Keep it Above Board Avoiding Common Conflicts of Interest

 When you serve on a board, sometimes you get a feeling of empowerment. After  all, you bear a great deal of responsibility for how well (or how poorly) your  building or HOA fares during your tenure. However, it’s important not to let that power go to your head and create a situation where  you are setting yourself up for a conflict of interest dispute. Nothing  undermines a community’s faith in their leadership faster than things like impropriety and self-dealing  amongst the board/management team, or even the implication that these things  might be going on.  

 Conflicts come in many forms, say the pros. “Some examples of conflicts that occur in condo and co-ops include if a board  member is a realtor and is using the association financial information to  assist in their outside endeavors,” says Regan Marock, executive director of business development for KW Property  Management & Consulting in Miami. “Or when a board member has a personal relationship and provides kickbacks to a  vendor, or when a board member or management company has an undisclosed  financial interest with a vendor.”  

 “Sometimes the manager is put in the middle,” says Lisa A. Magill, an attorney with Becker & Poliakoff in Fort Lauderdale. “A board member or officer wants something to satisfy his or her personal agenda—and if the manager protests too much, their job may be in jeopardy. The key to  any conflicts issue is disclosure. Everyone needs to disclose what relationship  they have with a potential vendor and the vendor should likewise disclose any  relationships.”  

 Avoiding Problems

 “Common sources of conflicts of interest are directors who directly or indirectly  are connected to companies that the association may currently use or consider  hiring,” says Donna DiMaggio Berger, a founding partner with the law firm of Katzman  Garfinkel & Berger in Fort Lauderdale. “This can be a director who owns a management company (or is a licensed manager  whom the board wishes to hire), owns a landscape company or other service  provider.”  

 In these cases, the director with the direct or indirect pecuniary interest in  the company being discussed has a conflict of interest, must disclose it to his  or her fellow board members and should not vote on matters on which he or she  is conflicted.  

 Other conflicts of interest are not as obvious. Perhaps the association is  trying to decide if they wish to pursue a noise violation when the only  complainant is a member of the board who lives next door to the accused  violator. The same could be true for a director with a boat looking to be  assigned the only remaining boat slip in the community.  

 “In these cases, the director with an interest at stake would be best served by  disclosing that interest, making his or her case to the board in the same  manner any other owner would and then letting the rest of the board vote on the  matter,” Berger says  

 Living in close proximity to others, along with a sense of loss of control,  gives rise to a whole host of different types of disputes. Adding a conflict of  interest problem into the mix can make the situation even more volatile.  

 “Property management companies should have a strict policy in place that no  gifts/kickbacks will be accepted and have the employees sign paperwork to that  effect,” Magill says. “Boards should always conduct due diligence and should require the manager to  obtain bids from vendors they learn about from other associations or other  professionals. I’ve seen too many communities duped when the bids are all procured by one person.”  

 Some board members try to get away with having pets in a no pet building, having  jobs done for free (such as landscaping) in exchange for hiring a contractor,  or hiring friends or family to do something in the building.  

 “In self-managed situations, the board should also have a strict zero tolerance  policy,” for those types of behaviors, Marock says. “It is important for board members to be kept up to date with the laws and  explain that if they become involved with anything of this sort, they are  subject to a civil penalty.”  

 Marock also offers that the sealed bid approach should be used when going  through the bidding process and it is important that all bidding criteria are  consistent for all bidders involved. It is impossible to eliminate conflict of  interest problems in this arena, however, but by following multiple steps, they  can be deterred.  

 Managers can also avoid conflict by making sure the vendors have good Better  Business Bureau ratings and that they have all the necessary insurance.  

 “Request multiple references to gain a feel for the company,” Marock says. “Management companies have the advantage that by having multiple properties, the  property managers can share information regarding vendors and share whether  they are a good selection or not.”  

 It is not only directors who have potential conflicts of interest. Occasionally  vendors being used by communities might have other significant relationships  that could prove to conflict with the association’s interest in the future. The best way to steer clear of conflict situations is  to ask the right questions beforehand.  

 Follow the Law

 According to Magill, conflicts are addressed in many sections of Florida  statute, and directors and officers are subject to civil penalties if they  destroy or deface accounting records.  

 The condo act prohibits officers, directors or managers from accepting anything  of value without paying for it from any vendor providing or proposing to  provide services to the association in Section 718.111. An example is a  landscaping firm offering to mulch the board president’s lawn to get his or her vote to hire the vendor.  

 “There are similar laws for co-ops and HOAs,” Magill says. “In fact, the Homeowners Association Act (Chapter 720, Florida Statutes) contains  a pretty strict anti-conflict provision.”  

 For both co-ops and condos, the General Corporate Not-For-Profit Statute in  Florida, Chapter 617, addresses director conflicts of interest and provides a  requirement that directors disclose conflicts of interest and abstain from  voting on issues on which they have such conflicts.  

 “There was a legislative push some years back to amend Chapter 718, the  Condominium Act, and Chapter 720, the HOA Act, to make director  responsibilities with regard to potential and existing conflicts of interest  more clear to the members and other board members, but that language was not  ultimately passed,” Berger says. “For now, conflict situations are handled by referring to Chapter 617.”  

 Cause & Effect

 Conflicts of interest that are either overlooked or allowed to continue can  create real damage to community morale as well as to undermine the credibility  of the governing board.  

 “In the worst case scenarios, board members with damaging conflicts of interest  have been recalled from the board and/or sued for breach of fiduciary duty,” Berger says. “Most people are savvy enough to understand that life itself brings conflict.  Based on the sheer number of relationships most people foster in their  lifetime, conflicts of interest are bound to crop up. It is also important to  remember that not every conflict of interest is negative.”  

 For example, if a director owns the best pool maintenance company in town, why  shouldn’t his or her community benefit from utilizing the services of that particular  company?  

 “As long as the director’s ownership is disclosed and the director does not vote on the retention of his  or her company and on future matters concerning same, the relationship is  appropriate,” Berger says. “Of course, many directors have learned the hard way that allowing their  companies to perform services for their own communities is often not a good  idea.”  

 When certain conflicts of interest occur, it’s the community that suffers. As an example, if a management company has a  financial interest in a vendor, not only is it hard to be sure that the  association is getting the best pricing, but if that vendor is failing from a  performance perspective, it is not in the management company’s best interest to recommend a change as they will be losing business.  

 “When illegal conflicts occur such as a board member receiving a kickback, there  is always the risk of a civil penalty,” Marock says. “A lot of board members believe the Directors & Officers liability insurance will cover them if something happens, where it is  quite the opposite. If found guilty, insurance companies will go after the  board member.”  

 Family Matters

 Let’s say a board member acting in good faith hires a family member to do interior  maintenance work in their building and something breaks. This is a serious  problem that you are better off not even giving yourself the chance to get  involved in.  

 “We as a company frown upon these type of occurrences as if something does go  wrong, the board member could possibly expect special treatment whereas at the  end of the day that family member will be liable,” Marock says. “We would encourage the board member to disclose the relationship to the rest of  the board prior to the family member starting so that they may use their own  judgment before making a decision.”  

 Boards who learn the hard way—either through criticism or in the most extreme cases recall from the board—that hiring a family member or friend was a bad idea from the get-go, often don’t repeat the exercise.   

 Keith Loria is a freelance writer and a frequent contributor to The South  Florida Cooperator.  

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10 Comments

  • one of our board director and tressure, he is also licenced florida general contractor, few contractors, engineering firm did some work in our condo, all these companies work with with our directorsbor they were working with him other project , is this a conflict of interest. he is as a consultant to other condo association bringing contractors, he brings the same contractor to do concrete restoration
  • Does a board member have a conflict of interest if his home is currently for sale? He has the ability effect the HOA fees and a new management company.
  • Can a Board member vote on a change in rules that will directly benefits him/her. Ex. The board member is an investor with more than 10 units and needs more parking spaces for tennants, therefore he/she moves to vote to change the rule allowing more spaces and placing him/her in an advantageous position to other residents.
  • Paid manager of HOA has close friendship with Board Members... Board Members hired manager... Is this a conflict of interest
  • Is the following a conflict of interest. The president of a condominium board of directors uses the associations attorney for preparing and filing assignment of unit garages to other units the president owns within the same condominium association
  • Is there anything in the rules about board members discussing board business with non board members
  • I live in Florida, our BOD has purchased a house for the management company to do business for us, purchased mailboxes. I was at the last annual meeting. We have 5000 homeowners, however, only a hand full of people were present. There were proxies submitted, In order to pass any budgets, or elections, does there have to be a certain amount of people present, or can they count the proxies. Also, it has come to my attention that if there are absent votes from members, it is counted as a yes. Is this allowed in the florida statutes?
  • What about a unit owner who is also president of the board and is also a licensed cam getting paid to also be manager?
  • Is there a legal problem with having an owner being a paid employee of the Property Management Company?
  • Is it illegal for a president of a condo association to work for the property management company under contract to the association and for that person to sign a new contract? Or is it just unethical and in poor taste creating a divided community?