What is a Board's Fiduciary Duty?
We often hear that a Board must act within its "fiduciary duty." Fiduciary duty means that Board members are bound under state law - usually a general nonprofit corporation or specific condominium/community association statute - to act within their authority, to exercise due care, and to act in good faith, taking into account the Association's best interest. Under the fiduciary model, Board members do not have individual power or authority. Rather, decision-making ability rests with the full Board.
A strict standard of care is imposed because Association Board members represent a public rather than a private trust. Owners depend on their Association to maintain, protect, preserve, and enhance the common areas, which as a result protects property values.
- Maintaining the common areas.
- Protecting the Association from liability through the purchase of insurance against both foreseeable and unforeseeable risk.
- Adequately funding a reserve for the repair and replacement of major components.
- Promulgating reasonable rules and following fair and reasonable due process enforcement procedures.
- Adopting policies to collect assessments.
- Administering the affairs of the Association.
- Ensuring that a system of internal financial controls is in place.
- Exercising fiscal responsibility by adopting an annual budget and exercising due care to ensure monies are spent prudently and vendors chosen with care.
- Reviewing and understanding periodic financials.
The law imposes fiduciary responsibilities to ensure that power is exercised conscientiously. Thus the fiduciary standard demands that Board members possess good communication skills, plan carefully in advance, delegate work to qualified Committees or advisors, exercise initiative and independent thinking, work well together, and always act in the best interest of the community as a whole.
The courts take the fiduciary relationship quite seriously. As a fiduciary, Board members are held to a higher standard than the man on the street. In your role as board member, your behavior and conduct has to be ethical and above board - not just for the sake of your Board, but for your entire community.
Business Judgment Rule
A more specific fiduciary benchmark is the Business Judgment Rule, which imposes on Boards the responsibility for understanding Association operations and researching every business decision they make before acting. It also offers some protection, because essentially the Business Judgment Rule states that if Board members act in what they believe to be the best interest of the Association - in a thoughtful, deliberative, prudent manner, after reasonable inquiry - then they're not liable, even if the decision turns out to have been a poor one. The Business Judgment Rule additionally requires Board members to exercise two more fiduciary duties: the Duty of Care and the Duty of Undivided Loyalty.
Duty of Care
Under the Duty of Care, Board members are expected to act in accordance with both the law and the Association's governing documents; and to use the care and skill that a prudent person would use in similar circumstances. Board members can also rely on information, opinions, reports, and statements prepared by their Committees, management company, legal counsel, and other advisers - provided they use this input to act in good faith, with no knowledge their actions are inappropriate. The Duty of Care applies to Board members in very tangible ways:
- Active participation. A Board member must actively participate in the governance of the Association by attending meetings, voting on issues, evaluating financial reports, reviewing Minutes, providing frequent communications to the membership, and so on.
- Board Actions. Board members who are present at a meeting when an action is approved by the Board are presumed to have agreed to the action unless they vote against it or are prohibited from voting because of a conflict of interest. Board members should not abstain from voting just because they do not want to hurt a colleague's feelings. They were elected by the owners to vote on their behalf; good Board members vote in the best interests of the Association.
- Books, Records, and Governing Documents. Board members should have general knowledge of the books and records, including the governing documents, maintenance records, and accounting statements, and make them available to owners who wish to inspect them. They must also ensure that Association records are accurate.
- Minutes. State laws require Associations to keep accurate Minutes of any meeting, including Board, membership, and Committee meetings. Good Minutes allow a Board to research past issues and decisions. Plus, in the event that a Board decision becomes a legal issue, the Association's attorney may need to review the Minutes to verify that the Board followed proper procedure.
- Restrictions. Among your Board's many important fiduciary duties is covenants enforcement. As fiduciaries, Board members are obligated to enforce all provisions in the documents and to ensure that they themselves are in absolute compliance. When the documents provide flexibility with regard to enforcement ("may" rather than "shall") must take into consideration many factors when deciding whether to take enforcement action against a member. If the Board makes a business decision not to enforce a particular violation because it's unpopular or will affect a large number of people, it must appreciate the consequences of that decision. It may establish a precedent that would make it difficult for future Boards to enforce that same restriction or other restrictions. The Board could face potential liability for failing to discharge its fiduciary responsibilities. Remember, the fact that a restriction is unpopular doesn't absolve the Board of its duty to enforce that restriction. The only way to legally avoid enforcing a governing document provision is to remove the provision through the amendment process. Alternatively, if the violation pertains to an architectural guideline or requirement, the governing documents may provide the Board the authority to grant a variance through the special resolution process.
Duty of Undivided Loyalty
Undivided Loyalty is the most stringent duty the law imposes on Board members. As a fiduciary, a Board member cannot in any sense be in conflict with the Association; he or she must act for the sole good of the Association at all times. To exercise its duty of undivided loyalty, a Board obviously should avoid conflicts of interest, which occur when Board members permit self-interest to interfere with their duty to the Association.
Example: Consider a Board that votes to employ the President's son as the community manager, or contracts a Board member's company to do the landscaping. In each case, meeting the duty of undivided loyalty would, at the very least, mean that involved Board members should fully disclose these relationships and abstain from voting and the Board should solicit additional bids. Only then would the liability arising from a potential conflict of interest be abated.