Conflict of Interest policy required?

Started by DawnL • 4 replies • 2377 views

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DawnL (California)
Posts: 37

Posted:

I had thought that "disclosure" was all that is necessary to prevent the Board from "legal trouble" if there is a perceived conflict-of-interest. I based this opinion on a California/legal/HOA website that I enjoy. It says:

"Conflict of Interest - if this is in fact occurring, it could mean serious consequences, and is also a legally actionable cause of action. However, sometimes when owners believe actual conflicts of interest exist, the requirements for pursuing a claim are not there. If a board member benefits financially from some action of the board (approval of a contract with the board member's family member or company might be an example), it is not a conflict of interest if it is disclosed."

We have a board member who believes, that since we are a non-profit corporation, and we are governed by non-profit law. . .that we need to formulate an official "conflict of interst policy" as required by the IRS for non-profits. She is concerned that disclosure of the conflict of interest (e.g. "That painting bid is my husband's) is not enough. She also believes that abstention from voting is required and that we need to formulate a specific "conflict of interest" policy to prevent possible future litigation.

(Our bylaws, CCR's do not REQUIRE an abstention from voting for any perceived conflict of interest, although past Board members have abstained just out of courtesy.)

With only three Board members remaining (the rest of the owners are ineligible), having an abstaining Board member will create a problem.

Anyone else have an "official" conflict of interest policy? or have any knowledge about what part of the law would speak to this?

Thanks!

Dawn

RickR3 (California)
Posts: 42

Posted:

Dawn

From the Davis Sterling act:

Conflicts of interest occur when a director, or the director's family, stands to benefit financially from a matter before the board. For example, the board votes to award a roofing contract to a company owned by the director or the director's spouse, brother, son, granddaughter, etc. Such transactions/contracts are voidable.
Potential Liability. Conflicts or potential conflicts of interest, however, do not not necessarily create liability if:

1. Full Disclosure. The interested director makes full disclosure of the conflict.

2. No Influence on Vote. The interested director should leave the room so remaining directors can discuss the issue fully and freely, and take vote without the affected director.

3. Fair. Even if the director makes full disclosure and avoids influencing the vote, the transaction must be fair and reasonable as to the association at the time it is authorized, approved or ratified. (see Corp. Code §7233 and Corp. Code §310)

Also

So as to avoid such problems, boards should adopt a written ethics policy

Rick

DebraV (Pennsylvania)
Posts: 8

Posted:

Oue Board members sign an "Ethical Conduct and Confidentiality statement" yearly.
A Confidentiality statement is also signed by memebers of some committees privy to sensitive information, Budget & Finance, Personnel, Rules Enforcement etc.

DawnL (California)
Posts: 37

Posted:

Thanks so much for the info. . .ethics policy looks like a good idea.

Dawn

SusanW1 (Michigan)
Posts: 5,202

Posted:

"Blind Bidding" will take care of this. All bids can be submitted to the Board, minus any names, just the bid information. If the Board member wants to abstain from voting, so be it.

I have no problem with hiring Board members or their family to do work. (You alway know where they live, if there's a problem) AS LONG AS BIDDING PROCEDURES ARE FOLLOWED.

I think there's some mis-interpretation on the words, "Conflict of Interest" and "Monetary Gain." Those terms are meant to prevent the Board from creating paying jobs for itself.

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