You’ve heard the saying that honesty is the best policy. Keep that in mind as you get into this article.

Board members are, on occasion, criticized for engaging in situations or arrangements that benefit them, their family or friends.

But are conflicts of interest always “bad?” And what happens if you unintentionally find yourself in this situation?

Read on to learn more.

Table of contents

• What is a conflict of interest?
• Types of conflicts
• How to deal with a conflict of interest
• Tips to reduce conflicts from occurring

What is a conflict of interest?

A conflict of interest occurs when a company or individual has a vested interest – including money, status, knowledge, relationships, or reputation – in something that could questionably influence their actions or decisions.

When talking about this matter in relation to HOAs, a board or staff member may encounter a conflict of interest when creating an annual budget, hiring a vendor or handling confidential information. 

For example, a board member is also a realtor. There is a house for sale in their HOA. Clearly, this poses a potential for a conflict, but there are a few options for addressing a situation like this. 

Most importantly though, the realtor should disclose to interested buyers that they belong to the HOA.

As a best practice, the realtor may want to give the listing to someone else.

Types of conflicts

While conflicts of interest will vary depending on the particular facts of each case, HOAs generally experience issues that fall into one of these categories:

Self-dealing

This is where someone makes decisions on behalf of the HOA that financially or materially benefit them, or their immediate family, directly as private citizens.

For example, a board member votes to hire a landscaper who is also the member’s father. The decision to vote for this service provider is based solely on the fact that they are related, and the board member did not disclose this information to the other board members.

Similarly, if a board member votes to ban pets simply because they don’t like dogs, that could be considered a conflict.

Bribes/gifts

Conflict may arise if an individual accepts substantial gifts, bribes, services, or other significant benefits that could realistically influence their decision-making on official HOA business.

If a resident sent a board member a $500 gift card to persuade them to vote a certain way on an important issue, this would be considered a conflict.

Misuse of confidential information

Using confidential information for personal gain can result in a conflict. Board members may have access to personal information about other residents or staff, but must treat that data with respect and care. It should never be sold or shared.  

Property managers can also get into trouble for conflicts of interest. However, most managers are trained and understand how to identify and avoid potential conflicts.    

How to deal with a conflict of interest

While specific guidelines for handling HOA conflicts of interest may be included in your association’s governing documents, not all communities have written instructions readily available.

We welcome you to use the guide below to help you or your board members navigate potential conflicts. However, if you are concerned about legal ramifications, you should always contact the HOA’s attorney.

1. Recognize the potential conflict

Potential and actual conflicts of interest are quite different. In order to stop a potential issue from becoming a real problem, you must be able to recognize the issue.

Try to put yourself in someone else’s shoes. Would they have a valid reason to question your decisions or actions based on the circumstances? If you answer “yes,” or even “maybe,” then you likely have a conflict of interest on your hands.

2. Disclose the information

Next, disclose the existence of any conflict of interest to the other board members, in writing. You want to be as transparent as possible about the issue so they understand how to address the conflict.

Remember, you’re not going to get in trouble just because a conflict exists. It’s when you don’t do anything about it that problems arise.

3. Give the board time to make a decision

The other board members will need to determine whether you, the board member in question, should participate in discussions or votes based on the nature of the conflict.

4. Withdraw/recuse  

In most cases, you will need to withdraw or be removed from meetings, discussions, and votes connected to the conflict.

However, if you must remain in a meeting to fulfill administrative responsibilities, do not participate in any discussion regarding the particular issue at hand.

Typically, recusing oneself from the voting process is enough to prevent conflicts of interest on a smaller scale.

 5. Resignation

For more significant conflicts of interest, it may be in your best interest to resign from the board.

6. Seek legal assistance

Conflicts of interest are not always simple. The board is not expected to have the legal knowledge to navigate all conflicts of interest on its own.

When in doubt, get advice from a qualified attorney. Should a director ever be found in a conflict of interest that has not been disclosed to the board, those members may require the director to fully reveal the nature of the conflict through the legal avenue.

Tips to reduce conflicts from occurring

Unfortunately, conflicts of interest cannot always be avoided. This is especially true in smaller communities where everyone knows everyone. However, being more knowledgeable about HOA conflicts of interest, and having a conflict of interest policy in place, can help minimize issues related to conflicts.

Understand your fiduciary duties

As a board member, you have legal and fiduciary obligations to the HOA.

For example, you have the duty of care, which requires you to be a careful steward of your association’s resources.

There’s also the duty of loyalty, which requires you to be loyal to your association and its members.

And you have the duty of good faith, which requires you to act in the best interest of the association. Prioritizing these fiduciary duties can help you avoid questionable situations.

Keep budgets impartial

Biased budget preparation is one of the best examples of conflict of interest for board members. On occasion, there will be board members who will want to lower dues or cut the budget to the point where proper maintenance cannot be upheld.

It seems innocent enough, and it might appear as though they are doing owners a favor. But if someone gets hurt because regular maintenance was neglected, it can lead to legal complications.

When it is time to figure out the numbers for next year, ensure that all board members keep personal interests out of the decision-making process.

Survey potential vendors thoroughly

As mentioned earlier, managers and management companies may also get caught in conflicts of interest. An HOA management company may give its clients advice that benefits them. For example, they might urge an HOA to hire a specific vendor, which, unbeknownst to the board, is actually owned by them.

An easy way to prevent this messy situation from unfolding is to ask potential vendors to list their parent companies, if applicable. Include a section asking for this detail in your request for proposal.

Alternatively, you can ask potential vendors directly if they have affiliations with the HOA management company.

Have a conflict of interest policy

Last but not least, a conflict of interest policy requiring board members to reveal potential conflicts of interest is a good way to get ahead of potential problems.

This won’t prevent individuals from willfully neglecting fiduciary duties, but it can assist members who genuinely need help navigating a tricky situation.

The policy should detail what qualifies as a conflict of interest, what to do if there is a potential conflict, and how to document the resolution of a conflict of interest. 

Conclusion

Sometimes, board members will find themselves in situations that could lead to conflicts of interest. That is okay. Just ensure this potential problem is shared with the board as soon as possible, and avoid taking actions that could escalate the problem.