Broadly speaking, if you influence or exploit a position of power for personal gain, you have a conflict of interest. If someone close to you might gain as a consequence of your actions as such, you have a conflict of interest. Conflicts of interest are either potential or actual. Potential conflicts of interest can exist even if no unethical or improper acts have occurred, such as when the board is soliciting a spa maintenance contract a HOA director declares a financial stake in a spa maintenance company. An actual conflict of interest would exist if the board hired this spa maintenance company.
One of the fiduciary responsibilities of a HOA board member is the duty of loyalty to the association (see related article on Fiduciary Duty). Board members are legally bound to act within the best interests of the association. Any decision that might personally benefit a director, at the expense of the association, should be avoided, and a potential conflict of interest declared.
If a potential conflict of interest has been recognized, it is not necessarily improper if:
- full disclosure of the material facts is made to the board before discussion on the transaction
- the resulting transaction would be of significant benefit to the association
- the interested party abstains from voting on the matter
According to the authors Tonia Sellers and Jay Lazega in their “Guide for Association Practitioners on Conflicts of Interest”, although the association’s manager may not be governed by the same state conflicts legislation as the board, he should still follow the same rules of conduct as the directors and must avoid attempts to influence the board’s decision.
One of your HOA’s responsible governance policies, as now required by CCIOA, compels the association to adopt and maintain a policy handling conflicts of interest involving board members. The Colorado legislature recently expanded upon this with House Bill 11-1124 to include circumstances and procedures for dealing with such conflicts. Typically, such a policy will be organized as a subsection of a general code of ethics policy.
It is not always possible to avoid conflicts of interest, however, it is a necessary part of a director’s duties to understand what it means, when it might exist and to act accordingly to avoid impropriety. Failure to do so could make a transaction or contract unenforceable or even voidable.