Keeping it Above Board Avoiding Common Conflicts of Interest

Keeping it Above Board

 One of the trickier problems to deal with when you live in a co-op or condo is  dealing with board members who sometimes let the power go to their heads. Even  though they are entrusted with a great deal of responsibility in the smooth  running of the building, it’s vital that board members don’t use their position to create a situation where they are setting themselves up  for a conflict of interest dispute.  

 “We have seen conflicts of interest arise in cases where a board member owns, is  employed by, or in some other way represents, a goods or service company that  wishes to do business with the building,” says Michael Berenson, president of AKAM Associates, Inc., providing on-site  management to New York co-ops and condos. “We have also seen conflicts of interest arise where a board member is a real  estate salesperson or broker and wishes to transact business with the building.”  

 In these cases, the board member stands to profit financially from mixing his or  her two interests and may be tempted to put the interests of the business ahead  of the interests of the building. When that happens, the board member runs the  risk of breaching his or her fiduciary obligation to the building.  

 “It’s a very dicey issue because there are no hard and fast rules and that’s a problem,” says Andrew P. Brucker, Esq., a partner with Schechter & Brucker, P.C, a law firm in Manhattan. “Even the appearance of impropriety—even if no conflict of interest has occurred—is something that boards need to look out for.” And 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.  

 Avoiding Problems

 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.  

 “The most common are most obvious, where a board member is getting favored  treatment one way or another,” says Larry Simms, president of the Alliance of Condo & Co-op Owners. “It could take the form of free work being done by vendors, could take form of  work being done by staff, could be gifts ranging from bottle of scotch to  getting premium cable services without paying for them. I have even heard of  cases of banks as an inducement giving favorable loan deals.”  

 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.  

 “Boards and managers should be absolutely certain that there is an arm’s-length relationship between the contractor and the building,” Berenson says. “This means that the contractor has no financial, personal, or other interest in  the building besides the immediate contract, and likewise that no member of the  board or management has any financial, personal, or other interest in the  contractor besides the immediate contract.”  

 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. Some examples  include a board member allowing an unlicensed painter to work in his apartment  or approving a sales application that otherwise might not be approved.  

 Other conflicts of interest are not as obvious as the examples above. 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.  

 In this case, 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.  

 Brucker says that something very common in co-ops and condos is the use of a  broker for insurance who is related to the management company.  

 “If they are supposed to advise you on things but are an affiliated company,  would one arm rat out another arm?” Brucker asks. “It’s the manager who usually looks out for the board’s interest, and this could cause a conflict of interest.”  

 Follow the Law

 Because New York State Business Corporation Law (BCL) prohibits conflicts of  interest in which an individual profits financially or otherwise by exploiting  his relationship with a co-op or condo, such behavior could void the board  member’s protection against liability as provided by the building’s governing documents and/or by the building’s directors and officers liability insurance.  

 “If the act is of significant magnitude, lawsuits and criminal charges also are  possibilities,” Berenson says. “In terms of day-to-day consequences, the unlicensed contractor who is a family  friend of a board member and who was allowed to work in the building by that  board member may not seem like a big deal at first … but both the board member and the contractor will be liable should the  contractor inadvertently break a riser in the course of his work in the  building.”  

 The best rule of thumb for everyone—for the board member, the manager, and the building—is to avoid all situations in which even the appearance of a conflict of  interest is present.  

 Cause and 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.  

 To help clients avoid conflict of interest issues, a manager should be  conversant in the regulations articulated by the BCL, which governs co-ops and  condos and specifically addresses conflict of interest. As well, the manager must be familiar with the co-op’s or condo’s documents and bylaws, which also will likely address conflicts of interest.  

 “Additionally, a past board may have established policies regarding conflicts of  interest in the building, and the manager should be aware of these policies and  remind the board of them,” Berenson says. “Beyond knowing the building’s governing rules, managers can help their boards avoid conflicts of interest by  strongly encouraging board members to disclose any relationship they may have  that could potentially pose a conflict of interest.”  

 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 Simms became president of his condo board, he learned that a Christmas tree  vendor was providing free trees to the board in exchange for being able to set  up shop on the sidewalk. To avoid a conflict of interest mess, Simms instead  negotiated a 20 percent discount for all residents, so that no one was getting  special treatment.  

 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 in.  

 “The immediate situation should have been resolved before the family member  started working in the building by the board member disclosing to the board his  relationship with the individual,” Berenson says. “If this was not done and a problem arises, the contractor should be removed from  the building immediately and the board member may be asked to relinquish his  officer’s position and/or to step down from the board.”  

 In these cases, the building must be made whole, and legal intervention will be  necessary to determine where actual liability rests and who needs to compensate  the building. After going through such a situation, boards would be  well-advised to establish clear policies and boundaries with regard to board  members and conflicts of interest in the building, and then to enforce those  policies and boundaries uniformly moving forward.  

 “We preach stay out of conflicts. Full disclosure is very important,” Brucker says. “If there is a conflict, not only should they not be involved in the vote, but  not involved in the discussion at all. Those other directors shouldn’t have to watch their words just because you are there.”  

 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.  

 “You should ask yourself, ‘Will this raise any eyebrows?’ But if you need to ask yourself the question, the answer is probably already, ‘yes,’” Simms says. “Sometimes you might have a vendor with special skills and there is no  alternative, and in this case, you should make the recommendation, disclose the  nature of the connection and then recuse oneself from the final decision.”   

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

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2 Comments

  • Please find or develop a model job description for Board Members which addresses the issues raised in this article eg. conflicts of interest. Another aspect to the job description is a policy role versus micromanagement. Liability on individual board members for micromanagement mistakes. Thanks
  • Curious for the degree of conflict of interest in a voting member of HOA who is a property manager doing business within the condo association - responsible for sales & rentals on properties. How does this person vote for budgets and management decisions knowing that there is a personal financial gain/loss interest in HOA decisions? Is there someone who can speak to this among Forum readers and knows of any specifics in Florida?