Reining in a Rogue Director

It takes only one bad apple to spoil things for a well-functioning co-op or condo board. Take the case of one New York City co-op, where a director wreaked havoc amid a roof project that involved asbestos removal. The asbestos was nonfriable — that is, bound to the roofing material and unable to escape into the air — but because the contractor had not explained to the board that workers would still be wearing hazmat suits, the director flew into a panic when he saw the men at work. Even after an engineering report confirmed there was no health risk, the director notified the Department of Buildings, which found no violation had occurred. That’s when his behavior crossed the line into misconduct.

“He sent flyers to shareholders about the board’s discussions on the project, which included information from meeting minutes,” says Dean Roberts, a partner at the law firm Norris McLaughlin who is the co-op’s attorney. “They’re still having to explain to people that everything was done safely. This one guy caused a lot of headaches over a nonissue.”

That one guy is not an outlier. Rogue directors are an all-too-common nightmare at co-ops and condos, whether they’re making decisions independent of their boards, taking on roles they were not given the authority to handle or flagrantly flouting established rules. “I can’t tell you how many calls I get from board presidents dealing with problematic directors,” says Ken Jacobs, a partner at the law firm Smith Buss & Jacobs. By far, the most frequent transgression that lands board members in trouble is breaching confidentiality by disclosing private information. Which begs the question: How can beleaguered boards rein in fellow directors who aren’t acting in the best interests of their buildings?

Degrees of Disclosure

Most confidentiality breaches are not intentional but inadvertent, the result of board members not fully understanding their duty to protect proprietary information — and how easy it can be to let things slip. Classic missteps include discussing ongoing board litigation in public, divulging personal shareholder or unit-owner information, or telling a spouse who is a real estate broker about apartments coming up for sale. Then there’s the well-meaning but misguided crusader — for example, the director who, in the name of transparency, stirs the pot by informing shareholders that the board is debating a maintenance increase or assessment even before a decision has been made.

When the slip-ups seem unintentional, a one-on-one conversation with the rogue director is often enough to curb disruptive behavior. “You have to explain that all information they learn as a board member is private and that innocent mistakes can have serious consequences,” says Jacobs, who recommends a second sit-down with the co-op or condominium’s managing agent or attorney for good measure. “Having a third party who is not affiliated with the board can enhance communication,” he says. “It can also help calm things down if emotions are running high.” 

Being Proactive

Some legal experts advise to get in front of the potential loose lip problem from the get-go. Roberts recommends the creation of a nondisclosure agreement (NDA) and requiring all board members to sign it. “Even though it’s not enforceable, I strongly recommend it because it’s an effective educational tool.” Roberts offers half-hour nondisclosure tutorials to his co-op clients. “People can’t plead ignorance about what information is private and what isn’t.”

Mary Federico, a consultant in organizational behavior and Habitat contributor who serves on the board of her Upper West Side condo, agrees. “You can’t enforce rules unless and until you clarify goals and set expectations,” she says. While board members should work as a group to determine what rules are best for their building, it’s impossible to cover every circumstance that might come up, so the more specific, the better.

Creating a comprehensive code of ethics — not just regarding confidentiality issues, but everything from accepting gifts to maintaining civil behavior with fellow directors — is another way to keep behavior on the straight and narrow. The “Model Code of Ethics” of the Community Association Institute, an association of board members, managing agents and business partners, available at https://bit.ly/MEthicsCode, is a good starting point. Some co-ops and condos adopt their ethics code as an amendment to the bylaws, which typically requires a supermajority of shareholders to approve. Like an NDA, it doesn’t have any legal force but it does create a “moral imperative,” Jacobs says, “because a director who won’t abide by it is violating the rules in black and white.”

Repeat Offenders

Some people never learn, however. To deal with loose cannons, consider turning to your bylaws. “Whenever I am reviewing and updating bylaws for a co-op, I recommend adding a specific provision that gives the board the right to privately and publicly censure directors,” Roberts says. “A private censure normally takes the form of a board resolution that sets forth the infraction and states that the director has been reprimanded. If the behavior continues, the censure is disclosed to shareholders by putting it in the public minutes.” If that is ineffective as well, the board can take the nuclear option and vote to remove the director. 

The state’s business corporation law gives co-ops the right to remove a director by a simple majority shareholder vote. The same provisions are usually found in condo bylaws. “The board can call for a special meeting, where it should clearly state its position on why it’s detrimental to have this person remain a member,” says Steven Sladkus, a partner at the law firm Schwartz Sladkus Reich Greenberg Atlas. “But it’s something that should be done only if things are really untenable — and by untenable, I don’t mean a director who has disclosed confidential meeting minutes about redoing the gym, but someone whose actions are putting the board in a legally precarious position.”

Getting that majority vote from shareholders can be tough. That high bar is one reason Roberts advises boards to consider a bylaw amendment to allow a board, instead of shareholders, to remove renegade members with a supermajority vote. 

This method is not without risk, Jacobs warns. “Boards might unfairly apply the rules to one member but not another, or even make false allegations against people who oppose them.” This could result in the individual who’s been removed suing to be reinstated, “a legal battle boards want to avoid,” Roberts says. 

Bottom line: “You don’t want to wait until there’s a crisis and deal with rogue directors on an ad-hoc basis,” Roberts says. “Boards should have every tool in their toolbox to deal with directors who won’t behave themselves and don’t understand that their agenda is not the building’s agenda.” 

At the co-op with the asbestos commotion, Roberts is working on a bylaw amendment that the board hopes will be approved by shareholders at the annual meeting this spring. “Fortunately, directors there have one-year terms, so the troublemaker will be off the board by then,” he says.

A Sample Code of Ethics and Rules of Conduct for Board Directors

The Board of Directors of [insert building] has the obligation and duty to make decisions for the entire community and is responsible to set a standard and a tone for behavior that is conducive to the best interests of the entire community. To that end, the Board of Directors hereby adopts the following code of ethics and code of conduct that are applicable to all volunteers serving the community:

1. The Board of Directors will use its best efforts at all times to make decisions that are consistent with high principles, and to protect and enhance the safety and property value of the residents.
2. No gifts of any type will be accepted by any individual Director from any resident, contractor, or supplier.
3. No contributions will be made to any political parties or political candidates by the Corporation without a majority vote of the community confirming such action.
4. The Board Members will protect confidentiality of other Board Members’ personal lives, as well as all residents’ personal lives.
5. No promise of anything can be made to any subcontractor, supplier, or contractor during negotiations, unless approved by the Board as a whole.
6. No drugs, alcohol, or substance abuse will be tolerated.
7. Any Board Member convicted of a felony will voluntarily resign from his/her position.
8. Language at Board Meetings will be kept professional. Personal attacks against Co-owners and Board Members are prohibited and are not consistent with the best interest of the community.
9. It is understood that differences of opinion will exist. They should be expressed in a clear and business-like fashion.
10. Proper parliamentary procedure should be followed to have such dissenting positions stated clearly within the official records of the Corporation.
11. A Board Member may not knowingly misrepresent any facts to anyone involved in anything with the community that would benefit himself/herself in any way.
12. No Board Member may use his/her position into enhance his/her financial status through the use of certain contractors or suppliers. Any potential or actual conflict of interest must be disclosed to the other Board of Directors.
13. All Board members shall maintain confidentiality with respect to the board’s “executive session” meetings, discussions, and communications.
14. Board members shall execute the attached “Agreement to Serve” upon assuming their positions. 

This resolution is adopted this ______________ day of __________________, at an open Board meeting where a quorum of the Board was present and will become effective immediately. Upon approval, each new Board member will be required to agree to this code of ethics and rules of conduct.

FOR THE RECORD: 

In addition to adapting a general code of ethics, boards can also draft a personal “Agreement to Serve” and require all directors to sign it.

I agree to serve on the Board of Directors for [insert building] (“Corporation”) and to be guided by the following principles:

• To attend and participate in all meetings and communications to the best of my ability to be present.
• To respect parliamentary procedure at all meetings, to refrain from speaking out of turn, and to participate in a business-like manner.
• To maintain confidentiality with respect to the board’s “executive session” meetings, discussions, and communications.
• To accept the board’s decisions, even if I disagree, as I understand there may not be unanimous support for every action taken by the board.
• To promote the goals and interests of the Corporation in a constructive manner, rather than create unnecessary conflict among the homeowners.
• To disclose to the board any financial conflicts of interests.
• To do my best to ensure that the Corporation’s finances are well managed.
• To uniformly enforce the covenants and other governing documents.
• To place the best interests of the Corporation above my personal interests; the interests of a particular homeowner; or the interests of a faction of homeowners.
• To abide by the Code of Ethics and Rules of Conduct enacted by the Resolution of the Board and provided to me with this Agreement.
• To resign from the Board if I find I can no longer maintain this agreement to serve.

Dated:________________ Signed _________________________________________________