations? It begins with the campaigning and election process in an HOA. That's worthy of another discussion but is beyond the scope of this particular post. A question I ask is: Would it be beneficial if candidates or potential board members had a comprehensive understanding of the duties and responsibilities of the board? There's an old saying "an ounce of prevention is worth a pound of cure." Once someone is on the board at this HOA, it's expected that they will fulfill their fiduciary duties commencing on day 1! Our association board's first major task is an intensive budgetary workshop. It's "hit the ground running!"

I've concluded that it is assumed that candidates or appointees know what is expected of them in their role as fiduciaries and what situations are to be avoided, etc.  That might be a tall order in an association in which we have owners who are unaware this 35 year old community is a PUD and what that specifically means! (Note 3).

I'm advocating better preparation for candidates and board members. To that end, this association has prepared a six page, informal document entitled "BLMH Board Member – Summary of Duties and Responsibilities." (Most recent draft dated June 1, 2011). This has been prepared by several members of the board and is currently undergoing review by management. It remains to be seen if it will be used in this association. It would be in conjunction with another set of documents which include specific descriptions of "duties and responsibilities" for each board member.

The general document includes the following topics:

I. Being a member of the board.
II. Know your specific duties and assignments.
III. Be Prepared.
IV. Be a fiduciary.
V. Avoid conflicts of interest.
VI. Be a working member of the board.
VII. Be professional.
VIII. Be Realistic.
IX. Maintain the purpose and confidentiality of executive sessions and board meetings.
XI. Examples of Fiduciary Duties.
XII. Examples of conflicts of interest.

Resolving Conflict of Interest Issues
The next post will look more closely at how a fiduciary could resolve issues involving conflicts of interest.



Comments, Corrections, Omissions, References

Note 1.  The necessity to avoid circumstances which could lead to conflicts of interest carries with it some choices. One of those occurred some months ago when I decided to avoid a small group at this HOA. Some of the members have stopped me over the years, and "gotten in my face" about their issues. I once told one of them "I don't agree" with their position on a specific issue. I was told "you are a hard, hard man!" Since then, owners and members stop me from time to time and attempt to enroll me in their perspective of what I should do as a board member. I've been told "this is the right thing to do," for example. If I choose any other path, I guess it is said I'm doing the "wrong" thing. I concluded that joining small groups could put me in a compromising position in which I might be expected to choose between duties to association and "friends." After all, what's the "right" thing to do? I think some owners truly believe that I should take care of individual owner issues and the association will take care of itself! I prefer to avoid the possibility of being in that situation. I once asked how to make such a situation work, but I haven't gotten a definitive answer and so I remain convinced, particularly in view of recent happenings, that it might put me at cross purposes. Other people are better than I am at resolving their issues with such potential conflicts, I guess. That was and remains a difficult decision for me.

I will avoid situations that could result in entanglements with small groups of owners. Its ironic that my stand on this matter has, in fact, gotten me entangled, and somewhat estranged!

Note 2. I've found the issue of "aloofness" to be interesting. There are always a few owners who want to "bend my ear" for the purpose of proving their case. Most have straightforward requests, some have demands. Sometimes their position is "This association is poorly run and here's more proof; what are you going to do about it, and by the way you should do something about it!" I've handled complaints by being direct in my responses, even when I was an owner (except then it was "isn't this terrible, the board should really be doing something about it. You agree, don't you!"). As a board member, I also tell owners the truth "I don't agree with you," or "I do agree with you" and on the issue of specific complaints "I can't make a promise about this." I've discovered that this may be twisted into "another example of poor communications or a lousy association." I have concluded the message to me might be "Its our way or the highway, Norm!"  

As examples, on the issue of maintenance, owners will time to time issue complaints about a partially completed swale, incomplete landscaping related to a water main repair, a chimney which needs paint, a rusty conduit, flaking paint, etc. etc. I've taken this approach. Be honest and answer these queries or complaints "The association is doing it's best to responsibly maintain the property and balance a very tight budget. Certain repairs are done on a cyclical basis. Perhaps this was missed in the last cycle and it should be addressed in the next." and "Landscaping is just beginning for the year (this to complaints made in April)." Where appropriate, I then do one of all of the following: 1) advise the board member responsible for the area, 2) contact management to discuss specific problems, 3) put it in my notes as a possible issue which requires further investigation. 4) Contact other professionals for guidance. 5) Write an email or letter to the owner, or return a phone call, if that's appropriate, and 6) copy the content of discussions or emails to others on the board. 

However, problems are prioritized. I put the roofing contracts a bit higher than "tadpoles in the stream."

Note 3. Improving the content of the newsletter is one method that is being used to address misconceptions by owners.

Note 4. "Conflicts of Interest" can be subtle. Sometimes, the decisions made to assure that the potential does not exist, are difficult and can have a financial consequence. Here's a "real world" example of the steps that businesses may take to avoid such conflicts. Some years ago I was involved as a principal in a technology company which provided sophisticated process control systems to various industries. We designed and provided systems comprised of hardware, software,  engineering, documentation and training as part of this advanced technology, to facilities throughout the U.S. The technology we offered was to be the best. What did that mean? We wanted to achieve certain breakthroughs in reliability, productivity, cost reduction, fuel consumption, human safety, etc. It was inevitable that we would be required to make recommendations for "ancillary" systems for the owner to integrate. Those recommendations were to be unbiased and in the best interests of the client. The problem? The recommendations could be "tainted" by personal involvement, specifically ownership of common stock, in some of the companies making the software or hardware that we might be inclined to recommend. The solution? Our company had a policy that we should not own common stock in companies we might recommend. Was there a work around? Yes, it was permissible to own mutual funds which might include these companies. Was this a popular decision? No it wasn't. However, it mean that in the internal decision making process, that engineers and technologists would not be arguing a position based upon personal gain. It did allow us to honestly state to clients that we were making unbiased recommendations based solely on the merits of the situation. Oh, and by the way, these were not a "fiduciary" relationships and so there was no legal requirement to take this position. But we considered it to be the ethical thing to do, and we also considered it to be "good business."

Note 5. I've asked a professional about the range of issues and problems in HOA's and their boards and his response was "there are probably hundreds, if not thousands, of HOA's every day in which there are serious differences of opinions." Another professional made the comment "I've attended meeting in which things got really heated, and in one the board members came out swinging!" I've decided to look into this issue quite a bit deeper. I've been discussing HOA and HOA board dynamics and issues with an individual I'll describe as a "behavioral psychologist." I'm quite serious about this, but there are limits to the amount of time and money I can devote to this. Why would this be of such interest to me? There is the fact I do live in a condominium, but in fact, in the U.S. there were about 5 million condominium units according to a 1994 U.S. Census report. However, the Community Associations Institute has estimated that 62 million Americans live in planned communities, including condominiums of which there are more than 300,000! So I view it as an important issue for those 62 million Americans who have made a substantial family investment in this type of living. Can it be improved? Well, I live in one, so where better to find out?

Note 6. Maintaining impartiality and putting the betterment of the association ahead of personal or individual owner issues could be a difficult thing to do, I would think. An HOA board is comprised of individual owners. Each has a personal interest and a personal stake in the association. For many owners, the condominium they own is their largest single asset. So is it any wonder that things might get contentious in an HOA?