CONFLICTS OF INTEREST IN YOUR HOA

Written by Richard Thompson

When elected to HOA boards, there is always the possibility that a conflict of interest will develop. Often, there is no intention to fall into one, however, it’s almost impossible to avoid them. But how they are handled is critical. They come in several shapes and forms:

Imbalanced Reserve Repairs. Due to poor reserve planning, the board must make judgment calls based on inadequate money. Some repairs get done and others don’t. If the board president approves painting his building instead of others, there is an conflict of interest, even if that building clearly needs it more than the others. So, while good reserve fund planning can avoid that from happening, today the question is “Which buildings get painted?” Rather than be exposed to criticism, why not have the manager ask a local paint company design consultant to make the call? This same principle can be used for many other kinds of repairs.

Voting. Another technique for avoiding conflict of interest is to abstain from voting when the outcome is self-benefitting. And make sure the secretary records in the meeting minutes that “(fill in blank) abstained due to a conflict of interest”. That way, the written record will show no intent to sway the vote.

Disclosure. The idea behind disclosure is that any possible conflict is brought to the attention of the board up front. If the board has no problem with it, it may be okay. But beware. Technically, if you advise the board to hire your brother in law, the landscape contractor, you’ve provided disclosure. However, to an outside observer, there would still be a valid suspicion of nepotism (hiring family members) or money kickbacks. While disclosure may explain away a conflict, look at the situation with a critical eye. If the issue is significant or costly, it’s best to shy away from it rather than have to justify it again and again.

Deal Openly. One of the best ways for the board to avoid self dealing is to hold open board meetings. Even if other members don’t attend, minutes should be completed in a timely fashion and distributed to all. Regular newsletters (at least four per year) should advise of significant board business and upcoming events. Board business should be transparent…nothing to hide. If the board knows the owners are watching and aware, it’s less likely to engage in self serving activity.

Ban Board Scofflaws. To have a director who is regularly violating the rules is unconscionable. And to allow this kind of conflict of interest to continue invites challenge from every HOA member accused of rule infraction. Habitual rule breakers should be gleaned from the board if they can’t mend their evil ways.

Developers. Many HOA developers are shortsighted when it comes to conflict of interest. The goal to make a profit causes them to set the operating and reserve budgets too low to attract (deceive) buyers. This strategy will invariably backfire shortly after the HOA is turned over to the owners since there won’t be enough money to properly cover HOA business. When the HOA runs out of money, guess who gets blamed? To avoid this problem, all HOA developers should use outside budget consultants to eliminate the conflict of interest. Using consultants keeps the developer “arm’s length”, more credible to buyers and defensible if the homeowner board ever raises the question of the developer underbudgeting.

Conflicts of interest always feather someone’s nest and raise suspicion. And no matter how hard you try, one will appear. Ask yourself if something the board is doing could be misconstrued by outsiders. Trust is a fragile thing so treat it like fine crystal. Find ways to “unfeather” the HOA nest.