Conflict of Interest if Board works at same Agency or Company?

Started by BH5 • 15 replies • 583 views

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BH5 (Virginia)
Posts: 84

Posted:

In Virginia, are there any laws that state or imply that Board members working at the same Agency/Company is a conflict of interest? There is nothing in our By-laws about this? Would it matter if one member supervised the other, or if one member were a contractor supervised (called COTR) by another.

MarkM19 (Texas)
Posts: 1,459

Posted:

You need to look at the Definition of "Fiduciary Duties" Board members are Fiduciaries of the Community they are elected to represent.

CathyA3 (Ohio)
Posts: 6,299

Posted:

Elaborating on what Mark said, it absolutely would make a difference if one board member supervised another. The employee may not feel able to disagree or express a particular opinion with his supervisor, which would prevent the employee from doing his duty as a board member. Even if the two only worked at the same company, they still may not feel free to be candid since many workers want to keep their private lives separate from their work lives (wisely so).

AugustinD
Posts: 5,144

Posted:

I agree with CathyA3's and MarkM19's points. Furthermore, if the Virginia NonStock Corporation Act applies to your single family (non-condo) HOA, then
"§ 13.1-871. Director conflict of interests" appears relevant to your concerns. Importantly, § 13.1-871 states appears to me to strongly suggest that any director with a conflict of interest had better disclose it early on in her or his service on a board and also before any discussion or vote where the conflict of interest could have a bearing.

I see nothing in Virginia's HOA statute on this topic.

TimB4 of Virginia hopefully will have more to offer.

KerryL1 (California)
Posts: 14,550

Posted:

I don't think the above situation is a "conflict of interest," where a director (or their family) could benefit--usually financially-- because of the situation. Sorry, my writing's too terse, but it might elicit better replies.

It feels more like an ethical issue if one director has power over the other at work. It seems that this oculus be a real problem on a small board. Maybe not so much on a board of say 7.

AugustinD
Posts: 5,144

Posted:

Quote:

Posted By AugustinD on 07/30/2020 8:43 AM
if the Virginia NonStock Corporation Act applies to your single family (non-condo) HOA, then "§ 13.1-871. Director conflict of interests" appears relevant to your concerns.

For the text of the Virginia Nonstock Corporation Act, see https://law.lis.virginia.gov/vacodepopularnames/virginia-nonstock-corporation-act/

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Personally I say if they both "properly" got on the BOD, then not a problem.

DouglasK1 (Florida)
Posts: 2,046

Posted:

Quote:

Posted By JohnC46 on 07/30/2020 9:07 AM
Personally I say if they both "properly" got on the BOD, then not a problem.

I agree. If the members feel there is a problem, they can rectify it at the next election, or even do a recall if needed.

Escaped former treasurer and director of a self managed association.

BenA2 (Texas)
Posts: 1,273

Posted:

I don't see any conflict at all. An employee might feel reluctant to go against their boss but that could happen with any relationship. As long as a vote has no relationship to the company, there is no real conflict. I do agree that there could be a perception of conflict so they should reveal that they work together if it isn't already known.

KerryL1 (California)
Posts: 14,550

Posted:

Good point, Ben. I've noticed on this forum many times in the past that "conflict of interest" isn't always correctly understood.

CathyA3 (Ohio)
Posts: 6,299

Posted:

Our attorney said that there can be a conflict of interest if a board member has a financial stake in the outcome of a vote.

While it depends on the personalities of the two board members involved, I can foresee situations where there could be a tit for tat: the employee supports some project that his employer (eg. the board president) wants in exchange for some benefits at work. Obviously this depends on the details of the situation. Many HOAs/COAs don't deal with the huge dollars that can encourage bad behavior. And for many board members, this sort of thing wouldn't even come up. But you can't rule it out.

An interesting question: would this sort of external relationship be prohibited on other boards of directors? If so, then this tells us that it is a potential problem that should be disclosed, at the very least.

CathyA3 (Ohio)
Posts: 6,299

Posted:

Quote:

Posted By CathyA3 on 07/31/2020 5:41 AM
... snippage ...
An interesting question: would this sort of external relationship be prohibited on other boards of directors? If so, then this tells us that it is a potential problem that should be disclosed, at the very least.

Ha!

https://www.imd.org/research-knowledge/articles/the-four-tiers-of-conflict-of-interest-faced-by-board-directors/

Quote:

"Tier-II conflicts arise when a board member’s duty of loyalty to stakeholders or the company is compromised. This would happen when certain board members exercise influence over the others through compensation, favors, a relationship, or psychological manipulation. Even though some directors describe themselves as “independent of management, company, or major shareholders,” they may find themselves faced with a conflict of interest if they are forced into agreeing with a dominant board member. Under particular circumstances, some independent directors form a distinct stakeholder group and only demonstrate loyalty to the members of that group. They tend to represent their own interest rather than the interests of the companies."

So yes, two board members who have an outside relationship such as boss/employee do, in fact, have a conflict of interest.

Having said that, we often see "cliques" forming among directors, or one director calling the shots while others don't push back. According to the quote about, this is also an issue even though there isn't any obvious financial advantage at stake.

AugustinD
Posts: 5,144

Posted:

Quote:

Posted By CathyA3 on 07/31/2020 11:41 AM
So yes, two board members who have an outside relationship such as boss/employee do, in fact, have a conflict of interest.

Absolutely. With money on the line (via workplace promotions, annual evaluations and the like), I think having two HOA board directors where, when not on the board, one works for the other, is a stunning conflict of interest.

Thanks for the quotation from our friends in academia.

KerryL1 (California)
Posts: 14,550

Posted:

Thanks for the quote, Cathy. I knew that not solely financial benefits created a conflict of interest, but did not know of the tiered approach to this topic.

So....and given that cliques do form within boards where there's no conflict off interest, what would anyone in an HOA do if bothered by the subordinate/boss relationship between two directors?

CathyA3 (Ohio)
Posts: 6,299

Posted:

Quote:

Posted By KerryL1 on 07/31/2020 12:00 PM
....

So....and given that cliques do form within boards where there's no conflict off interest, what would anyone in an HOA do if bothered by the subordinate/boss relationship between two directors?

That's a good question and I don't have a good answer to it since the relationship by itself may not be a problem - although I do think board members should avoid even the appearance of wrongdoing.

The best I've come up with is requiring disclosure of any formal, outside relationship and then keeping a closer eye on how the votes are going. I'd want to know if one director seems to be accumulating power and what that person is doing with it.

There are associations where one board member appears to be making all the decisions, but it's because the others are lazy or don't know what they're doing, so they just rubber stamp whatever the knowledgeable person says. If that person is making thoughtful decisions, I don't think I'd be trying to kick the board to the curb - especially since there may not be any volunteers willing to take their place.

A lot of what boards deal with is day-to-day, low stakes stuff. But if there are higher stakes issues involved, or if one director seems to have an agenda beyond just doing the job, I'd pay close attention.

Which is a long way of saying, it depends. :-)

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