Director Conflicts of Interest

DIRECTOR CONFLICTS OF INTEREST

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)

Recusal. Interested directors may be counted in determining the presence of a quorum at a meeting of the board or a committee thereof which authorizes, approves or ratifies a contract or transaction. Corp. Code §310(c) However, the director must recuse him/herself from the discussion and voting on the issue.

Recommendation. For smaller associations, a director's roofing company may provide welcome relief by installing new roofs at his or her cost. However, larger associations should avoid such arrangements because they are fraught with peril both politically and legally.

1. Political Problems. At election time, other owners may accuse the board member of reaping secret profits, taking advantage of his or her position on the board, doing shoddy work, etc.

2. Legal Problems. If the work is defective, the board faces the unpleasant prospect of making legal demands on a neighbor and fellow board member. At the same time, they face political problems with the membership for having given the fellow director the contract in the first place.

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

Updated by ADAMS KESSLER 8/21/2007