Board Members Must Respect Their Duty to Govern Fairly

To prevent board members from violating their responsibilities to govern fairly, it helps to …

CREATE AN CODE OF ETHICS 

Most boards are at least familiar with the concept of fiduciary duty and their obligation to act in the best interests of their co-op or condo community. Akin to a lawyer or financial advisor, a fiduciary is entrusted to make decisions on behalf of others while adhering to ethical standards. But board members may not understand the nuances of their responsibilities as directors when it comes to the business of running their buildings. 

DUTY BOUND. Directors have a legal obligation to act solely in the interest of shareholders or unit-owners. It requires what’s called a duty of care, which means carrying out your responsibilities as conscientiously and prudently as you would your personal affairs. This includes participating actively in board meetings and engaging in informed deliberations before making decisions, especially expenditures on behalf of your building. There’s also a duty of loyalty, which means you must place the interests of the co-op or condo ahead of your own by disclosing any conflicts of interest and not using board service for personal gain or for the benefit of friends or family. Similarly, the duty of confidentiality requires you to keep certain types of information private and not use it to your personal benefit.

We represented some shareholders at a Lower West Side co-op where the board was very divided, a reflection of two very different ideological factions who had voted the members in. Several of them had leaked sensitive documents to an attorney representing a party — who was one of their supporters — being sued by the cooperative. In their minds, they were being loyal to someone who had helped elect them. But it was a breach of their duty to the entire co-op, which should have come first.  

TOO CLOSE FOR COMFORT. More commonly, fiduciary duty is breached when a board member casts a vote as a favor to a friend or family member, which often happens in the context of property transactions, like bringing in a potential purchaser or hiring vendors they have a personal relationship with. Even in cases where board members recuse themselves from voting, the mere fact that they introduced these people to the board can sway the opinions of other members, creating an implicit conflict of interest.

In those situations, there are measures boards can take to bring problematic directors in line, whether they’re flagrantly breaching their duties or are simply unaware that they’re doing it. The first step is advising the individual that they’re violating their obligations, which would require a uniform decision by the other board members. The board might not consider the transaction at all because it has been effectively tainted, which also requires a unanimous vote. But you can’t penalize violators or remove them from the board. 

To help prevent problems, you can create a written code of conduct and have directors sign it. However, no one is legally bound to sign, because it’s not part of your official governing documents. For example, we dealt with another building where an insurgent faction running for the board refused to sign a code of conduct and had in fact made it a key issue in their election campaign. Their argument was, “Well, the bylaws do not require it,” which was correct. They lost and accepted the results of that election. They ran a second time, and the same thing happened, because people believed they weren’t willing to play by the rules. There may be little you can do to enforce a code of ethics, but having one does help.