Avoiding Conflicts of Interest
Servant of Two Masters
Although the position offers little compensation apart from the satisfaction of a job well done, building board members are still in charge of running a business—a business with revenues, expenses, and assets. Regardless of the size of the complex and whether it is of the co-op or condo variety, a board member’s job can hardly be considered insubstantial.
Responsibility and Risk
Unlike their counterparts at Fortune 500 companies, the board members of co-ops and condos are not usually career executives armed with lengthy corporate management resumes. The boards of co-ops and condos are stocked with people from all walks of life. Some are attorneys, some dentists; some are real estate brokers, some plumbers. Whoever they are, their status as board members automatically exposes them to one of the perils of their position: the potential for conflicts of interest.
Board members have enough to contemplate as they carry out their buildings’ administrative duties, but avoiding conflicts of interest—or even the appearance of such—is crucial. Nothing undermines a community’s faith in their leadership faster than impropriety and self-dealing amongst the board and management team. Conflicts of interest can be hard to avoid completely, but how they are handled is of the utmost importance.
But what is a conflict of interest, exactly? How do they come about? Why are board members especially at risk of such relationships? And most importantly, how can they be avoided? Let’s take a look.
What is a “C of I?”
Board members have a fiduciary responsibility to their shareholders; the other owners of the units in their co-op or condo. This means, in simplest terms, that their loyalty cannot be divided. They cannot serve two masters. They must place the interests of their community above all other interests—including their own.
In legal terms, conflict of interest “is a term used to describe the situation in which a public official or fiduciary who, contrary to their obligation and absolute duty to act for the benefit of the public or a designated individual, exploits the relationship for personal benefit—typically pecuniary.” So says David Byrne, a partner with Stark & Stark, a Princeton-based law firm that also does business in New York. He goes on to explain that “a member of a condominium, cooperative or HOA board is a ‘fiduciary.’”
Conflicts of interest can also be looked at in simpler terms. “It’s called self-dealing,” says Steven R. Wagner, a partner with Wagner Davis PC in Manhattan. “If they’re negotiating for themselves at the same time they’re negotiating for the board.”
The textbook example of conflict of interest is the kickback. Vendor X wants to get a service contract in your condo that’s worth a small fortune. Vendor X promises to give Board Member Y a suitcase full of unmarked twenties for throwing the contract their way. Board Member Y makes sure Vendor X is retained.
Common Conflicts of Interest
Many conflicts of interest begin innocently enough—with favors to friends or family members that, rightly are wrongly, are perceived as special treatment. The board president’s son has started his own lawn care company, would the board float him the business—that sort of thing. While it may not seem like a huge deal, nepotism rears a head that smacks of impropriety.
“I have seen board members related to owners or principals of vendors or professionals servicing that association, or trying to service that association,” says Byrne. Or it might be even simpler: the board president himself might be the one in the lawn business.
“Another very, very clear conflict is where a board member has himself, or a company with which he is affiliated, provide services or materials to the co-op,” says Wagner.
Then there are the conflicts of interest that involve real estate.
“The most typical conflict of interest is when someone who is a real estate broker is serving on the board, or is a relative of a board member (typically a spouse or child), and is involved in transactions in the building,” says Mindy H. Stern, a Manhattan-based attorney with Schoeman Updike & Kaufman, LLP. “In that instance, they should not participate in the decision to approve or deny the transaction.”
Another potential conflict of interest involves employment. Let’s say the superintendent buys another unit in the complex, and is now part owner, part employee. What happens if that super runs for board president, wins, and gives himself a fat raise? “I have also seen board members working for their associations while being on the board,” says Byrne.
Conflicts are not always about vendors, contracts, and bids. Any board member is also a unit owner, and as any board member knows, unit owners sometimes have conflicts with the board. What if the unit owner with a grievance is also the board president, whose job it is to defend the board from such grievances?
Two examples come to mind: a board member, acting as the individual owner, sues the board. Or, a board member is delinquent in maintenance payments, assessments, or other fees—so much so that the board must take action against him. In these cases, the inherent responsibilities of board member and unit owner are at cross-purposes, creating a conflict.
Dealing with Conflicts of Interest
The surest way to deal with conflicts of interest is to not let them happen in the first place. “A board member essentially should never take a position adverse to the legal rights of his association, if that position will benefit him,” says Byrne. “There are exceptions to that, but that’s the general rule.”
That said, there are occasions when what might appear at first blush to be a conflict of interest might be good business, when the appearance of impropriety is just that—an appearance, nothing more.
“Let’s say I’m the world’s greatest widget maker, and the co-op needs widgets,” says Wagner. “I’m willing to sell my widgets, which are clearly better, at a fair price. Can this be done?” Answer: yes. But the terrain is tricky.
“The board member must first disclose the conflict as a potential conflict of interest and then recuse themselves for consideration and any voting with respect to that negotiation,” says Wagner.
“Board discussions regarding a contract or transaction involving an interested director are more likely to be candid and complete if the interested director does not participate in the deliberations,” notes Stern. “Individual board members with reservations or concerns about the contract or transaction may not feel free to express them in the presence of the interested director, even though it would be a breach of their fiduciary duty not to do so.”
“Leave the room,” Wagner says, emphatically. “Just leave the room.”
To use the above example, Board President A would announce to the rest of the board, “Here is a bid from the widget company I own. I must recuse myself from the decision-making process. In order to avoid the appearance of impropriety, I’m going back to my apartment while the rest of you decide which bid to accept. Give me a call when you’re done, and I’ll participate in the next agenda item.” Or something similar. This way, Board President A has disclosed his involvement, recused himself from the process, and, even better, left the meeting while the bids were being weighed. Even so, it may not be the most prudent idea to buy the board president’s widgets.
“Absent special circumstances which make it clearly advantageous to the co-op to proceed with a contract or transaction involving an interested director, it usually is preferable for a board not to do so, even if the contract or transaction complies with the law,” says Stern. “The non-interested directors should ask themselves, ‘Does this pass the smell test?’ If the non-interested board members will be unable to explain to the shareholders why they entered into the contract or transaction with the interested director when there were acceptable alternatives, the board should not proceed with the interested director contract or transaction.”
Conflicts of interest are usually not dealt with in the laws governing the co-op or condo, but in higher governmental bodies.
“Garden-variety conflict of interest cases are dealt with by the New York State statute under which the co-op or condo is formed,” says Wagner. Board members who have been benefiting financially from a conflict of interest can have that financial advantage stripped away by the courts, and then some.
“When there is a conflict of interest, the person who has been putting money in his pocket can be sued for breach of fiduciary duty,” says Wagner. The courts take the fiduciary relationship quite seriously. “As a fiduciary,” Wagner says, “you are held to a higher standard than the man on the street.”
And whether you’re a Fortune 500 CEO, or a stay-at-home parent working on their first novel, in your role as board member, your behavior and conduct has to be ethical and above-board—not just for the sake of your board, but for your entire community.
Greg Olear is a freelance writer and a frequent contributor to The Cooperator.