Conflicts of Interest on Community Association Boards

The board of directors of an association must be aware of the potential for a conflict of interest at all times. This can be an especially difficult issue for directors to navigate, no matter whether the board members are appointed by the “Declarant” or elected by association members.

But what exactly does this stern warning mean?

Every person that serves on the board of directors owes a fiduciary duty to the association. This duty can be broken down into several categories, but for the purpose of this article, it boils down to this concept: Directors must act in the association’s best interests, not their own.

While the statement seems simple, it can be very hard to draw lines to determine if a director is actually acting in the association’s best interest, not the director’s own interest.

Conflicts (or the perception of a conflict) occurs when:

— a director’s personal matters or financial interests “conflict” with their duties;

— where the director’s actions adversely affect the trust the other members put in the association; and

— where the situation might affect the director’s ability to act in the association’s interest.

There can be a conflict when a director engages in “self-dealing.” Self-dealing is making decisions that benefit the director or their immediate family. Consider the common situation where a director recommends someone they know well for a service the association needs. If the director has a close relationship with that person, particularly a financial relationship, the independence of the director may be questioned.

Another type of conflict that occurs is when a director accepts gifts, services, or other benefits (that are substantial) which could influence the director. Accepting a free pen or plastic chotchke from a potential vendor is not exactly influential unless the pen is a luxury pen with a hefty price tag.

Finally, conflicts can arise when a director uses information he or she obtains through their work for the association for the director’s own personal gain. For example, a real estate agent serving on the board of directors of an association may come into possession of information regarding the members in the association and may be tempted to use that information to further their business of marketing homes within the community.

For more guidance and insight on what your association can and should do to avoid problems with conflicts of interest, please contact Amy H. Bray in our Commercial Real Estate Department for assistance.