Conflicts of Interest Can Be Sheep in Wolf's Clothing

Look everywhere and you’ll find that there’s a trend toward transparency, communication, and disclosing conflicts of interest. There's even a new state law designed to curb conflicts of interest on co-op and condo boards. This is a very good thing. There are three main rules for dealing with these issues: disclosure, disclosure, and disclosure. When people think about a conflict of interest, they think of it as something negative. People are hypersensitive about it, even though it can result in a positive outcome. This is especially true if a new board member thinks a management recommendation is conflicted. 

Boards hire professional management not only for its ability to run buildings well, but for its contacts in the industry. So when the issue arose of hiring an attorney to draw up a license agreement with the building next door, which was going to conduct major construction, I suggested the names of three attorneys who were experienced with these types of agreements and who my firm has worked with in the past. A new board member said, “Wait a minute. Isn’t that a conflict of interest?” 

If the alternative to a recommendation from professional management is to google a better solution, then there is a problem – either of trust or just general suspicion that any recommendation could be conflicted. Management companies typically place lots of business with professionals and vendors who perform well for them, and sometimes they get professional discounts because of this. 

Boards need to understand that there is a difference between an apparent and an actual conflict. Let’s say the property management company already uses one of the lawyers they are recommending to a board. Because of the volume of business that the manager has been giving this firm, the manager is getting a professional courtesy discount of 20 percent, which will then be passed along to the board. That can look like they’re recommending the lawyer because of the discount. They are not – but that appearance of a conflict needs to be addressed. 

One way of doing this is to have an attorney draw up what’s called a “waiver of conflict.” All three parties sign it and acknowledge the conflict and that they are not concerned. They understand the benefit. This avoids the very real problem that can arise if the manager does not disclose the relationship and he or she actually gets an undisclosed financial benefit from recommending the attorney. 

Michael Feldman is co-founder and CEO of Choice New York.