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Business Partner Ethics: Contracts, Corruption, and Candor

06/01/2021 4:04 PM | Bridget Sebern (Administrator)

By Ashley Nichols, Cornerstone Law

As a Community Associations Institute’s Business Partners Council member, one of my responsibilities is to teach the Business Partner Essentials course to both new and seasoned professionals who support common-interest communities. One of the course topics is ethics, and while CAI doesn’t have a model code of ethics for business partners like it does for Community Managers and Board Members, it does provide guidance for our members (and many local chapters have adapted each of these other model codes to adopt a Code of Ethics for Business Partners in their chapters).  

Two examples of business partner ethics provisions from another chapter are as follows:  

  1. A business partner shall not engage in any form of price-fixing, anti-trust, or anticompetitive behavior. This includes “pay-to-play” arrangements whereby a Business Partner provides valuable consideration of any kind to obtain business or a favorable position as against another Business Partner; and
  2. A business partner may accept from or give de minimus gifts to a client so long as such gifts are not given or accepted for the primary purpose of influencing that client’s decision to renew a contract with a Business Partner, to do business with a Business Partner, or to win business over a competing Business Partner.

Likewise, CAI developed the Model Code of Ethics for Community Association Board Members to encourage thoughtful consideration of ethical standards for community leaders. 

Provisions related to the topic of potential conflicts of interest in the Code state that:

  1. Board members should disclose personal or professional relationships with any company or individual who has or is seeking to have a business relationship with the association;
  2. Board members should not use their positions or decision-making authority for personal gain or to seek advantage over another owner or non-owner resident; and
  3. Board members should not accept any gifts – directly or indirectly – from owners, residents, contractors, or suppliers.

And lastly, a community manager works on behalf of the association and is the association’s agent. As such, the community manager should be taking action that is in the best interest of the association. Similar provisions are provided for in CAI’s Professional Manager Code of Ethics:

  1. Manager must disclose all relationships in writing to the client regarding any actual, potential or perceived conflict of interest between the Manager and other vendors; and
  2. The manager shall take all necessary steps to avoid any perception of favoritism or impropriety during the vendor selection process and negotiation of any contracts; and
  3. Manager must provide written disclosure of any compensation, gratuity or other form or remuneration from individuals or companies who act or may act on behalf of the client.

Lauren Holmes’ article in this issue, which discusses a board’s (or board member’s, and by extension, its community manager, as its agent) conflicting interest transactions, is a great place to start when reviewing the duty of the board and its agent regarding potential contract issues, preventing corruption, and promoting candor.

But when we think about business partners and marketing our businesses, we have to be careful not to cross the line with our industry relationships. Having great relationships with community managers is fantastic, but be mindful that the connections aren’t too close. For example, suppose your decking company is a “preferred vendor” for a management company, and you are building a deck for one of its managers at no, or significantly reduced, cost. In that case, that relationship might be too close.

And let’s be clear, the point is not to prevent community managers, board members, and business partners from having great relationships (that’s the cornerstone of our business) or even obtaining contacts that can help in your personal life. The point is that you must be candid about those relationships and be open to being vetted by our boards. Management companies should be asking their boards on an annual basis if they would like to rebid service agreements. It is not an attack on you or your services as the business partner – it’s good practice by the management company and the responsibility of a board to ensure it satisfies its fiduciary duty to the association. After all, the board’s responsibility is to ensure that its relationships with vendors are in the association’s best interests.

As another example*, Management Company X charges $35 per hour for basic maintenance performed by their “in-house” maintenance team. Management Company Y hires an outside vendor to perform the same work for $30 per hour and bills the association $35. Is this an acceptable practice if the management contract specifies that the work will be billed at $35 per hour?

What if, in the same scenario, Management Company Y gets a refund from the vendor instead of a markup? The vendor would bill $35 per hour directly to the association and then pay back $5 per hour to the management company.

In either situation, you are playing with fire. Many factors go into the answer, including, you guessed it, your candor in the situation (and whether the situation is appropriately disclosed). Additionally, typical contracts have language, providing any “discounts” accrue to the client, not the management company. The community manager’s relationship with the vendor is great but should be a benefit of lower prices to the client and not to pad the manager’s pocketbook.   

Your reputation for integrity is the most important asset of your company. Is what is being done in the best interest of the association? It’s easy to weigh (and should be weighed) whether it’s in the manager’s, individual board member’s, or your own self-interest before you act. Also, presume that everything that happens will be made public, then proceed accordingly. If it doesn’t pass the “smell test,” then you should probably pass. Nothing you do should be considered an act designed to influence business decisions. 

*Question posed recently in CAI’s Exchange online forum.

Ashley Nichols is the principal and founder of Cornerstone Law Firm, P.C. and is a member of CAI’s Business Partners Council at the national level.  She has been in the community association industry for over thirteen years, providing associations with debt recovery solutions for their communities. You may find out more at www.yourcornerstoneteam.com.  To find out more about CAI’s Business Partners program and the tools available to you as a business partner member, visit CAI at https://www.caionline.org/BusinessPartners/Pages/default.aspx

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