Ethical issues occur in everyday administration, management and governance of any homeowners association. In order to navigate these complex ethical dilemmas, HOA board members first need to be able to identify problems of ethics before they will be able to implement an ethical value system.
The Nature of Ethical Dilemmas
Ethical issues occur in everyday administration, management and governance of any homeowners association. In order to navigate these complex ethical dilemmas, HOA board members first need to be able to identify problems of ethics before they will be able to implement an ethical value system.
Many ethical dilemmas faced by board members on a daily basis are not clear-cut, often having no right or wrong answers readily defined. How your homeowners association deals with these ethical dilemmas says a lot about the character and integrity of the board.
Navigating the Grey Area
Ethical dilemmas often do not black or white answer, falling instead into a grey area that can be argued for or against in multiple ways.
According to Kenneth Blanchard and Norman Peale’s The Power of Ethical Management, HOA board members should ask themselves three questions when faced with an ethical dilemma:
- Is it legal? Study the California Civil Code and your HOA’s governing documents to determine if any will be violated by engaging in the action.
- Is it balanced? Consider the effects of the action on all parties involved, both in the short and long-term outcome to determine if the action is biased for those directly and indirectly involved.
- Is it right? Use your own moral guidelines to judge if an action is ethical. If you feel guilty, ashamed, or are generally unsure about an action, it’s best to refrain from committing it.
Most of the time, when dealing with grey area decisions, answering just one of these questions is not enough. Take the time to reflect on all three questions, and the most ethical course of action will become clear.
Fiduciary Duty and Board Member Liability
To maintain protection from liability as volunteer directors, HOA board members have to fulfill their fiduciary duty. According to Corporations Code Section 7231, this means board members must act in good faith, in the best interests of the association, and using such care, including reasonable inquiry, as an ordinarily prudent person would under similar circumstances.
To properly protect the actions of each member, the board, and the homeowners association, all board members should research and understand their fiduciary duties to ensure that they are acting ethically (especially a new board member with no prior director experience).
The Practice of Ethics
Practicing ethics involves integrity and personal responsibility. For a HOA board member, this involves knowing, understanding, and doing: knowing the rules of governance for the HOA, understanding the difference between right and wrong behavior or conduct, and always doing what is right.
Ethics of Board Duty and Responsibility
The HOA board should be focused on the main purposes of the association:
- Protecting and preserving the HOA’s common areas and other real, personal, and intangible assets.
- Managing the HOA’s finances, which includes statutory budgeting and disclosure requirements, reserve funds, and assessment collections.
- Promoting the homeowners’ unimpeded and safe use and enjoyment of the HOA’s common areas, exclusive use common areas and separate interests.
- Enforcing the association’s governing documents
Purposefully choosing to not commit an action for the best interests of the association can be both ethical and beneficial for a homeowners association. However, sometimes the act of not doing something can breach of a board member’s ethical duties. When inaction negatively affects the well-being of the HOA, board members cannot turn a blind-eye. No decision is a decision.
Board of Director Code of Ethics
Ethics are the moral compass that guides the performance of a director’s duties and governance of a homeowners association. Creating a functioning compass means establishing a standard for your HOA to follow when conducting its business. These standards are established, in part, in the California Corporations and Civil Codes. Boards should adopt a code of ethics or at a minimum a code of conduct, to establish a standard for how the board conducts itself and the business decisions of the association.
| The code… | |
|---|---|
| ✔ | Defines the value system of the HOA and how directors must behave |
| ✔ | Clarifies ethical standards regarding loyalty, fidelity, integrity, honesty, confidentiality and competency |
| ✔ | Establishes ethical standards that enable board members to avoid potential grey areas |
| ✔ | Incorporates preferred business practices, appropriate legal requirements, and the expected code of conduct for board members |
An ethics code or conduct code can be an invaluable tool to ensure that board members are aware of the “line in the sand” when it comes to grey areas and turn an otherwise confusing situation into a clear decision. A good practice is to distribute your board member code of ethics to the homeowners as well as the board. This will make the board’s actions accountable to each other and the homeowners, creating a transparency that’s a win-win for directors and owners.
View and Download our sample code of ethics HERE
Ethical Behavior in HOA Interactions
Ethical behavior is based on observations and perceptions – board members need to “walk the walk” as well as “talk the talk.”
In the homeowners association context, ethics are involved in approximately six types of relationships and interactions:
- Between individual board members
- Between the board and the association
- Between the board and homeowners/residents
- Between the board and management
- Between the board and association experts and consultants (i.e. association legal counsel, financial and tax advisors, reserve study providers, etc.)
- Between the board and vendors
Issuing platitudes as to what is and what isn’t ethical behavior is not sufficient for an HOA to be ethical. Board members should be held accountable for their actions, and their peers should demand that they implement ethical behavior.
The Business Judgment Rule
The Business Judgment Rule is a presumption that directors’ decisions are based on sound business judgment, which can be rebutted only by a factual showing of fraud, bad faith or gross overreaching. Acting in accordance with the Business Judgment Rule is an indication that a board member is likely acting ethically. In the California Supreme Court case, Lamden v. La Jolla Shores Clubdominium Homeowners Association, the effects of the Business Judgment Rule can be seen:
The court held that it will defer to a board’s authority and presumed expertise in discretionary decisions regarding the maintenance and repair of a common interest development, provided the board’s decisions are: (1) Based upon reasonable investigation; (2) Made in good faith and with regard to the best interest of the association; and (3) Within the scope of authority given to the board under the relevant statutes and CC&Rs. Assuming that a board was found to have acted in accordance with these factors, then the board would seemingly have committed no wrongs in performing whatever action was being questioned.
When acting upon/after reasonable investigation and inquiry, a director should…
- Independently investigate and evaluate facts particular to a situation before acting.
- Consult with experts or consultants (i.e. legal counsel, financial manager, reserve study provider, etc.) when it is prudent to do so.
- Rely on information, opinions, reports or statements prepared by experts and consultants.
When acting in good faith and in the best interests of the association, directors…
- Cannot make decisions that benefit their own self-interests.
- Must make decisions that do not negatively affect the association financially, legally or otherwise.
- Cannot act in the best interests of a particular group or minority interest of an association.
Identifying Unethical HOA Members
Ethical standards imposed on and expected of a homeowners association are only as good as their adherence by members.
Unethical Board Members
Unethical board members not acting in the best interest of the association are:
- Not enforcing the association’s governing documents (including not enforcing delinquent assessment collection policies).
- Acting in a disparate or discriminatory manner towards certain homeowners.
- Advancing self-serving interests to further their own agenda (which would be a conflict of interest).
- Improper corporate governance (i.e. not following the requirements of the association’s governing documents or statutory requirements).
- Not following the Business Judgment Rule.
- Violating the association’s governing documents. Depending on governing document authority, this can lead to declaring the seat of a director vacant.
- Breaking the attorney-client privilege and/or distributing confidential corporate/business records.
- Embezzlement – “Borrowing” permanently or temporarily from the association’s funds.
How to solve the problem: Educate board members of the above symptoms on their fiduciary duties, statutorily required standard of care, and code of ethics adopted by the board. Peer pressure can be an effective tool to curb unethical behavior – other board members should confront the offending board member to address ethical issues.
Unethical Homeowners
Unethical homeowners placing the association at risk are:
- Harassing HOA employees, independent contractors and vendors. The HOA is in an employer-employee relationship, and harassment can create a hostile workplace while exposing the association to potential legal liability.
- Damaging to the HOA’s common area.
- Continuously violating the HOA’s governing documents.
- Failing to pay assessments.
How to solve the problem: Enforce the HOA’s governing documents and discipline when appropriate.
Ethics are yours to adopt – if you don’t do it for yourself and your board, no one will.
Adapted from information provided by Karen Conlon and Sandra Gottlieb. Conlon is the president and CEO at the California Association of Community Managers (CACM), and Gottlieb is a principal at Swedelson & Gottlieb and Association Lien Services. Both are regular speakers at ECHO events and contributors to the ECHO Journal.