Board conflicts of interest: protecting against breaches of loyalty.

The fiduciary duty owed an association by its officers and directors includes loyalty. A breach of that duty--whether a board member serves with or without compensation--typically involves a conflict of interest, generally defined as "a clash between the association's interests and the private pecuniary interest of an officer or director."

The three most common potential conflicts are these:

* Conducting business with the association. An association officer or director contracts with the organization to buy or sell goods or services or to derive some personal benefit.

* Usurping an association opportunity. An officer or director acquires for his or her own benefit a business opportunity that should belong to the association.

* Competing with the association. An officer or director engages in a similar yet independent business.

Ensure full disclosure

The duty of loyalty does not totally preclude business interaction of the type described above. However, it does mean these transactions would be subjected to intense scrutiny by a court if called into question. Consequently, if a situation with the markings of potentially conflicting interests does arise, the association's best first move is to seek full disclosure.

The officer or director insulates himself or herself from potential liability by fully disclosing to the association his or her interest or involvement and all facts and/or terms of any agreement. However, disclosure alone is rarely enough.

* Where the officer or director risks usurping a corporate opportunity, he or she also should offer the association the opportunity. Only upon the association's informed rejection is the officer or director's duty fulfilled so that he or she may proceed.

* Where an officer or director is competing with the association--either as an officer or director of another association or sole proprietor in a similar business--if the officer or director is unable to carry out his or her duties to the associations without any harm to the associations and with positive benefit to the associations, then he or she must resign from one or both boards.

* Finally, if after the member discloses the potential conflict, any related matter is put to a vote of the board, the interested member should either refrain from voting or have any such action he or she participated in approved by a disinterested majority of the board.

Protect through policy

To protect the association and maintain its credibility, work with legal counsel to develop, adopt, and implement a formal statement of conduct for officers and directors. Include association policy regarding

* the affirmative obligation of officers and directors to notify the board immediately upon becoming aware of any potential conflict;

* employment of or contractual arrangements with officers or directors or their relatives; and

* provision of services, other than those provided through an official capacity, by officers or directors.

A policy statement also should include a discussion of the procedures whereby a disinterested panel would investigate a potential conflict of interest and report its findings, and the manner in which the association would resolve any disputes arising from an investigation. In addition, in the event a violation of the standards is deemed to have occurred, the policy should enumerate the available remedies--for example, voiding the deal, returning the improperly obtained "benefit of the bargain," passing through a usurped opportunity, and suspending or expelling the officer or director from his or her position or from the association.

Finally, an association can further protect itself by amending its bylaws to include a provision setting forth a special quorum and voting requirement when the board votes on a conflict of interest transaction or a requirement that officers and directors serve in that capacity, or any other, for only one association.

George D. Webster is general counsel to ASAE and a partner in Webster, Chamberlain & Bean, a Washington, D.C., law firm.