What is full disclosure for a conflict of interest?

Asked over 1 year ago - Walnut Creek, CA

Our board member disclosed to the board of directors a conflict of interest with a vendor who was an in-law. He disclosed it to the membership at a board meeting about a month later after the product had been delivered and the vendor was paid. Some of our HOA members claim he did not handle a "full disclosure" correctly and should be censured. Does a board member have to disclose to the entire membership a conflict of interest with a vendor of a company owned by an in-law? What is full disclosure anyway? Is it just to the board members? Or does it have to be to the membership? This has become a highly controversial issue at our association.

Attorney answers (1)

  1. Jack Richard Lebowitz

    Pro

    Contributor Level 18

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    Answered . Often conflicts of interest policies are set out in the corporate by-laws. Generally, they require potential conflicts, or appearances of conflicts, to be disclosed to the voting Board members BEFORE they take some vote on the item where there is a possible conflict.

    Generally the conflicted board member also recuses himself from the vote. In an HOA situation, the conflict would not have to be reported to the general membership if the membership did not ordinarily participate in that decision or that decision wasn't in their normal jurisdiction.

    Not all conflicts are bad, depending on the situation, but the board must be aware of them before they vote. In this instance, the possible "nepotism" might have been bad, or looked bad (people hire relatives and friends all the time), but there may not have been an actual conflict if the board member did not have a financial interest in the vendor's company.

    To take an example, let's say the Board reviewed three bids for paving the private roads within the HOA, or landscaping, or a security gate system. If a conflict was disclosed that Board member X was the in-law of the lowest responsible bidder, and a majority without the Board member voting approved the contract, no biggie.

    However, let's say that the Board member had an interest in the family landscaping company, didn't report the conflict, it was a "no bid" contract with the business going to the family company, that's probably a conflict.

    And if the HOA members didn't participate in the governance of the contracting for maintenance work, but just paid dues or assessments, they probably don't have any say in the matter, except if they can periodically elect directors and "throw the bums out", just like our normal representative democracy works (or doesn't work, depending on your point of view).

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