A Conversation About: Conflict of Interest

Michael C: We have a board member who has brought a lawsuit against our co-op. Is it ethical that this person remains on the board of directors? Can this be considered a conflict of interest?

CDT: At a minimum, the board member must refrain from participating in the discussion of any matter even remotely connected to the lawsuit, and should not be present during such discussions. Furthermore, the board member should have no contact with your attorney or any vendor who might be involved in the suit. In practice, the board member should resign. The potential for a conflict of interest – real or perceived – is just too high, especially if the director is an officer. How are you going to convince the other shareholders that this director will be acting in the best interests of the co-op if he’s simultaneously so angry with the corporation that he’s taking legal action against it?

ADC: Not necessarily. The dual role of board member and shareholder may bring conflicting issues [but] that may not mean that the person needs to step down. I don’t know the circumstances that led to such a lawsuit. The only thing to do is the board member should step out of the meeting when the matter is discussed, and the issue is not recorded on the minutes. Also, other board members should be extremely discreet not to be adversarial or comment on the lawsuit. Board meetings may start without the attendance of the board member in question when legal issues relating to the lawsuit are discussed or discussion with counsel should not be announced to the person in question.

RLM: Here’s my take – not a legal opinion, by any stretch. Any time a board member/shareholder may benefit financially, there is an automatic conflict of interest, since the board member’s fiduciary interest must be with the co-op first, last and always. The shareholder, as a board member, must therefore recuse him/herself from voting on all issues dealing with the source or consequences of that conflict. The board member, as a plaintiff, should not be privy to financial discussions or votes of any kind affecting the co-op, as defendant.

Anonymous: I believe this happened on our board last year. The board voted to create an “executive committee” that had the power to make decisions. This way the board member with the seemingly conflict was excluded from much board biz.

Judith F: First of all I am the one who brought the action against the corporation for not protecting my rights as a resident, which I might add I am entitled to do whether I am a board member or not. I am acting as a shareholder. There have been boards where board members sued other members and they do not have to step down. As most of you stated, you don’t know the circumstances. We have an extremely biased and prejudicial board. They only work for the residents they feel they should work for, not for all equally. Do any of you have that problem? I’d like to hear about that. I have been harassed and targeted by certain members on the board. Have any of you experienced that?

Anonymous: That a board member thinks it is okay to “represent myself as a shareholder in a lawsuit against the building and there is no conflict of interest” reminds me not to take seriously everything I read here. I thought at first that only knowledgeable and committed board members participated in this forum, but that is clearly not the case.

Anonymous: Every board member is a shareholder first. Just because you are on the board does not mean you lose your rights as a resident. That’s kind of absurd. Also, starting a board within a board is disenfranchising those shareholders who voted for any of the members that are being excluded. Does anyone think that’s right? As far as being a committed board member – that has nothing to do with someone’s rights as a shareholder. I don’t know if the individual who stated “reminds me not to take seriously” is an attorney. Every member has rights as a shareholder. Have you lost your rights because you are on the board? I would hope not. If so, that’s really sad.

A co-op attorney weighs in on the conversation:

Unfortunately, the concepts of “ethics” and “lawful” are not synonymous. The Business Corporation Law, Section 713, prescribes the few limits that may lawfully be placed on a director who has a conflict of interest.

These limitations include the right to set aside a board decision if a vote benefiting the “interested” director passes because of the vote of the “interested” director. The law does not preclude a director from attending any meeting of the board or participating or voting on any matter in which he or she has a personal interest. The law does not require recusal by that director.

As suggested in one of the above comments, if a director with a personal interest in a matter does not follow the ethical path and voluntarily excuse himself or herself from participation in discussions on the matter, the board may, under the bylaws for most co-ops, establish an executive committee of the board to consider the matter and deal with counsel representing the corporation. Ultimately, the executive committee will have to report to the full board to implement any decision that the committee recommends.

Given the unusual nature of co-op life, “conflicts of interest” arise more frequently than people realize: top-floor shareholders are often more concerned with roof repairs than lobby tenants, lobby apartment owners are often more concerned with noises from basement machinery, those with terraces focus on terrace floor repairs, etc. (For more on this topic, see “The Ethical Path,” Habitat, November 2006.)

—Arthur Weinstein, Principal, Arthur I. Weinstein

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