Conflict of Interest and the OVA-OGC Question

Much has been said on social media about the potential conflict of interest of OVA directors, as they decide on whether or not to provide a rather huge amount of support to OGC (OGC asks for at least $1.4M over the next 5 years). The intent of this article is four-fold: first, to review what conflict of interest is and what Davis-Stirling (California law governing HOA governance) and OVA’s own ethics policy says about it; second, to let everyone know how each member of the OVA Board of Directors responded to questions about his involvement in golf or the OGC, and his decision to recuse himself or not on issues relating to the OVA-OGC question, as well as providing him an opportunity to briefly explain his position; third, to provide some commentary on issues of interpretation and director answers, and, finally, to express my opinion on what standard for conflict of interest should be used in this specific case. I will state, up front, that I believe that any director should disclose to his constituents any information that may be prejudicial to a decision the board must make, or which may be perceived as a conflict of interest. If he is not willing to do that, he shouldn’t be a director.

Conflict of interest and California law

Three web pages from the Davis-Stirling.com website provide the basis for my understanding of the law relative to conflict of interest:

1. https://www.davis-stirling.com/HOME/Fiduciary-Duties-of-Directors

2. https://www.davis-stirling.com/HOME/Conflicts-of-Interest

3. https://www.davis-stirling.com/HOME/Recusal-Defined

I make no claim to legal expertise, but these pages are fairly easy to read and understand.

The first Davis-Stirling page declares that board members are fiduciaries and that, as such, “they are held to a higher standard and must avoid conflicts of interest.” In particular, “Directors must act in the best interests of the association even if at the expense of their own interests.”

From the second Davis-Stirling page:

Conflicts of interest occur when a board member’s decisions are influenced by his/her personal interests rather than the interests of the association, which can lead to breaches of their fiduciary duties.

. . .

Not a Conflict. Oftentimes board members vote on matters that result in a benefit to them that is not a conflict of interest because the matter also benefits the membership as a whole. For example, if a board member votes to add security patrols to the development, there is no conflict of interest since the benefit he receives from the patrol is same benefit received by all members of the association.

. . .

Regardless of whether he has a material financial interest, a director “may not make decisions for the association that benefit their own interests at the expense of the association and its members.”

. . .

directors must recuse themselves from discussion and voting on issues in which they have a direct personal or pecuniary interest not common to other members of the board. (Robert’s Rules, 11th ed., p. 407.)

The third Davis-Stirling page defines”recusal”:

“Recusal” or to “recuse” oneself means to remove oneself from participation in a decision so as avoid a conflict of interest.

No member should vote on a question in which he has a direct personal or pecuniary interest not common to other members of the organization. . . . (Robert’s Rules, 11th ed., p. 407.)

Recusal normally occurs when a director has a conflict of interest or prejudice concerning a particular matter. A conflict of interest is any situation in which financial or other personal considerations may unduly influence the director’s judgment. . . .

Leave the Room. In each case, the director has a personal interest in the outcome of the vote – an interest not shared by other directors. In such instances, the interested director should leave the meeting room so the remaining directors can freely discuss and vote on the issue. (California’s Fair Political Practices Act, Calif. Code of Reg. §18702.5.) Once the vote is taken, the recused director may return to the meeting.

Conflict of interest is critically important, because a director with a legal conflict of interest relative to any issue is not allowed to participate at all in the decision making about that issue (preceding paragraph).  Some situations are not clearly a conflict of interest, and those grey areas will be discussed in the Commentary section below.

Note that financial interest is not essential for recusal to be required. It is sufficient that a director has a prejudice concerning the matter at hand, which is not shared by the membership at large, and which might cause a director to vote differently from the way an unprejudiced director would vote. Note, also, that recusal is not simply not voting on an issue; recusal means walking out of the room whenever the issue is discussed, and not expressing an opinion to other board members about the issue.

In order to show a financial conflict of interest for an HOA Board member, one needs to show that his financial status would be improved if the contemplated action is approved by the Board. This seems clear for proprietary OGC members, for any proposal to provide financial support to OGC, because the value of their memberships would go up with OVA support. This value might only be realized if the club were liquidated, but it is value, nevertheless.

Ethics Policy for OVA Directors and Committee Members

The document of this title is dated November 21, 2017, and is available on the Oakmont Village website at https://oakmontvillage.com/wp-content/uploads/2018/01/2017-11-21-BoD-Aprvd-Ethics-Policy-for-OVA-Dtrs-Committees.pdf . I must presume that all directors have signed it, including those directors elected this spring.

Relevant quotes:

A. BOARD RESPONSIBILITIES The general duties for directors are to enforce the association’s governing documents, collect and preserve the association’s financial resources, insure the association’s assets against loss, and keep the common areas in a state of good repair. . . .

B. PROFESSIONAL CONDUCT

1. Self-Dealing. Self-dealing occurs when directors or committee members make decisions that materially benefit themselves or their relatives at the expense of the association. . . .

C. WHEN CONFLICTS OF INTEREST ARISE

Situations may arise that are not expressly covered by this policy or where the proper course of action is unclear. Directors and committee members should immediately raise such situations with the board. If appropriate, the board will seek guidance from the association’s legal counsel.

1. Disclosure & Recusal. Directors and committee members must immediately disclose the existence of any conflict of interest, whether their own or others. Directors and committee members must withdraw from participation in decisions in which they have a material interest. . . .

There is general consistency between the Ethics Policy and Davis-Stirling. In fact, the Ethics Policy affirms the obligation of directors to bring any unclear situations to the attention of the Board, and to immediately disclose and recuse themselves if a conflict of interest exists. The one difference I note is that the Ethics Policy only mentions “material interest”, i.e. financial interest, where Davis-Stirling uses a broader standard that includes non-financial interests: “influenced by his/her personal interests rather than the interests of the association.” Davis-Stirling, because it is state law, takes precedence.

The OVA Board of Directors: OGC involvement and who has recused himself

I have queried each director, individually, and their responses to these questions are shown below. “Refused to Answer” means either that they did not respond to my Email or that they responded, but did not answer the question.

The questions:

1. Do you or your spouse currently have an ownership interest in the Oakmont Golf Club, i.e. are you a full or proprietary member?

2. Are you or your spouse either current or past (since 2008) members of the Oakmont Golf Club?

3. Do you or your spouse play golf at least twice a month, or have either of you done so within the past 10 years?

4. If you answered “yes”to either question 1 or 2, then have you decided to completely recuse yourself from all discussions and voting related to the issue of OVA financial support for OGC?

5. What is the effective date of your recusal, after which you have not taken part in any such discussions or voting?

OVA director responses:

Question #	Spanier	Kendrick [2]	Neufeld	Medeiros	Klyn	Bettencourt	Goodwin
1. Owner mbr	Yes	RefAns	No	RefAns	No	RefAns	No
2. OGC mbr	Yes	RefAns	Yes	RefAns	No	RefAns	No
3. Play golf	Yes	RefAns	No	RefAns	No	RefAns	No [3]
4. Recusal	Yes [1]	RefAns	No	RefAns	No	RefAns	No
5. Eff date	May 3	RefAns	N/A	RefAns	N/A	RefAns	N/A

RefAns = Refused to Answer, N/A = Not Applicable

Notes (quotes, where present, have been authorized by the directors responding):

[1] Since recusing himself in May, Spanier has not been attending OVA-OGC meetings, which are led by Kendrick. But he does not believe that he has to abide by the “Leave the Room” rule. His authorized quote:

I have not and will not vote on OGC issues. Because I probably know more about the OGC than any other Director, I have, when asked, answered operational questions such as

What is the difference between a public, semi-private and private golf club?
Who owns the OGC?
What does the OGC own?
Why would people join the OGC rather than just pay as they go?
What facilities exist at the East and West golf course areas?

Certainly the OGC could also have answered these questions, but they’re currently answering much more involved questions, so the board felt I could reduce the number of questions we needed to ask them.

[2] Kendrick replied but refused to answer my questions, and did not authorize me to quote his rationale – see Commentary section below under “Scope of recusal” for my opinion about some of what he told me.

[3] Goodwin occasionally plays golf, but less than twice a month.

Commentary

Financial conflicts: In order to show a financial conflict of interest for an OVA director, one needs to show that his financial status would be improved if OVA chooses to provide financial support to OGC. This seems clear for proprietary OGC members, because the financial value of their memberships would go up with OVA support. This value might only be realized if the club were sold or liquidated, but it is value, nevertheless, and value that is not shared by the OVA membership at large.

When is an affiliation Not a Conflict? See Conflict of interest and California law section above. A financial interest of a Board member is not a conflict of interest if the financial interest involved applies to the OVA membership as a whole. The argument is made that, because of the likelihood that a thriving OGC has a positive effect on property values throughout Oakmont, OGC membership is not a conflict. Property values may be enhanced by the presence of OGC, but that does not cancel out the fact that OGC owner members (“proprietary members” or “full members”) have financial interests that go beyond those of us who are not owner members. Such Board members have a clear legal conflict of interest.

Non-financial conflicts of interest are more of a grey area, because everyone in Oakmont has some degree of interest in such things as green vistas, fire breaks, etc, and there is great variation depending on home location. The same would be true of almost any other decision of substance that the Board might make. I will argue, in the next section, for a particular standard relative to the OGC question, which is reflected in the questions I asked of the directors, but it is necessarily my opinion, and you are entitled to your own opinion on the what constitutes a non-financial conflict of interest.

Scope of recusal: In my view, the recusal should apply to the overall issue, not just to discussion once a resolution is on the table for a vote. This would mean that, as soon as the issue of financial support of OGC by OVA came up, many months ago, any director who had a conflict of interest, as defined above, was required to “Leave the Room” at any time any other directors were discussing the issue. I don’t think it means he can’t discuss it freely with non-directors (who don’t get to vote on it), provided, of course, that such non-directors are not being used as a means of communication to other directors. The opposing view, expressed to me by Kendrick, is that the conflict of interest only applies in the context of a pending decision, i.e. when a specific resolution is on the table for a vote. I can’t explain why he would think that, because it seems obvious to me that a director who needs to recuse himself, under Kendrick’s standard, could negotiate and argue for any proposal right up until it was turned into a resolution for voting, and that has to be against the intent of conflict of interest law.

Refusal to answer: I believe that every director has an ethical obligation to reveal to his constituents (all OVA members) any significantly relevant fact that might cause a significant prejudice for or against any important decision to be made by the Board. Any director who refuses to answer my simple questions is keeping relevant facts from OVA members, whether or not he believes that those facts constitute a conflict of interest. I am an OVA member, so I take his refusal to answer, either directly to me or in a public statement, as a strong indication that this person should not be a director. Period.

Unfortunately, the following directors have refused to answer: Kendrick, Medeiros, Bettencourt.

My preferred standard for whether or not an OVA director should recuse himself on the OVA-OGC question

First, I believe that a legal, enforceable conflict of interest exists for any OVA director who is an owner member of OGC, for reasons stated above. This is not a matter of preference, but a matter of law. Many would go further and say that any director who owns a property bordering the golf course also has a legal conflict of interest, because he has a financial interest (the value of his home) which is demonstrably more dependent on the health of OGC than those who do not own property adjacent to the golf course. I am sympathetic to that view, but my own standard does not include ownership next to the golf course – it just feels like going a bit too far.

My preferred standard doesn’t require, however, that a director have a financial interest. There may be directors who are non-owner members, or even who are not members of OGC, but who golf regularly and enjoy the company of other golfers who may be OGC members. I believe that such close association and the shared enjoyment of a beloved sport is very likely to affect the outlook of the persons involved in such a way that they will be prejudiced to favor OGC proposals for OVA support, even if they are not consciously aware of such a prejudice or deny such a prejudice. I would further extend that to those who, while not participants themselves, are married to ones who are – most of us would have a prejudice to support our spouse in such a situation. I would not expect a person to lose such a prejudice if circumstances caused him to no longer participate, so I would expect past participation to also be a strong indicator of prejudice.

Any such prejudice, as described in the preceding paragraph, might cause an OVA director to have poor judgment in the matter of OVA financial support for OGC, thus either consciously or unconsciously favoring the small minority who are members of OGC over the best interests of Oakmont at large. For this simple reason, I believe that any OVA director should recuse himself on the OVA-OGC issue if:

• he or his spouse is now or, within the past 10 years, has been a member of OGC, or

• he or his spouse plays golf regularly (say, twice a month or more often) or has done so within the past 10 years.

One final note on this subject. Conflict of interest is a legal term, which is ultimately defined by decisions in a court of law. The OVA Board of Directors uses legal counsel to advise them on whether or not they need to recuse themselves, from a legal standpoint. In my opinion, this tells them what they can probably get away with if it were ever brought to a court of law, but even there, lawyers and judges frequently have different opinions on an issue.

I will go further and say that an ethical conflict of interest may exist even when a legal one does not. The law defines what is legal, and not what is right, and my preferred standard is based on what I believe is right – I am not very qualified to say what is legal. I understand that what is right is a matter of opinion. My standard, as expressed above, is only my opinion, and it is up to each of you to decide what you believe is right. It is also your right to let your directors know what you think on this issue (and any other).

My judgement on each director

Spanier has recognized that he must recuse himself, and has publically announced that he has done so. He is in violation of Davis-Stirling for waiting as long as he did, while actively talking with OGC management and preparing to provide them with support, but at least he eventually recognized his obligation to recuse. His current level of providing information about the OGC may be appropriate, but it certainly does not meet the Leave the Room standard.

Kendrick replied to my Emails and has refused to make his OGC affiliation status known, and so he meets my criteria for someone who should not be a director. If he is an owner member of OGC, he is guilty of the worst behavior relative to conflict of interest law, because he holds the position of Liaison to the OGC and is in the middle of the OVA-OGC negotiations. If he doesn’t golf and has no OGC affiliation, then he is merely violating our trust by effectively telling us “none of your business” when we have every right to know.

By my standard, Neufeld should be recusing herself. She gave no rationale for her answers, but I presume she is of the opinion that, without financial involvement, there is no conflict. I give her credit for answering and making her status known.

Medeiros did not reply to any of 3 Emails I sent to him with the questions. This places him in the same category as Kendrick – should not be a director and should be considered to have a conflict of interest in this matter.

Klyn replied honestly and thoughtfully, and has no conflict of interest.

Bettencourt did not reply to any of 3 Emails I sent to her with the questions. This places her in the same category as Kendrick – should not be a director and should be considered to have a conflict of interest in this matter.

Goodwin replied honestly and thoughtfully, and has no conflict of interest.

Summarizing, we have two directors with no conflict of interest (Klyn, Goodwin), one who is a non-owner OGC member and admits no conflict of interest (Neufeld), one who is an owner member of OGC and has recused himself (Spanier), and three who refuse to reveal to OVA members whether or not they are affiliated with OGC (Kendrick, Medeiros, Bettencourt)

As you can tell from my earlier comments, my harshest criticism is reserved for those who think it is OK to keep this relevant information a secret from the OVA membership. I have no quarrel with any director who won’t talk to me but otherwise makes public his OGC affiliation status, but to refuse to let constituents know is unconscionable. Of course, if any of those directors decides to go public with their answers, I’ll say “better late than never”, but it will not be the same as it would if they had done the right thing from the start.

I would like to see the OVA Board agree and establish legally defensible criteria for which of the directors should recuse himself relative to the OGC issue, and ask all directors to honor that criteria. Then, of course, it should be public knowledge who is recused and who isn’t. This would resolve the criticism due to the fact that, to date, it has been totally up to each director whether or not he chose to recuse himself.