Board Operation, Some Examples and Fiduciary Duties, revisited - Part I

I'm going to provide a few quotes and links to illuminate the subject of "fiduciary duty" as it applies to an HOA with some insights into these duties as they have been and are being applied in this HOA. Because of the length and richness of this subject, I’ll provide this in three parts. Part I will serve as introduction, Part II will include references and review of “fiduciary duty” in the words of "experts" and certified "professionals", and in Part III I’ll look at some of the practical application of  "fiduciary duties" as currently and previously applied in this association and I'll draw some conclusions and perhaps make a few recommendations. 

First, some background information. If you came here for entertainment, you came to the wrong place. I don't think this subject will be particularly entertaining, but I suppose it could be. I should also state that one of the forces that drive us is the desire to remain in the dark, and unenlightened. That way, we can continue on our merry way and do untold mischief, and feel good about ourselves at the same time. Yes, it is true that "ignorance is bliss" and if you crave that, you have also come to the wrong place. 

Our board is comprised of many newly elected, or inexperienced members. That is to say, some have no prior experience on the board of an HOA, or any board, for that matter.  Some have no “professional” or business experience. So it would be presumptuous on my part, and arrogant on theirs, to assume that they know their true duties. Most of us, and that includes myself, operate more as technicians than as leaders. That's a natural way for most of us to be. We all have immediate tasks and responsibilities to perform, and we can and do become readily absorbed in the day to day minutia. However, to do any task well requires some critical thinking skills and the willingness and ability to keep "the big picture" in perspective, and to prepare for the part. That preparation can take years; some of us prefer to think like the Nike ad, which purports that all it takes is a nice expression such as "Just Do It" and we are ready for the task at hand. Reality has a way of deviating from 30 second sound bites. If you have read about Chesley B. "Sully" Sullenberger, the pilot who landed a disabled aircraft in the Hudson River in January 2009, you quickly discover that he was unusually trained. That training, some on his own initiative, allowed him to accomplish what some people think was a "miracle".

For the members of the Board of Managers of an HOA in Illinois, part of the training is an understanding of the Illinois Condominium Property Act, another is a comprehensive  understanding of the Bylaws of the HOA and the Rules and Regulations. Another and perhaps most important is an understanding of their “fiduciary duties”. Finally, each member of the board  must possess sufficient education to exercise common sense, make sound business decisions, and perform their specific duties and assignments.  If we are to assume that an HOA is first and foremost a business, which it in fact is, then some rudimentary arithmetic and accounting skills are required. How else to review, approve and execute budgets? And so on.

It is the responsibility of candidates for the board to determine their suitability and  to either possess or rapidly acquire the fundamental skills necessary to function as members of the board of managers. They all vote on all matters, and they begin voting at the first association meeting. So it would be common sense that the members each possess these fundamental skills. Of course, if they don’t then they must rely upon “professionals” who are experienced in these matters, or they must rely upon other board members. In either case, the quality of the board is impaired. In the first situation, a board can become over-reliant upon the judgment of a single manager or professional. In the second case, the board may become the expression of one or several “powerful” board members. In both cases, the results can be less than satisfactory. For example, at one time, this association relied upon a manager who provided guidance on budgeting and reserves which was, to understate it, less than adequate.  We have the historical data to substantiate this. 

The opposite extreme is also possible. In such a situation the board decides that it is far too reliant upon the “professionals” and is eminently and inherently qualified to make more or most of the decisions.  At our HOA, the term “larceny” is sometimes used by some unit owners to describe past boards and management. There is no proof of any of this; it's simply innuendo and character assassination. I do have to wonder how people can think and say that the past situations were so terrible, and then in the next breath promote a position founded on the belief that our current board is so eminently capable, qualified, trustworthy and honest that such a situation “could never occur here”. This type of flip-flopping is not rational and certainly doesn't adhere to any definition of  "common sense" that I am familiar with. Any manager is somewhat familiar with the “Peter Principle” and if people are seriously considering this route, I suggest all unit owners read Tom Peter’s management book “Thriving on Chaos” (sorry for the pun, Mr. Peters). I do have a copy of this excellent book in my library.  But again, the fiduciary duties of a board would prohibit certain aggressive actions. 

Of course, a board could take the approach that they are first and foremost "administrators", hire professional threesomes in all categories, and then sit back and allow or direct, depending upon the skills of the board, the professionals to argue each position and present for each situation. The board would then simply select the two that, in the opinion of the board, are most satisfactory and vote on that. Using this approach could be prohibitively expensive and would run afoul of "fiduciary duty" issues. After all, could anyone really state that such an approach was a good and prudent use of association fees?

The members of our board are mandated and required to put the association first, at all times. Upon becoming members of the board of directors of BLMH, they gave up certain personal rights as a unit owner, because they must now act in the interests of all the owners of the association. They are prohibited from creating or supporting groups or sub-groups in an HOA. For example, as a unit owner, one can ignore the rules and assume this is primarily a social club and press for block parties, garage sales, street fairs and socials and coffees. However, a member of the board of managers, who also may have similar beliefs and agree with a specific group, is required to put their personal wants, needs and desires aside. They must view this solely with the perspective of an impartial member of the board of managers. That perspective should include a consideration of  the impact on all unit owners, which may include but is not limited to the cost of insurance for these public parties, the consequences of accident and possible litigation, direct and indirect costs, the problems of traffic and parking and possible hazards with visiting people driving our, to them, unfamiliar streets, and finally the consequences and desirability of the imposition of these events upon all unit owners. (Note: We don't have a sidewalk along our streets so most unit owners and their pets walk in these main streets, which because this is a PUD, are narrower than the usual, and cannot readily accommodate pedestrian traffic and two-way vehicular traffic).  A member of the board must weigh the possible benefits to all unit owners, as well as all costs both direct and indirect, as for example "wear and tear" on association property, and any and all possible liabilities. The personal position of the board member is of no relevance. Members of the board must  actually transcend the issues and view everything from the perspective of their fiduciary duty on one hand and the Illinois Condominium Act, the Bylaws and Rule and Regulations of the Association on the other.

What's best for the association is not necessarily the result of formal or informal polls. As an example, what if the majority of this association, as the result of a poll, decided they wanted no reserves and that all monies paid should be returned? This is an extreme example, but I think some of our board would be inclined to say "return the money" because that's what they believe the "majority of us" want! That’s one of the dangers inherent in an HOA in which a member or members of the Board of Managers are unfamiliar with their true “duties and responsibilities”.  If any member of the board assumes they have a broad political or  “social mandate” and their duties encompass ambiguous “change” and their specific tasks are the administration of  the Landscaping contractor, Maintenance contractor or even simply preparation of our Newsletter, then they are operating out of a personal perspective, not a fiduciary one.

To look at this a little closer, it is perfectly appropriate for me, as a unit owner, to express my "outrage" over what I perceive as "injustice" or infringement upon my personal “rights” or the rights of others, and I can threaten, cajole, or solicit agreement to change the rules which don't work for me. And in so doing I can ignore all or most of  my neighbors. However, as a member of the board, I must publicly and privately uphold the current rules and regulations and see that they are applied fairly and impartially to all unit owners. The board may openly discuss the issues inherent in the current Rule and Regulations, but is bound to uphold those rules fairly, impartially for all unit owners, no matter what their personal situation, relationship to the member(s) of the board or even their proximity as neighbors.  There is a method for altering the rules and regulations, but again that method not only encompasses open discussion but it also requires the members of the board of managers to view this from the perspective of their “fiduciary duties”, which includes the rights and privileges of all unit owners.

To overstate this, I can also, as a unit owner, operate from the perspective that I want to be as popular as possible. I can schmooze and "ooh and ahh" and express "oh, you poor dears" to my heart's content. However, as a member of the board of managers I must remain somewhat aloof and avoid entanglements and promises. I can only promise that I will always be objective, will do my best to use sound business judgment and common sense to guide this association in such a way that divisiveness is reduced, that the property (common elements) is well maintained, and that I will evaluate budgets encompassing both current and future needs when preparing and voting for assessments, fees, promoting capital projects and the funding of current operations and maintenance. 

It is unfortunate but in the real world, not all of us operate from integrity and it is also true that individuals seek seats on boards for personal esteem, personal reward and to promote personal agendas. If you doubt me, then you are truly naive. I recommend that you spend about $100 and talk to a good lawyer who specializes in condominiums and HOA law in Illinois. I can recommend one.

As individuals and unit owners, we may perceive our duties and obligations as the member of a board of managers of an HOA in a certain way, and there are many possible interpretations, but only one is of any significance, and that is the legal interpretation as it applies to our HOA. Winning a seat on the board of managers is nothing more than an opportunity to be a steward. Some say it is to work for the good of the association. But what truly is the "good of the association"? That is an area of mischief. Only by becoming intimately familiar with the concept and realities of one's "fiduciary duties" and by using that as a beacon to guide a board member's actions, is it possible for the board members of an HOA to navigate through the problems which face them.  If the board member is capable of exercising common sense and good business judgment, it is then a possibility that the board member will successfully complete his or her tasks, but will most likely not be universally popular.  

Actions by a board to put the board first is not putting the association first; power in a democracy does not give one the power to do whatever one pleases. It does provide the opportunity and that can be coupled with private agendas; ergo the need for the Illinois Condominium Property Act, for observers, and for point of law. Of course, what does one do in an association when members of the board have the unflagging opinion or belief that their position always conforms and aligns with the "right" position? That is, of course, in accordance with their personal beliefs, standards, judgments and evaluations.  It may also be aligned with those of a group of unit owners which is forever promoting and reinforcing these unshakable beliefs, to the benefit of course, of that particular group. In such a situation the board member occupies the center of the universe, and we the unit owners, in particular the "silent majority" of us are, I suppose, simply dust and detritus orbiting around them!

When posing some of these questions, I have been told that a good paper trail is always a handy thing to have, and there are any number of organizations that provide "independent and objective evaluations of fiduciary compliance".

  In part II, I’ll take a closer look at what exactly are the “fiduciary duties” that guide our board and how they guide and enable a member to do “the right thing”, no matter what their personal viewpoint may be.