Governance Theory for Condominium Management Associations from the Perspective of an Internal Auditor - Part 4: Is the Management Company a Partner? Or a Subject of Oversight?

Governance Theory for Condominium Management Associations from the Perspective of an Internal Auditor - Part 4: Is the Management Company a Partner? Or a Contractor to be Supervised?

Part 4
The management company is both a "partner" and a "contractor to be supervised"

In the operation of a condominium management association, the presence of a management company is extremely significant.

Accounting.

Support for the operation of the board of directors and general meetings.

Management of buildings and facilities.

Contract management.

Support for repairs.

Daily resident support.

For many management associations, it is not easy to continue daily management without a management company.

As mentioned previously, management associations do not have specialized departments like corporations.

That is precisely why the expertise and continuity of a management company are a great strength.

However, when looking at a management association as a Certified Internal Auditor, one important question arises here.

Should we think of a "reliable expert" and a "contractual partner to whom we outsource work" as the same thing?

I believe it is necessary to think of these two separately.

⸻

The management company is indeed an important partner

First, I want to be clear.

I do not consider the management company an enemy.

Quite the opposite.

For a management association where board members change in a short period and there is no specialized department, the practical experience, specialized knowledge, and historical information held by the management company are extremely important.

Even if a new board of directors is inaugurated, the management of the condominium does not stop.

There are contracts from the previous fiscal year.

There are ongoing repairs.

There are facility inspections.

There are also unresolved issues.

A management company that continues to support these practical tasks is an important partner for the management association.

The Ministry of Land, Infrastructure, Transport and Tourism also provides the "Standard Condominium Management Entrustment Contract" regarding management entrustment contracts between management associations and condominium management companies, establishing a standard framework for clarifying the scope and content of entrusted work, entrustment fees, etc. Note that this standard contract is not a law itself, but a template to be used as a reference when concluding a contract.

⸻

However, the management company is also a counterparty to a contract

This is where the discussion of governance begins.

The management company is an expert.

At the same time,

it is also a trustee that performs work while receiving compensation from the management association.

A management entrustment contract exists between the management association and the management company.

In other words,

"Someone who always helps me"

should not be viewed solely through the lens of human relationships.

What was entrusted in the contract?

Is that work being fulfilled?

Are the entrustment fees reasonable?

Is the reporting sufficient?

How is work outside the contract handled?

How will improvements be made when problems arise?

The management association itself needs to confirm these points.

The Ministry of Land, Infrastructure, Transport and Tourism's standard management entrustment contract also adopts a structure that clarifies the relationship between the management work entrusted and the entrustment fees.

⸻

The background is the asymmetry of knowledge

Why are management associations prone to depending on management companies?

At the root of this is

asymmetry of knowledge.

Management companies are in charge of numerous management associations daily, and they accumulate information as a business, ranging from legal amendments, technical trends in equipment, and market prices for construction, to case studies from other properties.

On the other hand, the board of directors is a group of unit owners selected by rotation or lottery, and many reach their term without having practical knowledge of management.

Moreover, their terms generally change every two years.

The side that accumulates knowledge and the side that cannot.

This asymmetry is unavoidable due to the system.

That is precisely why

the management company's explanation easily becomes the "sole source of information" for a board of directors that lacks specialized knowledge.

Materials for comparison,

and knowledge to refute,

are often absent on the board's side.

This does not mean that the management company is hiding information.

It means that as a structure, there is a difference in the quantity and quality of decision-making materials from the start.

If this asymmetry is left unchecked,

"If the expert says so, it must be true"

the board of directors will naturally drift toward this kind of mental stagnation.

⸻

"Leaving it to them because they are experts" is the most dangerous approach

Management associations lack specialized knowledge.

That is why they outsource to a management company.

This is rational.

However, next,

"Since they are experts, we can just leave it to the management company."

Then the story changes.

This is dependence on expertise.

As long as there is an asymmetry of knowledge, this dependence naturally arises.

That is why one must consciously resist it.

For example, let's consider equipment replacement.

Suppose the management company proposes,

"It is about time for a replacement."

What the board of directors should confirm is not

"We will replace it because the management company says so."

Why is replacement necessary?

What is the degree of failure risk?

Is there no option for repair?

What is the risk if the replacement time is extended?

Is the quoted amount reasonable?

Have other options been considered?

The board of directors makes a judgment after understanding such information.

That is decision-making.

⸻

The management company is not the decision-maker

This point is extremely important.

The management company supports the decision-making of the board of directors.

However,

it is not an entity that acts as a proxy for the decision-making itself.

At least in the general board-of-directors-style management association assumed in this series, the role of the board of directors itself does not disappear due to outsourcing work to a management company.

Receive proposals from the management company.

Listen to explanations.

Request additional materials if necessary.

Listen to the opinions of other experts.

Compare options.

Consider risks.

And then,

the board of directors decides.

If this is left ambiguous,

"Did the management company decide?"

"Did the board of directors decide?"

It becomes unclear later.

This is also a matter of accountability.

⸻

Structural conflicts of interest can arise here

Furthermore, from the perspective of internal auditing, there is one more thing that must be confirmed.

The interests of the management company and the management association do not always perfectly align.

This is not to say that the management company is bad.

As long as they are contractual parties, it is a structural problem that can naturally arise.

The management association wants to

receive better services

at a reasonable cost.

On the other hand, the management company is a for-profit enterprise and cannot continue its business without securing appropriate profits.

Furthermore, in repair work or equipment replacement, the management company itself or related businesses may be involved in proposals or receiving orders.

And seeing through this conflict of interest itself is difficult for the board of directors.

Because,

specialized knowledge is required even to judge whether a conflict of interest is occurring.

Asymmetry of knowledge not only creates dependence,

but also makes the discovery of conflicts of interest itself difficult.

Therefore, what is important is

not to play detective to find out "whether there is a conflict of interest or not."

Assuming that a conflict of interest can arise,

disclose information.

Compare.

Seek the opinions of third parties as needed.

Record the history of decision-making.

It is to have such a mechanism.

This is governance.

⸻

Who supervises the management company?

So, who supervises the management company?

It is not the auditor.

It is the board of directors.

This has been consistent since Part 2.

Once work is entrusted to a management company, it is the role of the board of directors to confirm the status of its fulfillment, provide necessary instructions, and appropriately manage the contract.

And what the auditor looks at is,

rather than the management company itself,

"whether the board of directors is appropriately fulfilling its role."

Therefore, from the auditor's perspective,

Management Company

　↑

Entrustment/Supervision

　│

Board of Directors
　↑
Independent Audit
　│
Auditor
This is the relationship.
It is important not to make this positional relationship ambiguous.
⸻
Checking the management company is not "distrust"

"Supervising the management company"

"Keeping the management company in check"

These words might have a slightly strong impression.

However, I do not think so.

In a company,

it is natural to confirm the work of a contractor.

Confirm billing details.

Confirm contract fulfillment.

Evaluate results.

Request improvements if there are problems.

One does not think of this as

"doing it because I don't trust the business partner."

It is done because it is appropriate management.

It is the same for condominium management associations.

Trust.

But confirm.

Entrust.

But do not leave it entirely to them.

Utilize expertise.

But do not delegate decision-making.

This sense of distance is important.

⸻

And that is where the Condominium Management Consultant comes in

Once we reach this point, the role of the Condominium Management Consultant mentioned last time becomes visible.

Asymmetry of knowledge is not just a problem between the board of directors and the management company.

Unless the board of directors itself has the means to bridge the asymmetry, the structure will not change.

A Condominium Management Consultant is not used as a "person to monitor" whether the management company's explanation is correct.

They supplement the expertise that the board of directors alone lacks,

provide a different perspective,

organize options,

and create a state where the board of directors itself can make judgments.

They are utilized as a third-party expert for that purpose.

In other words, the role of a Condominium Management Consultant is to

shrink the asymmetry of knowledge between the board of directors and the management company from the board's side.

Especially in large condominiums, the amounts for management entrustment fees, repairs, equipment replacement, insurance, etc., also become large.

Even if costs for an expert arise, if it improves the quality of important decision-making and allows for more appropriate judgments regarding contract conditions, construction content, and future risks, it should not be evaluated merely as a "cost."

It is not about how much to pay an expert, but how much the quality of decision-making is improved by that expertise.

This is what needs to be looked at.

I would like to take another episode to think about this theme.

⸻

Conclusion

Is the management company

a partner?

Or a subject of supervision?

My answer is

"both."

For a management association with limited human resources, a management company is an indispensable professional partner.

However, at the same time, it is also a contractual partner that performs work based on a management entrustment contract.

At the root of that relationship is a structure that is unavoidable due to the system: the asymmetry of knowledge.

Based on the premise of this asymmetry,

trust.

And confirm.

Utilize expertise.

And keep in check.

Receive support.

But do not let go of decision-making.

I believe that this relationship is the healthy relationship between a management company and a management association.

And the entity that creates that relationship is

the board of directors.

Next time,

I would like to make "What is the purpose of a Condominium Management Consultant?" the theme.

How does decision-making change when the board of directors has a third-party expert different from the management company?

And what is the meaning of paying for an expert in a large condominium?

I will think about it from the perspective of investment in decision-making quality, rather than "cost for an expert."

⸻

HI (Human Intelligence)

Certified Internal Auditor (CIA) | Certified Fraud Examiner (CFE)

Translating the knowledge of governance, risk management, and internal control cultivated in corporations to the field of condominium management associations, and researching and disseminating "governance appropriate for condominium management associations."

Series

"Governance Theory for Condominium Management Associations - Decision-making of the Board of Directors as Seen by a Certified Internal Auditor -"

Regarding the institutional background, the Ministry of Land, Infrastructure, Transport and Tourism has published the 2025 revised Standard Condominium Management Bylaws, Standard Management Entrustment Contract, etc. This article uses these as an institutional reference framework.

Ministry of Land, Infrastructure, Transport and Tourism "Standard Condominium Management Bylaws"

Ministry of Land, Infrastructure, Transport and Tourism "Standard Condominium Management Entrustment Contract, etc."

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