Duty of Loyalty
The obligation of board members to put the interests of the association ahead of their own personal, financial, or familial interests when making governance decisions. Duty of loyalty is one of the three core components of fiduciary duty and is often the most scrutinized because violations tend to be the most visible and damaging to community trust. In practice, duty of loyalty requires board members to avoid self-dealing transactions — for example, voting to award a contract to a company the board member owns or has a financial interest in. It requires disclosure of any actual or potential conflicts of interest before the board discusses or votes on a related matter. It prohibits the use of confidential association information for personal advantage, such as learning about a planned capital improvement and using that knowledge to influence property transactions. And it forbids board members from accepting gifts, favors, or compensation from vendors seeking association business. Under California Corporations Code Section 7233, a self-dealing transaction is not automatically void but must meet specific fairness requirements — either the transaction must be approved by a majority of disinterested directors after full disclosure, or it must be shown to be fair and reasonable to the association at the time it was authorized. Violations of the duty of loyalty can expose the offending board member to personal liability, disgorgement of any profits or benefits gained, removal from the board, and, in egregious cases, legal action by the association or its members.
Example in Context
A board member disclosed that her brother-in-law owned the landscaping company under consideration for the community contract. She recused herself from the discussion and vote, and the disclosure was recorded in the minutes.
Frequently Asked Questions
What should a board member do if they have a conflict of interest?
Disclose the conflict immediately and in full to the board before any discussion or vote on the matter. Recuse yourself from the discussion and the vote. Leave the room during deliberation if possible. The disclosure and recusal should be recorded in the meeting minutes. In California, Corporations Code Section 7233 allows transactions involving a conflict to proceed if approved by a majority of disinterested directors after full disclosure, but the safest practice is complete recusal.