When your Management Company has a Conflict of Interest

Posted by Andrea Drennen, CMCA on May 27, 2016

Management_Company_COI.jpg

It's easy to justify a conflict of interest.

Your management company is operating on notoriously thin profit margins, taking the bare minimum in management fees from your clients.

In order to stay competitive without lessening the level of service you provide, you need to bring on alternative revenue sources. One easy option is to provide additional services with a higher markup, such as maintenance and landscaping.

But when you have some level of hiring power over vendors AND you have ownership in a service provider, that means you have priviledged information, and it's a conflict of interest.

Justifying the conflict is easy. You know that your service will do a better job than all of the rest of the companies out there. And you can charge less than those other guys, so the community saves money. Then of course there is the fact that you (and thus the Board) will have more direct control over the workers. All this, and you are able to keep your management fees low for the community. With all those benefits, what's a little conflict of interest between friends?

A conflict of interest is a breach of trust

Just as you trust the board to exercise their fiduciary duty and self-police when they have a conflict of interest, your professional code of ethics as a manager requires you to do the same.

Boards hire a management company to provide them with professional management services for their community. They expect a fair and independent advisor to help them make decisions that are in the best interest of their community, not your management company's pocketbook.

That doesn't mean that you cannot do what is needed to make your business succeed. It's not wrong for a management company to have a landscaping service. What's wrong is leveraging your insider information to win bids and earn business. It is possible to marry your management division with your service provision.

4 ways to get around a conflict of interest

1) Disclosure - The first step is to be completely open and transparent. Make sure you have fully disclosed to your Boards any and all affiliations you may have with vendors. You can further cover your bases by including an addendum to your contract that lists out the organizations the management company or executive team have an interest in (or a relationship with), and have the board sign it when they hire you. Be sure to check your state laws as well. For example, California requires managers to send an annual disclosure statement in which all potential conflicts of interest are listed.

2) No Bundling - While it may be tempting to bundle additional services with your management fee, resist the urge. Bundling locks the community into using your service provider, and makes the conflict a central component of your relationship with the community. When services are bundled with management, if they are dissatisfied with your lawncare, they have to consider the entire contract (and possibly cancel it). Offer your additional services as options, with their own contract, not built-ins with no way out.

3) Open RFPs - When sending out a request for proposal to find an organization to perform work for the community, you can prevent a perception of a conflict of interest by using an open bidding process. Open bidding means that the RFP is posted somewhere (usually online), and any vendor who wishes may bid on the job. Sites like Porch.com and Homeadvisor.com are open RFP hosting sites designed for home renovations, but most of the vendors there are more than capable of scaling up to larger community jobs.

4) Sealed Bids - The best thing you can do to eliminate the perception of unethical activity is to use a sealed bidding system for RFPs. With sealed bidding, there is no possibility of the manager feeding competitor bids to the preferred vendor so they can undercut the bid. In order for sealed bidding to work, it's important that a third party (like a board member) is selected to collect the bids by a certain date, and they are then opened and reviewed for the first time in a meeting in front of the full board.

Your management company is a business, and as a business, you have a duty to your clients to make enough money to stay in business. At the same time, your business' reputation is based on trust. And you must do everything in your power to preserve that trust.

By following these simple steps, you can have your cake, and eat it too. Instead of justifying your conflict, be open and honest about it. Rather than eroding trust with your boards, you can build it. And you might find that you are all the more successful because of it!

 

*Image credit: Laura Lewis via flickr

Download this sample request for proposal template

Related Posts

 

Comments