By: Elina B. Gilbert, Esq.
Oftentimes, when owners get on the board of directors, they have no idea what they are getting into and the tremendous importance of their responsibilities as directors. Furthermore, such individuals may also have no idea what type of liability exposure they are taking on by serving on the board and what types of protections are available to them through the law.
The Nonprofit Act states that directors have a duty to:
- Act in good faith
- Act with the care of an ordinarily prudent person
- Act in a manner the director reasonably believes to be in the best interests of the association
If a director complies with all three of the above requirements, such director will not be liable for his/her decisions even if they turn out to be wrong. Thus, the next logical question is how does a director comply with these requirements? Although there are many different ways to comply, this article will focus on being prudent, which is interpreted by attorneys in the industry as, among other things, being informed.
Why is being informed so important? It is important because without knowing and understanding what the board is voting on, including available options, risks, and benefits, boards may as well roll the dice to make decisions. The chances of making the “right” decision will be the same. Furthermore, making uninformed decisions is deemed to be a breach of the directors’ duties as listed above and could expose the directors to personal liability.
To be informed, directors must seek the advice of professionals and then listen to that advice. Good directors recognize they are generalists who often need the advice of specialists in order to be well informed. Directors should seek the advice of community association managers, accountants, lawyers, engineers, contractors, and the like, as circumstances require. The best part about relying on expert advice is that such reliance insulates the directors from liability regardless of the outcome of the decision.
Some boards are hesitant about getting expert advice because the advice may be expensive and the board is trying to save money. However, this is not an excuse most judges accept. Saving money by not consulting with experts oftentimes leads to more expensive expenditures to defend boards and associations in court.
In addition to being informed and making educated decisions, below are some additional things directors should do to stay out of liability’s way:
- Understand the association and its operations. This means knowing and understanding the association’s authority and responsibilities as defined in its governing documents and by practice, its finances, its management, and the relationship with its members. Responsible decisions are most possible when directors understand the community they serve.
- Do not make a decision solely because it is popular or merely to quiet dissension. Later, when hindsight is sharpest, this rationale will do nothing to protect a director who has made a decision that cannot be defended. Be an active director. Most associations require its boards of directors to meet regularly and, absent special circumstances, make their decisions in meetings. This is based on the valid conclusion that the process of listening, asking, and speaking leads to better decisions. In order to be able to be active, you need to get informed. Ask for information about decisions that are to be made and then study what you are given in advance of the meeting at which the decision is to be made.
- Do not accept special treatment. Altruism in its most rigorous form should control your decision to be a director and should characterize your service. Even the most inconsequential compensation or special consideration will prove indefensible when raised at an annual meeting or during a deposition.
- As a director, be reluctant to do business with the association. Any transaction with the association should be at arm’s length and for the association’s benefit, not yours. Every such transaction should be fully disclosed and memorialized. Be sure to follow the association’s governing documents and policies and be sure that other directors follow suit.
- Make sure the minutes reflect the process that was followed and the advice received for all major decisions.
- Attend a presentation by association’s legal counsel on fiduciary duties of directors and applicable statutes.
- Adopt a comprehensive risk management program designed to minimize liability and reduce damages in the event of liability.
If you have questions about using your professionals and duties of the board, please contact a Altitude Community Law attorney at 303.432.9999.