The Functional Board

Several years ago, I wrote an article entitled “Tied Up in Knots” (Habitat, December 1998) about the conduct of dysfunctional boards. That behavior manifests itself as egotism, indecision, failure to act, inappropriate anger, and a tendency to ignore facts. The functional board operates quite differently.

The functional board is the antithesis of the dysfunctional one. The decisions rendered appear to emanate from a unified body. Many are compromises even if the vote is unanimous. Even if the vote is unanimous, the process is dependent on communication among members. Leadership plays an important part in decision-making, and it can be centered in any one or several members. This board efficiently reaches decisions and effectively acts for the greatest good of the community.

Such well-being is measured by what will provide the greatest happiness to a majority of its residents. The board’s ability to reason will determine whether decisions are made in the best interests of all. In his Commentaries on the Laws of England, William Blackstone states that, if reason were “...clear and perfect, unruffled by passions, unclouded by prejudice, unimpaired by disease or intemperance, the talk would be pleasant and easy; we should need no other guide but this.” A functional board is a reasonable board.

How can you recognize a functional board? There are three major points to look for:

Sound finances. Sound finances begin with a balanced operating budget. This is the framework defining the financial parameters in which an organization operates for a set period. Authorized expenditures fall within the budget framework. Anything outside this requires board approval. That should be rare, with careful consideration of how you will pay for non-budgeted items.

Boards have a fiduciary responsibility to owners. This begins with the preparation of a budget. That document consists of several components: income and expenses from operations, debt service, capital expenditures, and reserve funding. After operating expenses and debt service have been met, it should show a positive cash flow. Capital expenses are paid out of a reserve fund, by special assessment, or by incurring debt. It is preferable for boards to establish and maintain a reserve fund for contingencies and future capital expenditures. A healthy fund, built up over time, keeps debt low or nonexistent and minimizes the need to tax owners with assessments. Once established, this provides financial peace of mind for the community.

In any case, operating expenses should be met by operating income, not by drawing on savings or assessing the owners. A deficit will not go away by itself but must be eliminated or it will grow with inflation. If a board lets a deficit grow, the funds needed to bridge the gap will increase. To ignore this is irresponsible.

Every organization has limited funds. A budget serves as a tool to live within one’s means. Since so many individuals live their financial lives impulsively, it is important for a board to keep a close watch on expenditures. It is very easy to justify spending; someone always comes up with a good cause. If expenditures exceed the budget, the board will have to answer to the owners: “What did you do with our money? Why are our charges going up?”

Successful completion of short-term projects. Once the property’s finances are in order, the board can focus on short-term projects. These are budgeted and completed within the current fiscal year. Those selected should be prioritized for the greatest need. Reputable contractors with proper insurance coverage should competitively bid on contracts. Once the correct balance of price and quality is ascertained, the work can proceed.

Planning for long-range projects. The last area that identifies the work of a functional board is in the planning of long-range projects. Replacing roofs, windows, and doors and repaving a parking lot are examples of projects that fall in this category. Depending on the size of the property, these projects can run into hundreds of thousands of dollars. A fiscally responsible board will establish a reserve fund in which a small sum is collected each month earmarked for the long-range projects. Having this fund can increase the property’s value. It offers a secure financial foundation in which to operate.

That sums up the work of a functional board; it is fiscally responsible, efficient in carrying out projects, and plans for the future. Through these practices, the board maintains and improves the property, providing an attractive environment and increased value for the owners.