Turning Bad Habits Into Best Practices

Most co-op and condo boards run reasonably well. And then there are those with some very bad habits: boards who pay themselves; boards who hire a vendor who’s a relative; boards who play favorites over garage spaces or storage bins.

What's a managing agent to do when he or she signs on with such a co-op or condo?

"It's about being proactive – we don't want to wait until something happens," says Thomas Thibodeaux, CFO and co-owner at New Bedford Management. "A lot of times at the first board meeting we attend, we bring out a code of ethics" – such as the National Association of Cooperative Housing's Board of Directors Code of Ethics – "that describe board members not benefiting from their positions, not self-dealing, keeping an arm's-length distance from vendors, keeping the confidentiality of things that are not meant to be spread around the building, such as [issues that could compromise] the privacy of individual owners."

A little schooling is in order, too. "You have to educate them, you have to lecture them – I mean literally lecture," says Siren Management president Jeffrey Heidings. "You have to make a compelling argument to show a board why something is in the best interest of themselves as a governing body, of the entity they represent, and of the shareholders of that entity – what the positive effects would be and what the negative effects might be if they carried on in such a way."

Thibodeaux agrees: "The board will say, 'Ah, we've done this for 30 years.' So I tell them stories about how, 'This is what happened in this building after 30 years, and this lawsuit that went against the board.' I'll go through and tell them where it went wrong and why a little bit of luck is not enough."

A board can leave itself and its shareholders or unit-owners open to liability if they behave irrationally. And the types of irrational things some boards have done can be astonishingly brazen.

For instance, Thibodeaux recalls, "We managed a building for almost a year, and when the holidays came around, the board gave us a list of the staff that they wanted to give a bonus to. They also gave us a list of board members and a dollar amount each board member needed to get paid for their bonuses!" He laughs at the memory. "I told them, 'Wait a minute, it doesn't work that way – it's a volunteer position, you can't be compensated.' They go, 'Well, we did a lot of hard work, and we've always done this in the past.' So you tell them to imagine what the shareholders would think if they knew the board was taking money out of the operating account and arbitrarily deciding how much to pay themselves with shareholder money."

Reluctantly, the board stopped paying itself bonuses.

Which brings up a final point: Forget the past. "You might find out that someone in the building owns the architectural firm the board uses. Address it immediately," Thibodeaux advises. "We don't want it to get personal."

Instead, he says, it's important to let boards know that "we're not on a witch-hunt, we're not judging anything you did before, we're just trying to teach you best practices and let's talk about the future. We're not in the blame game. It's about growing and learning and moving forward."