Abdicating Responsibilities and the Potential for Conflict of Interest
W
hat I am about to talk about may be a mystery to you. However, the definition of abdicate is to give up formally a throne or authority or to surrender or repudiate a right or responsibility. If you sit on a board of directors for a community association, you need to be aware of this possibility. You may have surrendered a responsibility without knowing it. But, before I get carried away with what I’d like to say, let me be clear that I am not suggesting the board of directors needs to micro manage anything. I am suggesting that board members need to recognize the responsibilities of the board of directors under the governing documents of the association and state statutes — especially, the nature of the obligations the board has to the membership. My goal is to create better-informed board members. (If you are on the board of directors of your common interest community, you have many of the same responsibilities that boards of directors of other corporations have within the state.) How many times have you seen association members elected to the board of directors simply on the basis of having the “time” to serve on the board. Yet, they may have never read the association’s governing documents or the state laws that apply. For all intents and purposes, they are complete unknowns. Maybe they have read the association’s governing documents or maybe they haven’t. Yet, they are elected to serve the interests of their fellow homeowners and manage the affairs of the association according to the governing documents and state law. Homeowners frequently seem to elect new board members simply on the basis of “they have the time” and they have a good sense of what is fair and equitable. I am suggesting that the association should have a nominating committee that seeks out qualified candidates to serve — not simply candidates with sufficient time to devote to the board, but with skills and talents that will benefit the association as a whole. At the annual
meeting, isn’t it better to have candidates who are known rather than subject the membership to the “grab bag” of nominations from the floor? If you serve on the board of directors and there is no nominating committee, are you abdicating your responsibility to the membership by failing to recruit qualified candidates for the board of directors? Most frequently, the abdication of responsibility occurs within the management agreement itself. It may be found in a paragraph that refers to some vaguely worded relationship the management company has with outside business partners or suppliers. Some management companies may even tout it as a list of preferred business partners. It is not that a list of preferred business partners is unusual or wrongful, but it is the basis of the relationship between the management company and the business partner that is most critical. For some, the nature of the relationship could mean a conflict of interest and the association may only discover this when the work performed by one of those business partners is unsatisfactory and there is a need for recourse on the part of the association. It’s only then that the association may discover that the contractor it thought it had hired to perform the work was not truly independent and free of any conflict of interest. For some, the relationship between the management company and a business partner looks like a sparkling Christmas tree that’s fully decorated and has many huge gifts that are neatly wrapped with colorful bows that are all meant to serve the needs of the membership. It all seems to be too good to be true. It’s kind of an all-in-one service. You hardly need to lift a finger — it can all be done by the management company. If there’s a problem, they’ll fix it — all you have to do is approve the invoice. If this situation doesn’t give you a reason
By Gil Cross, GWCross, LLC
to pause and reflect — perhaps it should. Whose invoice is being paid, the management company’s or the business partner’s? Is there an underlying relationship that is not completely and indisputably disclosed to the association or its membership? Is there a reason that management fees of some companies may be less than they were 20 years ago? Are management companies acting in their clients best interest or are they merely attempting to make a buck by offering services that they have a financial or ownership interest in — could this be considered self-dealing? Another potential problem that may lie within the management agreement may be insurance. I am not speaking of the type of coverage that may be required, but again I am referring to the nature of the relationship between the management company and an outside business partner. For example, if your association’s insurance is grouped with other properties managed by the management company, there may be a significant cost savings. Are all of those savings passed directly to the association? What about the makeup of the properties in the group? Are there properties within the group that have suffered repeated losses that have not been addressed — for example, ice dams? If the board of directors were to request a “loss run” or history of its insurance claims, it might not be able to get the information specific to its property (the information is likely to be for the group of properties). Without a history of its claims, it may be difficult or impossible for the association to get a quote from an insurance carrier. Who provides the insurance costs for your association? Does the premium for your portion of the insurance billing come from the management company or from the insurance company? In addition, when a contractor is hired to perform work for the association, who is Abdicating continued on page 26
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Minnesota Communit y Living