By Nicole Bailey, RBC Wealth Management
Summer has arrived! With summer comes irrigation issues, landscaping projects, pool openings, and painting, roofing, and siding projects. Sometimes with so much activity around the physical assets in the community, we lose sight of what makes it all happen – the money! Community associations are non-profit corporate entities, and the financial components of the association should be managed with the same ethical care as with any corporate entity. The next few paragraphs will cover ethics definitions pertinent to community associations, who falls under ethical guidelines, ethical actions of each party, and potential consequences if ethical guidelines are not followed.
According to the Cornell School of Law, ethics is defined as “What is good for the individual and for society and establishes the nature of duties that people owe themselves and one another.” This moral concept is central to behavioral guidelines for community volunteers and business partners. In the context of a community association, the nature of the duties is outlined by the legal concept of fiduciary duty. In Colorado, nonprofit corporate entities like community associations are subject to the Colorado Revised Nonprofit Organization Act (revised October 2019). The Act describes the fiduciary obligation as acting in good faith, with the care of an ordinarily prudent person, and in a manner believed to be in the best interest of the corporation. As it relates to fiduciary duty, in order for parties to act ethically, they need to ensure they are looking out for the organization as a whole and making decisions with care and in the best interest of the organization.
While the Colorado Revised Nonprofit Organization Act pertains specifically to the board of directors, all individuals with a relationship to the organization have a fiduciary duty to the organization. The board of directors is elected by the membership to make decisions on behalf of the membership and with the best interest of the organization in mind. The community manager is contracted by the board of directors to carry out the decisions of the board and therefore in the best interest of the association. The insurance agent, accountant, investment advisor, and attorney are required to provide guidance to the board of directors with their fiduciary duty at the forefront of any advice. Each person is tethered to the same duty of care that binds the board of directors with their ethical obligation to the community.
The specific actions of each party should reflect their consideration for the preservation of association assets. For the board of directors, decisions should be made carefully and by consulting with industry experts. For the community manager, the decisions should be carried out fairly and consistent with board direction and governing documents. The team of business partners should advise the client in a manner consistent with specific industry standards and community policies. For example, if a board of directors makes the decision to replace the roofs in the community, they should make that decision based on the benefit to the community as a whole, not the benefit to any specific homeowner. When the manager seeks proposals for the work, the manager should consider the experience, insurance limits, and qualifications of the bidders. In choosing a contractor, the board should disclose any conflicts of interest. The entire process of the roof replacement should be managed fairly and consistent with the fiduciary obligations of the parties involved. Acting in a fair and transparent manner when carrying out actions of the board is to act in an ethical manner.
On the other hand, we have all likely seen examples of people straying from their duty of care for the association. A board member may have a cousin who provides services to single family homes, does not carry appropriate insurance for a project this size, lacks experience with community associations and yet the board selects this contractor because of the relationship. Hypothetically, a community manager may have consistently worked with the same service provider for the last 10 years, so they may feel there is no need to gather proposals from different contractors. The community manager should consider whether or not this is in the best interest of the association and if they are acting ethically.
When ethics are cast aside from decision making, the community is impacted legally, financially, and even culturally. If a breach of fiduciary duty by board members is detected, members of the community could file a lawsuit or seek removal of the directors and any damages resulting from the actions. To refer back to the example above, contracting with underinsured or underqualified parties may result in additional costs to the association. When breaches of fiduciary duty take place, community members may stop trusting one another. Elections may be challenged and decisions may be halted. Trust among community members is essential to the progress of a community association and trust among members requires ethical behavior.
Acting in an ethical manner would suggest all parties be transparent, fair, and prudent when making decisions. Consequently, careful consideration should be given to the impact each decision has to the association. To conclude, to act ethically requires each decision be made for the good of all individuals, which of course includes the association itself.
Nicole brings a broad background in community management in the Atlanta and Denver areas to her role on the West Wealth Management team. She actively volunteers with the Rocky Mountain Chapter of Community Associations Institute on the Marketing and Membership Committee.