A Conversation About a Conflict of Interest

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JF in Brooklyn

A shareholder was a board member two years ago and has since resigned. He soon moved out of the building to another co-op (in which his wife is on the board) and leased his apartment. He has been subjected to a sublet fee (instituted while he was on the board) and has constantly complained that it’s too high and he can’t afford to pay the fee. We looked into other calculation methods, but none were better than the one in place. As such, this was communicated to him.

At our annual shareholders meeting recently, he nominated himself for re-election to the board, and has brought up the same complaint about the sublet fee.

We feel his rejoining the board is a conflict of interest because:

1) He does not live in the building – and is unable to participate as other resident board members are; and

2) His re-joining the board appears disingenuous and not in the best interest of the co-op as a whole.

Is this legal, and has anyone experienced this situation? Would appreciate any and all comments on this matter.

Carl Tait (CDT)

Three-part answer:

1) No, there is no conflict of interest in this person running for the board. Anyone who qualifies may run for any reason, or no reason (“Hey! I wanna be a director!”). That said, one-issue candidates are rarely good board members.

2) Yes, if this person is elected, he should be prohibited from discussing or voting on sublet fees and policies so long as he is subletting himself. That would be a conflict of interest. (In practice, I can imagine this being problematic if several members of a small board were all subletting.)

3) Maybe this person qualifies to run for the board, but maybe not. There’s no fixed answer; you’ll need to check your bylaws. In our co-op, a nonresident shareholder would not be qualified, due to language we adopted several years ago: “Each Director of the Corporation shall be a shareholder or the spouse of a shareholder. Directors shall be residents of the apartment building owned by the Corporation.”

JF in Brooklyn

Thanks, Carl! Your answers were a big help. I checked our bylaws and it is not included. Will certainly look to add this policy for sure.

dsi

Carl’s first two points are correct as far as I know. Single-issue board members rarely last long; either they achieve their goals and leave, or fail and leave. The greater issue is, even if they recuse themselves, their friendships, presence, etc., can affect votes. The real problem is that it is actually a form of self-dealing, if, in fact, they can directly benefit from the outcome of a vote. I don’t believe residency, while generally desirable, should be an issue, provided that a nonresident board member is involved with the building and maintains a reasonably active presence. Good board members are hard to find and train. If you are in a small building, it can be really tough, so I wouldn’t want to lose a good one for those reasons, unless there is a reasonably capable replacement ready to step up. Many co-op governing docs actually do not require any board officers to be shareholders outside the role of president. The hard thing is finding willing shareholders who understand that what is best for the co-op as a community and to maintain a financially viable entity is not always what is best for a particular individual. In a co-op, a (wo)man’s home is not their castle, to do with as they will; it is always subject to the greater good. That is a tough concept.

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