The differences between right and wrong and good and bad aren’t always obvious. Is your association board leading with morals and principles in mind?
Mark Smith, president of the Sun City Aliante Homeowners Association in North Las Vegas, doesn’t want the appearance of impropriety – even the hint of it. That’s why he stepped aside when it came time to consider renewing the contract of his community’s management firm, RMI, which employs his daughter elsewhere in the region.
“Sometimes perception is worse than reality,” Smith says. “I’m not going to do anything to give anyone a perception of bias or favoritism.”
He tapped three directors to renegotiate or go out for bids. Then he removed himself from the subsequent discussion and vote, even though Nevada law would have allowed his participation after he disclosed the relationship.
Smith, a former prosecutor who handled public corruption cases in Florida, is hypersensitive about ethics. He concedes that another board member in the same situation could make an entirely different decision and take a hand in matters.
“I don’t need that aggravation and it just doesn’t look good,” Smith says.
As if community association board members don’t have enough to worry about, along come ethics to cloud their worlds.
Ethics refers to integrity and separating personal interests and gains. In the context of a community association, the term encompasses how an elected leader conducts business on matters like developing the budget, enforcing rules and assigning contracts. Some professionals even equate ethics with the “golden rule” that children learn in school: Treat everyone fairly, as you would like to be treated.
But it can be more complicated than that. After all, what’s fair and evenhanded, especially when several personalities are involved?
“People come from different backgrounds; they have different ideologies. Some come from other countries. There is a common value most of us have as far as how you interact with neighbors. But as far as how you arrive at that, there are a lot of different views,” says Nick Haley, education and information officer for Nevada’s Office of the Ombudsman for Owners in Common-Interest Communities and Condominium Hotels, which sponsors board member education classes.
The hair-splitting about the definition and scope of ethics may go on and on, but that won’t stop dilemmas from surfacing when least expected, creating headaches across the table. Poorly navigating the situations that do crop up can alienate owners who already may lack trust in their boards. Perhaps worse, missteps can break the law outright of invite legal challenges.
“Just upholding your governing documents with regard to how you mail out notices and how you hold meetings – that’s not ethics. Ethics goes far beyond that,” says Donna DiMaggio Berger, founding partner of Katzman Garfinkel & Gerger in Fort Lauderdale, Fla., and a member of CAI’s College of Community Association Lawyers (CCAL). “Ethics is the cold questions of: How do we conduct ourselves? What kind of moral decisions do we make? How do we address issues where there’s conflict that’s not addressed in governing documents? The lack of ethics training and ethics understanding in shared-ownership communities is becoming more apparent over time.”
What would you do?
Consider these scenarios, which have befuddled community associations:
A board member is having a sexual relationship with an employee of the association. Adrian Adams of the California law firm Adams Kessler recalls a real-life incident in which board members at a high-rise condominium sought advice when one of them began dating the on-site engineer.
“The rest of the board came to me and said ‘Whoa, what do we do? This makes us nervous, it just doesn’t feel right,’” says Adams, who maintains a website (www.davis-stirling.com) that offers a range of “what-if” ethical scenarios, coupled with advice. “I told them, ‘Look, it’s a problem in that as soon as he gets fired, he’s going to claim that he had to sleep with her. He now wants millions of dollars because of sexual harassment.’ We resolved it by asking the director to resign from the Board.” Fortunately, she did.
A board member hears personal information about a resident or employee in executive session and later shares juicy details with his spouse. Princeton, N.J., attorney Ronald Perl says legal liability looms if a board member goes outside the inner circle. Potential infractions include blabbing about the cancer treatments of an owner who is falling behind on assessments or divulging an association’s lawsuit strategies to an outsider.
But concerns about confidentiality should not be used to withhold all information from owners, says Perl, a CCAL member.
“There are some cases you have to say, ‘We can’t discuss it at all,’” he says. “There are other cases where, if we’re talking about contracts, you can say, generally, ‘I can’t tell you who the low bidder is, but I can tell you we have some really competitive bids.’ Confidentiality shouldn’t be used as a crutch or an excuse for lack of openness.”
A board member uses association resources for personal or political reasons. One disgruntled board member of a St. Louis-area homeowners association tapped into e-mail addresses from a pool-registration database to contact owners and launch a board-removal campaign. CCAL member Marvin Nodiff says the plan worked, and the association board was without elected leaders for several months.
Setting aside those drastic consequences, Nodiff says the initial use of the e-mail list constituted an ethical breach. “You look at the duties of a director and the board. At the top of the list is undivided loyalty. A director should not be conducting himself in a way that undermines the board,” he says.
SHADES OF GRAY
Professionals recommend that boards consult their attorneys on particularly thorny issues, even though expense may be incurred. For board members seeking guidance on their own, the rules of the road can be a little obscure. Statues don’t delve into ethics beyond some basic do’s and don’ts regarding self-interest.
The most common danger zone, to be sure, is conflict of interest. That’s when a board member has a personal or business stake in a decision, such as a contract or purchase.
Such arrangements aren’t necessarily illegal or even undesirable, depending on the circumstances. Adams, the California attorney, says a contract with a board member may be an attractive option for associations with tight finances.
“You’ve got a director who owns a roofing company who says, ‘I can do it for cheaper than everybody else.’ Well there’s a huge amount of temptation there,” he says.
At the very least, a board member is legally obligated to disclose the relationship or interest, and the full board should be aware of the ramifications as it moves forward. Some state laws allow conflicted members to vote on the business matter after airing their conflicts, but what if statutes don’t offer guidance on a pertinent question: Should they?
Wendy Taylor, CMCA, AMS, LSM, PCAM, general manager of the South Riding Proprietary in Virginia, says a board member at her 6,500-home association recused himself during voting on a relatively small contract for his consulting corporation. The board member could have voted but chose to steer clear, she says.
“He just felt for his own ethics, he didn’t want to vote on it,” says Taylor. “One of the things I tell my boards is, ‘Perception is reality.’ If it’s perceived to be an ethical breach, it’s almost as bad as it being an ethical breach.”
In New Jersey, when a conflict arises, the state’s not-for-profit law requires that a formal board vote be taken by a majority of “disinterested” members, and the transaction must be demonstrably “fair” to the organization.
That sounds clear enough. Yet, Perl, the New Jersey attorney, remembers one condominium board president who aggressively lobbied trustees to hire a family member’s landscaping firm at a greater cost than competitors would have charged.
“The board president was determined that his son get this contract, and the contract was not equitable to the association,” Perl says. “The board was dominated by the president and approved the contract anyway, over my objections.”
The suspect decision could have led to legal problems. An owner could have challenged the board’s action in court, Perl says, or accused board members of neglecting their fiduciary duty to the association.
Things are simpler in Nevada. The Silver State bans any board member from having a direct business relationship with his or her community association – period. The law doesn’t prohibit connections involving family members or relatives.
Then there are gifts. State laws and an association’s documents will differ on what – if anything – can be accepted from vendors or contractors who have a stake in board decisions. Nevada, for example, prohibits board members and managers from accepting goods or services totaling more than $100 annually from anyone.
“As a portfolio manager, I try to stay away from the idea that in any way I’m being bought,” says Chris Peitsch of Thoroughbred Management in North Las Vegas. “Will I accept a $10 gift card to Starbucks? Sure. When it gets into that $75 to $100 range, it does become a little more of a question. Would a normal person look at that and ask, ‘Are you (being paid) for a favor?”
More broadly, Florida prohibits condominium board members from receiving any gift “of value,” though they can receive items or services in connection with trade fairs or educational programs.
“Then the people start hanging their hats on, ‘Well, it wasn’t really of value,’” says Berger, the Fort Lauderdale attorney. “What’s really ‘of value’? At the end of the day, some people are going to be prone to making these ethical compromises, and other people aren’t.”
Adams says California doesn’t prohibit a board member from accepting a gift, which potentially sets the state for debate among board members. What if, for example, a contractor offers to wine and dine board members?
“It might depend on the circumstances,” the attorney says. “If they just concluded working with a vendor that completed a big project, and everybody’s happy with it, and the vendor says, ‘To thank everybody, I want to take everyone to dinner,’ that’s fairly innocent.”
If somebody is bidding on a project and wants to take the board to dinner, Adams says that would be a problem. “You don’t want to have even the appearance of impropriety,” he warns.
CODE, WHAT CODE?
There’s no assurance that newly elected board members will receive ethics training, even in states where some kind of educational component is required.
Some professionals purposely include an ethics primer in the workshops and classes they conduct on association governance. Experts say having a code of ethics is probably the best way for boards to stay on the straight and narrow. Yet relatively few community associations adopt them – and usually only after trouble strikes.
Jeff Kutzer, Colorado division president of The Management Trust, says only 20 percent of the communities his firm oversees has some kind of ethics policy.
“We have a number of boards where they literally have their ethical standards and policies that every board member signs, and they live by them,” he says. “It runs to that end of the spectrum to the other ones who say, ‘I think it, therefore we should do it,’ regardless of whether it’s in the statute or in their documents.”
One client of The Management Trust, the Kipling Sun Town Home Association in Littleton, Colo., adopted an ethics resolution in 2007 following an internal board dispute. Board President Neill Kefauver lobbied his peers to approve an ethics code that would, among other things, define the type of misbehavior that could trigger the removal of a board member.
The resulting resolution “gives you clear grounds for any course of action against a member of the board or committee, to say, ‘You stepped over the line,’” Kefauver says. “It gives you, as the board, a warm feeling that everyone knows what the rules are.”
The ethics code also requires cordial and professional conduct, obligates board members to “treat other board members, owners and residents with courtesy and respect” and discourages personal attacks.
“Unfortunately, at least 50 percent if not 70 or 80 percent of the time, the discussion you’re going to have with an individual homeowner is not one where they want to hear the answer,” Kefauver says. “They say, ‘I want this fixed,’ and you say, ‘No, that’s not one of the things we fix.’ That’s the kind of thing that is called out in the ethics code – that you basically can’t call somebody an idiot.”
That intertwining concept of “professionalism” is no small point to Perl, the CCAL member from New Jersey. He says board members should maintain a high standard of manners and decorum for all interactions with owners, even during meetings when residents turn hostile.
“It can’t devolve into a neighborhood gang fight,” Perl says. “I’ve been at meetings where they’ve had to say ‘Meeting adjourned. Everybody go home.’”
Associations can amend their documents to incorporate ethical standards, but more often, boards take the simpler route of adopting a code as a stand-alone resolution. Professionals disagree on whether such a measure is legally binding, but they say board members at least feel peer pressure to honor the guidelines.
“It’s good to have it on your radar,” says Taylor, whose South Riding Proprietary has a compact, yet strict, code of ethics.
Smith says his Las Vegas community does not have a separate measure for ethics, but the former prosecutor thinks his board does well with guidance from managers and by reviewing Nevada’s concise law.
Still, there are occasional blips. One of Smith’s peers who sits on both the Sun City Aliante Homeowners Association and its master association sought to negotiate a deal for a room rental between the two entities. Smith had to set his colleagues straight about the conflicting roles his peer was assuming.
Says Smith: “If you have to think about something and say to yourself, ‘Should I or shouldn’t I do that?’ then you shouldn’t do it, because you have a doubt in your mind at the very beginning.”
By Mike Ramsey