Whether they serve a co-op, condo, or HOA community, board members have a responsibility to govern and make decisions on behalf of that community—a charge that is often referred to as the board's 'fiduciary duty.' Decisions made on behalf of their fellow residents must be made in good faith, with the best interests of the community always guiding those decisions. Violating this duty can lead to legal consequences for boards and individual board members who stray from this rule.
That’s why understanding the breadth and the limitations of fiduciary duty is essential for both multifamily community board members and residents who don’t hold an office in their community. All residents must keep their elected officials honest by paying attention to their actions, whether they are city councilmen or condo board members. They must stay attentive to ensure that the proper actions and methods are performed by board members. Failing to do so could mean a special assessment is levied on everyone in the community, in order to pay for unnecessary legal fees.
To pursue the best practices in governing their community, board members must fully comprehend the concept of fiduciary duty, and allow that guiding principle to inform all of their choices as elected members of the community. They need to take the idea to heart, and keep it in the front of their mind, always asking, “What’s in everybody’s best interest?”
Defining fiduciary duty as it applies to board members means, in part, always putting the overall interests of the community first, regardless of the issue that the board is considering. But a selfless perspective for a community politician is just part of the responsibility that every board member of a co-op or condo assumes when they are appointed to their new position. The particulars of that duty are what give some board members pause, sometimes leading them to wrongheaded thinking.
“Fiduciary duty is their standard for being responsible for the association’s assets. It means having a loyalty to the association and a responsibility for the community’s property and money,” says Marc Garrison, president of Private Holding Group, a full service real estate management company based in Chicago. “Board members are supposed to look out for the association’s interests above all others, including their personal interests.”
This trust that residents put in their community’s volunteer leaders goes a bit further, though—wanting to do the right thing is not enough to really fulfill a board member’s fiduciary duty. One must do all of the work required to make the best choices in the interests of the community. Sometimes that means reading documents that are boring, or absorbing technical material or pages filled with numbers, or information which must be explained to the board by an accountant, professional engineer, property manager, or another expert consultant.
Being a board member means doing the hard jobs that are part of working in the management side of the community. That means doing tasks like poring over financial records, or perusing resumes and interviewing several candidates for a position, or even firing an incompetent property manager or a lazy building superintendent, despite the fact that nearly everyone in the building just loves the employee.
“Fiduciary duty means it’s the responsibility of the board to consider things in a businesslike manner and perform due diligence to make good decisions on behalf of the community as a whole,” says Michael Daniels, chief operating officer of Skokie-based Cagan Management.
Some guidelines for this responsibility include not getting personal; using your resources as a board member to make good decisions; and always deciding things for the community with your head, not your heart, Daniels advises. Following these guidelines will lead to success as a board member, and ignoring them can end in failure.
“When board members deal with things on a personal level, like taking something personal such as an eviction—a lot of times they make decisions that satisfy their need to get back at people, rather than making those decisions in the interests of the community,” Daniels says. “Board members could be sued, which is why they carry insurance. It’s paid for by the condo association, but they do need directors-officer’s insurance.”
Using resources as a board member means knowing when to seek the professional knowledge that is just a phone call or email away. Such advice should be sought any time a board member is not certain he or she fully understands an issue that could be voted on. Instead of half-guessing the correct answer to the issue, board members should always seek the input of their consultants, whenever it is relevant. Rather than thinking you know the right answer to an arcane question about construction, plumbing, roofing, or accounting, allow your accountant, property manager, engineer, super or another appropriate professional take a look at the problem before you act.
As a board member you are never really alone. Although beholden to certain standards of conduct, a good board member has sworn his or her loyalty to the community. Simply put, board members are not self-employed in their elected position; they work for the community.
“A board member acts as an agent of the community,” says Scott Seger, president of Forth Group Management in Chicago. “Property managers and management companies are all duty-bound to uphold the best interests of the community.”
When even one board member forgets this duty, problems can arise. Sometimes a single-issue board member is elected, though he or she never really had the interests of everyone in mind. Instead, this person had one goal to accomplish upon election: for example, changing the bylaws in order to put in a roof deck.
“The challenge in associations is one-topic board members, who get on the board for that reason, like a board member who got on the board to replace drafty windows,” Garrison says.
After accomplishing their goal, such a board member’s interest might fade. Soon, the board member becomes apathetic or even selfish in their decision-making, and that could lead to problems down the road.
Self-involved actions by a single board member can hurt everyone in the community. But smart board members know they need to check their egos at the door of the boardroom before a meeting. Making foolish or self-interested decisions could haunt them and even cost them money, which is why the board is insured by the community.
Boards and board members are regularly sued, and when they don’t do their jobs, they often lose those lawsuits. And when they do lose, all resident lose, having to pay a premium in legal fees.
Even actions that some in the community wouldn’t find objectionable could put the board in jeopardy. Such a case could happen, for example, when the board allows the manager to hire one of his relatives. The manager has been with the building for decades and everyone likes him, so why not hire his son or nephew or daughter, the board figures. Not being lawyers, they don’t see the legal nuances of the decision.
“Illinois law says no relatives can be hired. It’s clear about avoiding conflict of interest,” Seger says.
With Chicago co-ops, business corporate law can take precedence in legal matters. Depending upon the legal issue, when it comes to condos, the Illinois Condominium Property Act could take precedence. And of course, any clearly illegal behavior by a board member such as “fixing” bids for construction work on a building so a friend, associate or relative has the lowest bid and wins the contract, could land that board member in jail.
Even much less egregious actions—or lack of action—by a board can be problematic. For example, if there is water leaking from the building’s roof and the board has only had a temporary or inadequate fix done on the leak, they haven’t fulfilled their fiduciary duty. They might be liable if one of the building’s residents decided to file suit over the matter. When that happens, both sides can incur heavy legal fees.
Other issues might appear simple at first glance, like when the manager has recommended that the façade be repaired, but a board member doesn’t want to spend the money on the repair. He doesn’t want to do a special assessment, which will be needed to pay for the façade repair. Thinking that he is being prudent, he fights the assessment and the repair. Bad move.
In such scenarios, it’s a property manager’s responsibility to give the board member a reality check and remind him of his duty. “It’s something we have to remind board members of in different situations,” Garrison said.
Righting the Ship
If a board member blatantly neglects or disregards his fiduciary duty, his neighbors in the community can take corrective actions. When the board member in question holds an office on the board, his fellow directors could vote to remove him from the office. If enough people in the community find fault with the board member’s action, they could vote him out of office in the next election.
A recall vote also could be taken in order to remove the person from office. And obviously, if the board member is doing something that is illegal, like fixing bids, residents could call on the authorities to prosecute the wrongdoing. “Certainly, if somebody broke the law, that would become a criminal matter and be reported to police,” Seger said.
On a board, usually one bad apple doesn’t make a big difference, Daniels says. “Sometimes a board member suggests the board invest in something that’s a commodity. When they’re dealing with other people’s money, they have to act prudently,” he says.
But getting the building into unnecessary lawsuits is as imprudent as they come, experts warn. The major issue regarding fiduciary duty is when the board doesn’t do its job and is sued because of it, Garrison says. “The biggest problem in my view with fiduciary duty is board members who are disinterested. It ultimately leads to a board being sued,” he says. “Board members who don’t take the job seriously run into problems.”
Conversely, boards that run efficiently, smoothly and conscientiously might not be noticed doing their jobs so well by their peers, until they make an unpopular decision such as a special assessment. But voting for such a fee, while perhaps universally unpopular among residents, could be the only fiscally responsible thing for the board to do. Making those unpopular decisions, despite potentially raising the ire of residents, is what separates well-run boards from all the rest.
Jonathan Barnes is a freelance writer and a regular contributor to The Chicagoland Cooperator and other publications.