The Two-Way Street Board Accountability, Shareholder Responsibility

The old adage that knowledge is power holds doubly true when it comes to assuring ethical conduct and adherence to bylaws by a governing board, regardless of the size of a community size or the severity of a given crisis.

But the laws that govern certain aspects of board performance and accountability aren't just arbitrarily assigned rules and regulations; they're spelled out in the state's Business Corporation Law, or BCL. Supporting the framework of the BCL are a few other, more common-sense pillars: open communication, proactivity, and initiative on the part of not only board members and managing agents, but shareholders themselves.

Give and Take

An ethical, competent agent can help serve his or her building community and keep its board accountable, but ethics and common sense go both ways; they can raise a red flag for an aware, involved, shareholder faced with questionable action by their board or agent. Such situations often call for shareholders to challenge decisions made by their representatives and hired professionals.

"Shareholders [should] communicate with their management and with other shareholders and take advice from their own lawyers and accounting firm," says Robert Grant, director of management for Manhattan's Midboro Management. According to most bylaws, shareholders can petition for a special shareholder meeting - and sometimes bring legal action - with 25 percent approval, as well as pursue, if necessary, a legal avenue.

Stephen W. O'Connell, an attorney with the Manhattan-based law firm of Hartman & Craven LLP, has 18 years experience in real estate law with a concentration in co-ops and condos. O'Connell explains that a board's conduct is primarily governed by the state's BCL and the provisions of the business judgment rule, which came out of a 1990 legal decision that gives boards of directors the right to make reasonable business decisions in the best interests of their shareholders. Thus, it's been routine policy of the courts to avoid second-guessing the business decisions of boards, be they commercial corporations or cooperative apartment buildings.

The final decisions are made by directors who have acted on an informed basis, in good faith, and on the honest belief that their actions are in the best interests of the community association. But this protection is not bulletproof.

According to O'Connell, "If a shareholder is prejudiced or damaged on account of unlawful actions under the terms of the proprietary lease, bylaws or the law by the board or a board member, the aggrieved shareholder may seek recourse in court by way of an action for damages or for injunctive relief."

However, lawyers are expensive, and most minor disputes should be mediated outside of the courts. But if the case involves serious criminal activity - like financial fraud or libel - the attorney general's office can be contacted for guidance - but this is not common. Even in our overly litigious society, "lawsuits are the exception, not the rule," says Daniel T. Altman, an attorney with the Manhattan-based law firm of Belkin Burden Wenig & Goldman LLP. Although with more reports of kickbacks and money laundering making headlines in recent years, more shareholders are apt to pursue legal recourse. "In extreme [situations] there are cases brought forth, but bringing a suit is difficult because you [have the] burden of proof," says Altman.

Before holding the title of president at J.R.D Management Corporation in Mamaroneck, Frederick Mehlman served in a law practice that represented co-op and condo boards and was the Assistant Attorney General in charge of the real estate financing bureau of the New York Attorney General's office. He explains what authority the attorney general has in relation to overseeing co-op and condo boards.

"The attorney general's authority relates to the offering for sale of real estate securities, including cooperatives and condominiums," says Mehlman. "The attorney general regulates the conduct of the sponsors of co-op and condo conversions and - to the extent that the actions of the "˜bad board' relate to improper sponsor actions - the attorney general may take action." But, notes Mehlman, "Absent such sponsor involvement, the actions of the board are not regulated by the attorney general."

Usually before bringing an issue before the attorney general, a board's attorney, or the attorney of an individual shareholder will investigate all charges.

"There are other legal avenues that may be pursued, depending upon the severity of the situation, but lawyers are expensive and may not always be an efficient use of resources except in serious matters," says O'Connell.

The question of what makes a "bad board" is often subjective and or relative to the situation and the players involved. However, if unlawful activities are substantiated, the big guns can be brought out in the name of justice.

"The attorney general's office is generally reluctant to get involved in cooperative or condominium board disputes unless [the problem is] truly egregious. The attorney general is not there to police board actions," says O'Connell.

"However," adds O'Connell, "if the sponsor-controlled board member is the focus of the inquiry, then the attorney general is more likely to take an interest, since sponsors are subject to the enforcement powers of the GBL and the Martin Act." The General Business Law - or GBL - and the Martin Act prohibit the sale of condominium interests unless an offering plan of such sale is filed with the New York State Department of Law.

Open Lines of Communication

According to O'Connell, it's all about operating in the open and keeping lines of communication clear. "Communication is the key to any effective board performance," says O'Connell. "It's not necessarily what the board members know, it's what the shareholders understand the board to know."

It's also about what a board takes the initiative to find out. "A proactive, cutting-edge board will take advantage of useful publications in the field, attend seminars on co-op and condo issues, and be in close contact with counsel, accountant, and their managing agent," O'Connell continues. "By keeping an eye on current developments, more can be done to be proactive to avoid potential pitfalls."

When attorneys speak of "pitfalls," they're usually referring to things like inept or misdealing board decisions and sometimes the outright abuse of power - ineptitude and abuses that might have less of a chance to flourish if non-board shareholders and unit owners are keeping a watchful eye on their elected directors.

"Shareholders have the primary responsibility to monitor their board's activities," says O'Connell. "This is difficult by virtue of the fact that shareholders can be apathetic unless there is some hot issue facing their building. Nonetheless, it's important for shareholders to be involved and take an interest in their government - even in uneventful times."

Shareholders and unit owners can monitor their board by making sure there is regular interaction and communication between the two parties. Shareholders should also be vigilant in ensuring that the annual certified financial statements are carefully reviewed and that maintenance and capital improvement needs in the building are being addressed adequately and on time, Mehlman says.

Altman agrees, saying that a closely monitored board is more easily held accountable for its action - or inaction - but adds that communication and responsibility is a two-way street. "The shareholders are ultimately accountable when they vote, but the board itself can monitor its own progress by asking the shareholders how they are doing," he says.

And, according to O'Connell, a conscientious, forward-thinking board should not only use all the communication devices at their disposal - like shareholder meetings, newsletters and lobby postings - but always be exploring new initiatives that will maintain and improve the quality of life within the building they govern.

Who Can You Trust?

Oftentimes, the best defense against board member or managerial misbehavior is shareholders who have even a modest grasp of the law and who know who their building's partners are (i.e., board members, accountants, managing agents and attorneys). Shareholders should also be familiar with the language in their lease and bylaws that outlines the responsibilities and boundaries governing the board, the managing agent, and other related professionals. A well-informed body of shareholders, taking an active role in the governance and management of their home and community, makes for an environment inhospitable to fraud or accidental mismanagement.

According Grant, "A system of checks and balances for finances and construction [contractor bids] needs to be implemented - that's the framework necessary for a board to trust their agent."

"Monthly management reports and all contracts should be received and reviewed by both a building's counsel and board members," says O'Connell, as well as by the building's accountant to ensure accuracy. Despite the benefits of having many eyes following the processing of documents, O'Connell adds that delegation of authority for actually negotiating contracts, agreeing on terms of business, and other economically important decisions should be "conservatively implemented" to avoid needless - and often expensive - quibbling among board members and service providers.

The Voice of the Shareholder

Since managing agents, attorneys, and financial or accounting advisors are hired by a building's board, they are by extension "employees," and as such can often be conspicuously quiet when it comes to speaking up against mismanagement or bad judgment on the part of their employer. While this is certainly not always the case, it is another reason for shareholders to be vigilant when monitoring their own board's practices and policies.

Daunting as it can be sometimes, shareholders must also take responsibility for the well being of their own community - and investment - and assume an active role in charting its course. According to O'Connell, "Some boards accept constructive criticism better than others. Shareholders can get involved by attending annual meetings, submitting questions to the board and/or managing agent, and by generally "˜talking up' building issues with fellow shareholders," he adds.

A License to Lead

A license to drive doesn't necessarily make for a good driver - and while New York's property management laws require managers to undergo hours of pre-licensing training and education in order to practice their profession legally, sometimes the best experience comes from a proven track record.

"Not all managing agents go through the exact same certification process," says Altman, adding that, "Like anything else, the more competent he or she is, the more aware, the better the understanding - and sometimes that comes from 25 years of experience."

"Today's agents are expected to know about financing, banking, budget forecasting, accounting, real estate law, labor law, security law, unions, and managing," says Grant. And these skills must be married with superb communication. "Agents are expected to be organized, have excellent writing and communication skills, computer skills, time management, and know about psychology," says Altman, who continues, that, "some of this can be learned, some comes with experience, but it all requires dedication, intelligence and common sense."

The Final Word

Mehlman believes that the offering plan, bylaws, and proprietary lease or condominium declarations should be the starting point, rather than the final word on how a building is run. Within this framework is room for expansion on mandatory protocol. "While the bylaws generally require only an annual meeting of shareholders or unit owners for the election of directors, a responsive board could call a shareholder or unit owner meeting when other major building decisions are being made," says Mehlman.

"There is no substitute for courtesy and fair dealing with neighbors and fellow shareholders for the smooth operation of the co-op or condo," says O'Connell. "The bylaws should not be reviewed on a daily basis for guidance. Common sense and integrity serve as the best guideposts."

In theory, bylaws and declarations are created for the purpose of governing, and while these documents are geared toward fairly representing a constituency, implementing common sense practices is often the best way to keep all parties involved not only accountable but satisfied with any given decision.

W. B. King is a freelance writer based in Westchester and a frequent contributor to The Cooperator.

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3 Comments

  • I found this article to be quite interesting however what are you to do when a board member that is a real estate agent and owner violates the sublet rule? She has illegally subletted over five years and has not paid the fees at all. When approached by a fellow board member to pay the full restitution, fine and resign on her own she said no. Let the shareholders vote me out. If the board president doesn't act upon it because legal counsel said let her pay 6 months and move on from it, which I feel is wrong. He deals with her on a business aspect outside of the board and it is a conflict of interest in this case.
  • every person on the board has an agenda.
  • Are Coop Boards required to ask potential buyers their source of funds, especially if the buy transaction is an ALL cash transaction??