Like most business corporations, co-ops rely on a board of directors to oversee operations and make decisions for the benefit of all shareholders. What makes a co-op's board unique is that itsmembers are responsible not only for the corporation's finances, but for the quality of life within the building as well. Thus, it is vital that co-op shareholders have a unique system by which to judge their board's performance.
Experts agree that residents can evaluate their board's performance by making note of several factors, including the quality of communication between the board and shareholders, the speed with which problems are resolved, and the degree to which boards foster resident involvement. The implementation of safe-guards to prevent the board from getting out of control is another important guide. All of these factors aid in cementing the sometimes tenuous relationship between the board and shareholders.
Although the governing documents of every co-op dictate the responsibilities of the board, and their boundaries of power, abuses do persist. Boards have a fiduciary responsibility to their fellow residents. They are obligated, under the New York State Business Corporation Law (BCL), to make their first allegiance to the corporation as a whole, not to themselves. Given the large degree of trust that is handed over to the board by shareholders, it seems reasonable that they expect to be kept informed on any and all matters affecting their building. Through regular meetings and newsletters, board members can keep shareholders informed, allay any fears they might have, and strengthen the bond of trust so vital for the good of the building.
According to Jay Zinns, partner with the law firm of Jacobs and Zinns, there are definitive ways for shareholders to determine if their board is working: If the board is sticking to the policies it enunciated at the annual meeting; if conflicts are taken care of with relative speed, he says. Mark Luxemburg, of the law firm Snow Becker and Krauss, adds that a good yardstick is to look at how well physical problems are handled and how expertly resident's needs are attended to. Zinns adds, Residents should be enjoying a building that is clean with systems that are operating the way they're supposed to. They're not just living in the building, they have an investment in it; obviously, they want to be sure their investment is being handled well.
Much of the success of any corporation lies in the level of communication developed among its members. The only way to avoid excluding someone is to take precautionary steps to make everyone feel part of the whole, not left out in the dark. This is especially true in the relationship between co-op boards and their shareholders.
According to Robert Tierman, an attorney with the law firm Salon, Marrow and Dyckman, nothing drives shareholders crazier than lack of communication. A board that doesn't communicate with its shareholders is just creating a breeding ground for rumors and problems.
Certainly this was the case in Robert Kraus's Third Avenue co-op. There was zero communication between the board and shareholders. No shareholder meetings. Nothing. The next thing we knew, there was a large jump in our maintenance. We were never told why there was a raise. You can't do that; you can't keep residents in the dark, says Kraus.
Jan Sigmon ran into the same sort of difficulty in her East 70's co-op. "Our building had just completed expensive and extensive lobby renovations. For the first time in a number of years, there was an increase in the maintenance. The shareholders went nuts. The board gave reasons for the raise, but only after residents demanded to know why.
"If the board had held meetings with us, saying, 'Look, the reason for the increase is that we didn't know the work was going to be so extensive,' we would have known and there would have been no conflicts."
Phyllis Weisberg, an attorney with Kurzman Karelsen and Frank, advocates regular shareholder meetings. This is an excellent way for shareholders to find out what's happening with their building.Regarding how often shareholder meetings should take place, Luxemburg feels it depends on the size of the building. Fifty to 100- unit buildings and up should have meetings monthly, he advises, whereas in smaller buildings--six to 15 units--boards may not need to meet with shareholders that frequently.
But it goes both ways, and if shareholders don't attend the meetings, they're only hurting themselves. At our shareholder meetings, maybe seven or eight people show up, complains one shareholder of a Queens co-op with over 100 units. The poor turnout made me feel like it was a waste of time going, he adds.
One way of ensuring that the board holds shareholder meetings is to send letters to board members requesting a meeting or going to them personally, as a group of concerned shareholders and demanding that building residents be kept in the information loop. Sigmon went to her board and gave them written sheets explaining the problems her building was having with the board. I created this question and answer sheet with the other shareholders. It was very detailed, explaining the problems we had with the board and our proposed solutions, she says. Because they saw this sheet, the board started holding shareholder meetings and, when there was an opening, asked me to join.
Kraus, who, in addition to being a shareholder, is a lawyer with Rosen and Livingston, focused the same scrutiny he uses for legal issues on the problem he was having with his board. He advises other shareholders to do the same. First, approach board members you disagree with on a personal level and tell them how you feel. It's best not to run to lawyers or send threatening notes. You're going to have to live together. Make yourself available to explain your position at a shareholder meeting and the problem, most likely, will end up reasoned out.
Shareholders should be aware that if they are faced with a board that is not acting on their problems effectively and quickly, they can always vote them out when the time comes for the annual meeting. Also, in most by-laws, with as little as 25 percent of the shareholders in agreement, a meeting can take place for the specific purpose of removing the board of directors.
In one East 60's co-op, One of the board members ran everyone, says a shareholder. He wasn't even board president! We found out later, after the board was voted out, that he ran them with an iron fist. Anyone who spoke against him, he'd yell at them; call them names, like 'stupid' or 'dumb.' He told the managing agent what to do, who to send checks to, everything.
This extreme situation provides a good example of why no one board member should have all the power. It shouldn't be one board member making all the decisions. If it is, it'll probably become another story of how power corrupts. If it's just one or two people making all the decisions, their personalities will be all over the choices made, says Tierman.
One way to avoid such abuses is to divide assignments up among board members and interested shareholders. One sign of a successful board is the division of labor among members, with each in charge of specific tasks. For example, one member can handle all accounting details while another is in charge of overseeing the managing agent and a third handles capital improvement projects. Getting the shareholders involved in building operations makes the system even more democratic, and helps avoid the Us vs. Them mentality that sometimes plagues co-ops and condos. Sub-committees can be formed of non-directors and be put in charge of areas, such as building maintenance or renovations, says Zinns. This way, the decisions made reflect the whole building, rather than simply the board of directors.
One of the most fundamental ways to ensure that your building has a quality board is to attend the annual shareholders meeting and vote. Find out in advance who is running and what they have to offer the building. Tierman feels that a wide range of professionals, such as lawyers, accountants, engineers or architects, will help create a better board. Entrepreneurs and business owners are also good potential board members, because they can help foster a positive environment for decision-making, says Tierman.
It rests with the shareholders to determine whether their board is acting in their best interests and giving them the quality of life they expect. If not, steps might need to be taken. And if extreme abuses persist, shareholders should be urged to act as a group and let the directors know how they feel .