Are You "Human Capital for An Errant Board of Directors

If you find yourself dealing with self-serving Board of Directors that seems to be indifferent to your concerns about enforcing rules or managing the Association’s funds, particularly if the Board seems to spend these funds to improve their property values before yours, then you may be dealing with problem that is difficult to correct. In such a case, you become human capital for these Boards, meaning that you are paying for their needs, not yours.

The first impediment to correcting this situation is that the Association’s governing documents may not make it easy to replace a self-serving Board. The Association’s governing documents usually state exactly how the Board’s directors can be removed; and the easiest thing to do, …and I do not mean it is really easy….is to obtain ballots or signed proxies for an up-coming annual meeting so that you have voting power to replace directors who have repeatedly violated their responsibilities.

The second impediment to correcting this situation is a corporate law commonly referred to as a “Business Judgment Rule” (BJR) which does not hold the Boards of Directors accountable for making bad decisions on behalf of their Associations, as long the Boards acted in good faith for no self-serving reasons. The Courts in different states may be more specific about how much leeway they will grant to the Boards for their mistakes in judgment. For example, in Washington State, the Boards must demonstrate that they followed a reasonable decision-making process prior to making a decision; but if the decision was self-serving that would raise a red flag. Therefore, to correct this situation, the members have to be able to demonstrate that an errant Board of Directors had a self-serving agenda (ie., that certain Directors benefited from their decisions that adversely impacted other members of the Association).

The third impediment to correcting this situation is that the errant Boards will undoubtedly cover their tracks when it comes to hiding their handling of the Association’s funds. They will not keep invoices; they will hire service providers who will kickback a fee off the books to a Board member. In other cases, Boards may impose a huge special assessment for repairs, in which case the members should insist on reviewing the competitive bids, which are not usually available if something is fishy!

The fourth impediment to correcting this situation is that the Boards can use their insurance coverage and the Association’s dues to hire an attorney to defend their self-serving actions. Therefore, it is most important to become involved. Most members forget to do this which increases the likelihood that Boards will eventually take advantage! The first three situations described above are the easiest problems to solve because they do not require paying attorney’s fees.