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

"In successfully run homeowners associations, members of the board of directors possess good communication skills, carefully plan in advance, make good judgments based on sound decision making practices, delegate work to qualified committees or advisors, exercise initiative and independent thinking, and work well together as a team. In contrast, political or fiscal failures often result from the acts or omissions of boards of directors lacking good communication skills, procrastinating necessary work, making bad judgments without seeking input from committees or advisors, stagnating for lack of initiative, or political stalemates caused by dysfunctional personal relationships among the board members. From this perspective, the exercise of fiduciary duty flows naturally from effective business management, and it is the breakdown of good management practices, and the lack of skilled leadership, that breeds claims for breach of fiduciary duty."(6)

This is the second post on this subject and the first half of Part II of a multi-part post. In these posts I'll reference and quote a few sites and professionals, and provide a few "real world" examples. This will illuminate some of the issues faced by our board (or any HOA board) and a few of the issues when performing one's fiduciary duties. The next post will go into this a bit further.

I suggest the reader take the time to visit the links at the end of this series of posts, for further information. 

I am of the opinion that our board has been operating at a "technical" level. There are more than a few reasons for this. There have been and continues to be loosely defined responsibilities and accountabilities among members of the board. I think there is a perception that they must keep a "majority" of the unit owners happy and contented and at other times also cater to the whims and complaints of other groups. They may see their principal job as overseeing the maintenance, landscaping and other firms which support this organization. They may perceive their "duty" as bending the rules by reducing the enforcement of the rules, so that no one is offended and no one is compromised. Of course, in such a situation we are all compromised. If they are, in fact, attempting to operate for the majority of us, rather than for all of us, is it any surprise this association is sinking into divisiveness and petty complaints?

The irony is, the group that initiated this was all about a shift from a business model to a social model.  They seem to have become that which they most abhorred! Isn’t there an expression that "What you resist, persists"? Perhaps this is why our HOA is becoming a field for power plays, resentment and passive-aggressive behavior? I'll let the board and our great thinkers answer that one,  because whether they know it or not, they do, in fact, "lead by example".

I have recommended, in writing, that our current board attend a session with attorney and workshops to improve their understanding of the meaning of their "fiduciary duties".  This would be a mandatory assignment for all board members. Failure to attend would require resignation. In this small, intensive and "hands on" workshop, there are numerous questions to be asked, and answered. What are the issues and the practical application in an HOA? How to run an association for the benefit of “all” and avoid catering to the majority or other groups? How to balance the business aspects with the social aspects and properly enforce the rules and regulations? How to deal with dissension among unit owners and divisiveness among board members and successfully complete and uphold our duties? What is the proper conduct for a member of the board?

Here is the first of several examples, to illuminate the question "what are fiduciary duties". Sometimes it is useful to determine what something "is" by determining what it "is not". Or, what actions "are" consistent with fiduciary duties, by studying actions that "are not". Here is a list of recommended actions:

(1) "What actions can community association boards take to limit claims that they have breached their fiduciary duties?

In general, we offer the following advice to community association board members:

1.     Understand the association and its operations.

2.    Devote time to association business and actively participate in decision-making.

3.    Select and support good management.

4.   Seek the advice of professionals and listen to the advice those professionals give.

5.    Avoid making decisions solely based on popularity or to quiet dissension among neighbors.

6.   Serve the association altruistically, without compensation or special treatment.

7.    Conduct business at arm's length and for the association's benefit, not your own.

8.   Document the decision-making process in the association’s minutes, including professional advice received, for all major decisions."

I suggest the reader re-read the above. I’ll use some of the above in a few “real world” examples.

Let’s start with Number 3. Last year, there was open hostility toward existing board members, management and our professional maintenance company. It seems that the position was taken that one doesn't have to support management if they truly believe that management isn't "good". Really? REALLY? Certainly FUPM's communication methods with unit owners were under par; there were sufficient unit owner complaints about that. But it went further; why, ”we all knew” that management isn't good, didn’t we?  Question: Who is the "we" and how do we know what we know?  Well, I take another view. I think that it is the role of the board to support management, to guide management in correcting their inadequacies as part of the "partnership" that exists in running this HOA. And vice-versa. Instead, it became very clear that our management firm was in the crosshairs of a few. But the storm seemed to “blow over” and nothing happened! Actually, something did happen, and management now appears to be far more compliant to the wishes of the board, including the board's position on "hot button" items such as unit owner fees.

Current or recently elected board members have chosen to listen to management when it serves the purpose and position of some of the members of the board, and management seems more compliant, sometimes defending the position of certain board members during association meetings, etc. This year, management made an about face at the budget meeting of the association and made a statement which was something like "management does not believe a fee increase is necessary at this time." This was immediately seized upon by most of the board and has been used to justify their vote, to hold fees constant. How is it that members of the board can have it both ways? Management is “good” if the information it provides suits and supports the position of the board, and yet management is also “bad”. How can that be? Our treasurer, an experienced board member, stood his ground and did not cater to the "will of the majority". Good for him.

Number 5 seems to be a reoccurring and very difficult one. Is the goal to please people or keep them happy and thereby seek re-election? At times members of recent boards have seemed to promote and favor the wishes of groups, including the ever changing and nebulous "majority". Our current board may be accelerating the movement in that direction. Forms are being prepared with questions for unit owners to answer. From this, the position of the majority on key issues can be tabulated. Of course, since nearly half of our membership doesn't vote, it would be "common sense" that the majority will not respond to these forms.  There is a problem here. A group is a group. Satisfying the needs of the majority at the expense of a minority is "making a decision based on popularity." I thought an association is to be run for the benefit of "all" members. Any time the board of an association operates by seeking approval from a group of unit owners and then attempts to justify their actions because of the "will of the majority", it is headed down a very slippery slope. Consider for a moment the possible rationale of such a board. "We are merely doing what our membership is asking us to do." Is that leadership, or politicking?

Our board will have to make unpopular decisions. It appears that their current rationale is to attempt to offend as few people as possible. That in and of itself, is neither "good nor bad". However, it is not a valid approach if the principle goal is to be "popular or to quiet dissension among neighbors."

The board must uphold the condominium act, must collect sufficient funds to properly maintain this property (common elements) and in other ways "protect unit owners from themselves". That will include unpopular actions. Interesting, but no one asked me if I was for or against a fee increase during the budget planning period, and it’s my understanding that board members don’t read my blog. I suspect some don’t read my letters which are routed through management, either. Is it possible that the justification for this is their position that I am not a member of the majority, or some other special group? Since when is that a criteria? The only approach which is acceptable is for our board of managers to make decisions in good faith and with a rational and informed basis, which is to say, "in a manner each director believes to be in the best interest of the association, and with such care, including reasonable inquiry, as a prudent person in a like position would ordinarily use under similar circumstances." That is why I have taken the position that each and every board member should be willing and able to discuss their votes, and provide their basis and reasoning in reaching that vote. Is it possible that reading this blog would be a part of being “informed” and making “reasonable inquiry”? It certainly isn’t if the goal is to only read that which supports one’s preconceived notions.

If there is a desire or emphasis to satisfy the purported "group or majority", it is inevitable that some unit owners will be given short shrift.  I'll use the example of the change from guest parking to unit owner parking, which was discussed and voted last year in our HOA. During the unit owner's portion of that meeting, a unit owner made the request that the board consider preserving some of the guest parking as handicap parking. Some board members began discussing this, including the fact that the "guest" spaces did provide level asphalt for egress from vehicles, but it was quickly passed over in the rush to vote for the conversion of all "guest" parking to "resident" parking. As I recall, this had been promoted earlier in a survey. It seems that this conversion was the "popular" decision to make. If such a stance is taken, doesn’t that mean that the issues and the votes will go whichever way the wind blows. Is this leadership?

Continuing to another "popular" item last year, there was a request to change the rules to allow lawn posting of unit "for sale" signs. These are currently permitted only in windows. This item did not make it to a vote by the board last year. It will resurface. I don't have a personal opinion, either way. The questions for the board to answer in considering this would fall under the umbrella “How does this serve, enhance, or detract the entire association?” Some of the specific questions could include: 1) What is the recommendation of management, and why. 2) What is the opinion of professionals and who are they and why did they state what they stated. 3) How does this serve all the members of the association and why does it do so; alternatively, which members of our community are not being served.  4) Who made the request that the board consider this change. 5) Are there any costs or liabilities to the association in doing this, 6) What would be the effect if 20, 30 or more signs were posted? 7) What would need to be done to control the posting and maintenance of these signs. 8) What rules would be necessary for esthetics, such as to keep signs “neat”, maximum size and quantity per unit, 9) Could or should signs be removed by the association and under what basis? 10) Should a fee be extracted if there is any requirement for cleanup by maintenance, for example, damage to lawns, signs scattered on the grounds, etc. 11) Who is responsible for damage to lawns, etc. 12) In considering this at this particular meeting, what other business needs to be considered by the board at this time and which may be of higher priority due to scheduling, weather, breakdowns, etc.

And then there are requests for "garage sales" and "association parties" on the property, and so on. These I am certain will again come before the board. So how would one, if on the board, present this? I suggest that a "reasonable inquiry" in this example would include, at a minimum: 1) What was the cost to this association when the last injury case came before it in legal action, 2) Has the board considered the "experts" position regarding the possibility of legal action against this association, for example, noted attorney Mark Pearlstein's statement that "60% of all condo boards and homeowners associations in Illinois are involved in some kind of legal suit" see Our "City within a City" , 3) What was the increase in insurance rates the year following that last legal injury case, 4) What is the cost for rider insurance for each party or activity; last year it was initially stated to be nothing but later it seems a rider was quoted at $4,000, 5) Did our board budget funds for this insurance in 2010, 6) Is this a prudent use of unit owner fees, 7) Is it possible to control visitors and if so, how and if not, is that a problem or could it be a problem for unit owners. 8) Specifically where on the property would this occur and what limitations would be placed on unit owners. 9) Are there any safety or legal issues to be considered. 10) Has legal counsel been consulted. 11) Who will pay for any cleanup costs, damages, wear and tear, etc. and how will this be collected. 11) What restrictions will be placed upon unit owners who participate or organize these events. 12) What other restrictions would be necessary so as not to interfere with the lives of unit owners who choose not to participate, for example, what dates, times, day of the week, etc. 13) Who does this serve in the unit owner body, and who might it not. 14) In other cases, this board has taken the position that all unit owners in the immediate proximity of unit owners who want to make certain changes must be consulted and must give approval. Would that not also be appropriate for these types of events? If not, why not?

If the above questions are not asked by the board, then are they in fact "acting in good faith and reasonable care" in exercising their duties and responsibilities?   

As another example, I want to present the discussion last year of the ongoing upgrade of the railings on second floor patios. You may recall the meeting in which some board members challenged the necessity of doing so. Unit owners attending the meeting expressed anger over fees and the apparent willingness of the board to waste money. The new board members stated that this was a problem because 1) we are not currently required by our city to provide this improvement, and 2) There was issue taken that our maintenance company was doing the work, and making money doing what seemed to be an unnecessary task. During the discussion that ensued, our professional management stated 1) This was being done as a pro-active measure, it was also stated by other board members that 2) The association has, for a period of years, been providing free screening to cover the open areas of the older style rails to any unit owner who is concerned about the size of the openings or have children or pets and request this. 3) Management and the architectural director stated that while not currently mandated by code, this has a safety component and the association has been pro-active in doing this. 4) The existing board stated that by doing it this way, the association can spread the costs over a period of years and coordinate with the painting schedule of the buildings, 5) It was stated that all aspects of decks have been a particular concern of the association ever since the notorious collapse of one in Chicago several years ago and the litigation that created, 6) The architectural director stated that the association routinely maintains and repairs common elements, including the concrete first floor patios. The maintenance of railings would therefore seem to be appropriate for second floor owners. When the vote was taken, the board decided to continue the replacement of balcony railings on the normal schedule.

In the above example, was the decision appropriate to "fiduciary duties"? Were the explanations reasonable? Did the board seem to understand the operation of the association? Was the board supporting management? Was the advice of professionals sought and considered? Was this made as a popular decision? Was compensation to board members involved in the decision making? Was the decision made "at arm's length" and with no political or other reward?

Looking into it a bit deeper, is the association responsible for the maintenance of common elements and secondly, is the association required to provide adequate or necessary safety measures for common elements? The answer to both of these questions is "yes" and by addressing this issue, was the board of managers "acting in good faith, with a rational and informed basis for their decision?"

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References, Errors, Omissions, Additions:

(1)  Colorado HOA Governance
(6)  HOA Law - Jeffry A. Barnett, APC
 * Miscellaneous spelling, grammar and typographical corrections.
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