"Phantom" Boards Now You See 'Em...Now You Don't

"Phantom" Boards

 As the directors of a cooperative corporation, co-op board members have a number  of duties to their shareholders, chief among them to preserve and improve their  investment and to maintain and/or improve shareholders’ standard of living in the building. Along with that responsibility comes the  necessity of keeping building community members informed of board meetings,  important decisions, and anything that might affect their investment and  day-to-day life in the building.  

 But what happens when board members are unresponsive? What if they don’t return calls, don't hold regular meetings or elections, keep non-board  residents in the dark about their building's business, and are generally MIA?  

 Legally Required

 Co-op boards in the state of New York are regulated under one of the state's  original statutes created to regulate businesses, the Business Corporation Law  (BCL). This statute primarily governs how cooperative corporations, including  co-ops, must be run. The BCL provides specific rules regulating the corporate  governance practices of co-ops, including the manner in which boards and  shareholders conduct meetings, amend bylaws, and vote, and the BCL prescribes  the rights and responsibilities of boards and shareholders. While it may be  asking a lot of volunteers to study the entire BCL or know its nuances by  heart, it's a good idea for all board members to at least be aware of its  existence, and better to have a passing familiarity with its contents.  

 The BCL was implemented over a century ago to regulate governance of  corporations in New York, and remained more or less unchanged until it was  overhauled in 1998. “The BCL was drafted generally for corporations, [the legislature] didn’t have co-ops in mind, and the courts have applied the BCL to co-ops,” explains Stephen M. Lasser, a partner with the Manhattan-based law firm of  Barton, Barton & Plotkin, LLP.  

 What happens if a co-op’s bylaws are inconsistent with the BCL? The BCL provides that when there is a  conflict, the BCL will prevail: “The bylaws may contain any provision relating to the business of the  corporation, the conduct of its affairs, its rights or powers or the rights or  powers of its shareholders, directors or officers, not inconsistent with this  chapter or any other statute of this state or the certificate of incorporation.” The BCL is a default set of rules.  

 In addition to outlining board responsibilities and shareholder rights, the BCL  provides detailed regulations on the manner in which boards and shareholders  conduct meetings and do business. The rules outlined in the BCL have the  potential to empower shareholders to ensure their boards are performing  lawfully. According to Richard Siegler, a partner with the Manhattan-based law  firm of Stroock & Stroock & Lavan, LLP, shareholders can potentially bring lawsuits under Article 6 to  assert their rights. “Suppose a co-op corporation doesn’t have an annual meeting for two years? Can a shareholder seek to have an annual  meeting to elect new directors? The answer is yes—it’s in Article 6—they can have a special meeting to elect directors.”  

 For shareholder meetings, Section 602 of the BCL allows cooperatives to create  their own rules in the bylaws, as these meetings “may be held at such place, within or without this state, as may be fixed by or  under the bylaws, or if not so fixed, at the office of the corporation in this  state. The BCL does prescribe, however, that annual meetings must be held for  the election of directors and transaction of other business. Meetings via  conference call or video conference are now permitted by the BCL as long as  everyone in the meeting can hear each other at the same time.  

 “The BCL does not deal explicitly with issues such as who presides during  meetings, what parliamentary rules govern, nominating procedures, proper format  for committee reports, the method and timing of notices, the format of proxies,  or methods by which questions from the floor are fielded,” according to Bruce Cholst, a partner with the Manhattan law firm of Rosen,  Livingston & Cholst, LLP. “The absence of clear-cut guidelines regulating the precise manner in which  shareholder meetings are noticed and conducted often leads to confusion and  sometimes rancor at shareholder meetings. This is particularly the case when  insurgent shareholders perceive that the rules are being arbitrarily applied  for the sole benefit of the incumbent board,” says Cholst.  

 Apathy...or Worse?

 Under the BCL boards are required to hold annual resident meetings, and also to  hold annual elections. As pointed out, apart from that, there is no legal  reason compelling board members to communicate regularly and openly with  shareholders and other residents. Regardless of how it might seem to non-board residents, when boards are not  communicating, it’s not because they are a secret society hellbent on world domination beginning  with your co-op; usually, it's just because there’s nothing pressing to communicate.  

 “The boards I saw that were ‘phantom’ met four times a year because of apathy,” says Anton Cirulli, managing director of Manhattan’s Lawrence Properties. “There were just no issues—they had a strong super or managing agent.”  

 Or a strong board president. According to Cirulli, in a well-run building he knows, the president of the  board has been there for 20 years with great success, and the other board  members rubber-stamp whatever he wants to do. There is no revolutionary movement to oust him; on the contrary, the residents  are happy to have a strong leader.  

 “That happens when you have an election, and no one’s running,” he says.  

 Generally, this happens more in smaller buildings—a Brooklyn Heights brownstone, say—rather than larger, newer high-rises. “The building is financially solvent,” says Cirulli of the two-decade president's particular case. “People are generally happy.”  

 Of course, there are some people who are never happy, no matter what the  situation. A shareholder could die and leave $10 million to the co-op to build the best  garden in New York, and rest assured, someone would complain about the bees. It is a rule of thumb among industry pros that five percent of the residents  will issue 95 percent of the complaints.  

 In a co-op this reporter once lived in, one chronic complainer harassed one  board member to such an extent that she had to take out a restraining order  against him; for reasons clear only to himself he then sued the board—and then complained at the annual meeting about the legal fees stemming from  defense of his bogus lawsuit that the co-op had to pay for!  

 It's a Customer Service Thing

 “Boards pay management companies to handle complaints,” says David Kuperberg, CEO of Cooper Square Management in Manhattan. “It’s part of the service. One of the major components of a management company is customer service, and the  shareholders are customers.”  

 Managing agents, then, act as buffers between the boards and the problem  residents. “If you have someone who’s just a chronic complainer,” says Enid Hamelin, a property manager with Lawrence Properties and a veteran  Manhattan board member, “the managing agent knows how to handle it.”  

 Boards who utilize their management companies to handle the chronic complainers  can wind up with “phantom” reputations, as the chronic complainers tend to complain to whoever happens to  ride the elevator with them.  

 “The only time a resident should ever have to approach a board directly,” says Kuperberg, “is if the managing agent is not responding, or if the board is doing things they  shouldn’t be doing.”  

 Such as criminal behavior?

 “No,” he says, laughing. “Micromanaging. Not allowing the management company to do its job. If the board is responding directly to every resident, they are rendering the  management company ineffective.”  

 While there are compelling reasons for boards to communicate to the residents—of which more shortly—they are advised, in case-by-case situations, to use the management company. “Defer to the managing agent,” says Hamelin. “The managing agent should respond immediately.”  

 “For individual issues, boards` should respond that we have forwarded your  request to the management company, and the management company will respond on  our behalf,” Kuperberg says.  

 In fact, between the board members and the property managers, there is not much  lack of communication going on.  

 “We pick up the slack,” says Cirulli. “We respond. ‘We’ve gotten your letter, we put it on the agenda, we’ll get back to you shortly,’ That’s generally 99 percent of the battle.”  

 Speak Up

 That said, it can be in the best interests of the board to keep residents in the  loop.  

 “Communication is so important,” says Hamelin. “If you don’t communicate, it fuels animosity and resentment.”  

 More often than not, what most people really want when they lodge a complaint—even the chronic complainers—is to be acknowledged that their voice has been heard. No one likes to be ignored.  

 “What you want to do is answer immediately, within 24 hours,” says Hamelin. “When I was on the board, we tried to answer immediately, even to touch base, or  else people felt abandoned.”  

 This doesn’t mean the board should open every meeting to every resident, just that it  should let people know what’s coming down the pike. A newsletter announcing a new initiative to renovate the lobby, for example,  followed by a town hall meeting, is better than announcing it fait accompli—or not announcing it at all.  

 Again, there’s no law compelling a board to do this. It just makes good business sense. We all want to live in a building where things move smoothly.  

 “It’s more a question of etiquette and people’s style,” Hamelin says.  

 One newfangled way to get people talking is using systems like Building Link,  which is an Internet-based system that manages all day-to-day communications,  record-keeping and task tracking between occupants, building staff and property  managers in residential buildings. Hamelin reports than many buildings are now  using these services, with positive results.  

 At the end of the day, it comes down to respect. People like to feel noticed. Responding to an email with a boilerplate “I got your note and have sent it to the manager” can go a long way to fostering harmony in your building community.    

 Greg Olear is a freelance writer and author and a frequent contributor to The  Cooperator.  

 

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Comments

  • If a board has take such control excluding shareholders and is not consistant with BCL, just running a muck, then who shall enforce BCL? It's clearly a free ticket to do unlawful acts!!!