To Err is Human
Avoiding Common Board Mistakes
Boards of directors are usually made up of ordinary people, elected or appointed by their neighbors to run their building smoothly and efficiently. Most board members do their utmost to fulfill that expectation, but occasionally, even the most well-intentioned board members can make mistakes—some of which may have serious legal ramifications for their buildings. Fortunately help is available to both novice board members as well as seasoned veterans, in the form of fellow board members, building professionals and seminars.
The Dirty Dozen
While any board member can misstep at any time, most often it is the new board member, filled with sometimes overzealous ambition who is more prone to errors in judgment, says Suz Landi, vice president and director of management for David Frankel Realty, Inc., a management company based in Manhattan.
“Many come to the position with the misconception that it’s a fast-track to getting a personal problem solved. They lose sight of the fact that they’re really volunteering for the greater good of the constituency of the entire building.”
That realization often comes as a rude awakening, says Landi, especially when the board member is accosted in the elevator by people who he or she thought were friendly neighbors. “They bear the brunt of other shareholders’ frustrations,” says Landi.
A more grievous error, and one which often is committed both by seasoned and entry-level board members alike, is forgetting that what goes on behind the board room door is privileged, confidential information.
“It shouldn’t be part of pillow talk or conversation with friends and neighbors or family,” says Landi, “because then the network grows by leaps and bounds and things that should not be discussed with anyone other than board members become public knowledge. That can compromise the corporation and leave them exposed to lawsuits.”
Gerard J. Picaso, president of Gerard J. Picaso, Inc., a real estate management company in Manhattan, says ambition can often be the undoing of a newly appointed board member.
“Usually, the mistake they make is that they get elected and expect to do too much too soon—they get bogged down and never get anything done.”
Picaso says rookie board members are better off limiting themselves to one or two projects a year—one big one and one small one—and that project can include anything, from changing a bylaw to renovating the hallways. Otherwise, he says, “It’s too much for them to do, and it’s too much for the building to absorb all at once.”
Yet even veteran officers of the board can slip up from time to time and make just as dangerous errors. “I think quite often seasoned board members, given different situations, forget the fact that they are supposed to work as a cohesive group and that individually, no single board member has any power whatsoever,” Landi says. “Past experience has shown me that board members sometimes go directly to staff with instructions without realizing that there may be other things going on in the building of an emergency nature.” She says sometimes they forget their role as a board member and attempt to act independently, or unilaterally.
More often, it’s the newer buildings with less experienced boards that are at a higher risk for board errors. “It’s usually the new boards that want to change things,” Picaso adds. “The seasoned boards are usually there for a reason. They get reelected because they know what they’re doing, and they haven’t caused any large dissention in the building.” He says it’s the new board that tries to change everything at once that ends up in trouble.Communication Breakdown
Communication between the board and the management company is a crucial ingredient to any successful co-op or condo, and can make or break a building. Landi says that when investigating the reason behind some common board-related snafus, she finds that it usually can be traced back to lack of communication between the board and the management company.
“After 25 years of doing this for a living at all different levels of management from subsidized to luxury housing,” says Landi, “I’ve found that the problems that most building managers complain of usually stem from either the inability to understand that they have to communicate, or from not having honed their communication skills.”
It’s very difficult for people to lash out at management or at the staff if they’ve been told exactly what’s going on, she continues. “Managers often take it upon themselves to make major decisions, instead of taking the alternatives back to the board and letting the decisions rest with the people who really should be making them.”
However, adds Picaso, other times the fault lies with the board itself. “A lot of times they don’t listen to the advice of their professionals, and I don’t just mean the managing agent—I mean the attorneys and the accountants, too.”Lending a Helping Hand
One of the most obvious ways for new board members to learn the ropes is to learn from their more experienced colleagues, but Landi says newbies have other options available as well.
“We make sure that technology is a tool that everyone uses daily,” she says. “Every board member and every member of our staff has contact information via e-mail, cell phone, and so forth.” She says board members should make themselves available to each other and also have informal meetings, especially on the committee level. “That way, when the regular board meetings occur the board only has to make the final decision and decide upon policy instead of wasting the time of all board members discussing minute details,” she says.
Departmentalization and the utilization of committees helps all of the board members, Landi says. She says they can also share historical minutes so that new board members have a point of reference when they come aboard. “Then everyone doesn’t have to spend the first several meetings participating in an orientation—new members can self-orient by reading the minutes,” Landi says.
Picaso recommends that all new board members familiarize themselves with the bylaws of the corporation and the house laws of the building, and that they should at least read the last year’s minutes to bring themselves up to speed with what is going on. “The reason you want new people on the board is that a lot of times they can bring some new ideas and energy,” Picaso says.Power and Prejudice
Despite even the most meticulous orientation methods and the most diligent communication system within a building, mistakes both large and small still occur. Landi says one minor mistake that can affect the mood and morale of the whole building is for board members (deliberately or not) to “give the illusion to shareholders that board members are entitled to preferential treatment—or that they become a different class of shareholder than the rest.”
A major mistake, on the other hand, “would be something that puts the board in legal jeopardy,” Landi says. She says a number of years ago the illegal practice of accepting gifts from contractors or vendors for signing contracts was quite prevalent, and that many building professionals as well as board members paid with fines and prison terms.
“Another of the most egregious things is breaching the confidentiality of issues that are supposed to be kept in the boardroom,” Landi adds. “That’s pretty much an overview for anything that’s discussed: the financial background of prospective purchasers, the reason for denying a sale, the details of approval of a major alteration, or matters of discrimination.”
Picaso says trying to do too many major building projects at the same time is another major mistake that taxes not only the building staff but also the shareholders. “You can’t have your building under construction all the time—there has to be a break,” he says.
If Your Board is Bumbling
According to Landi, “[Building shareholders] really have to exercise their right to vote for a board every year—but many lifelong co-op shareholders become very complacent. When things are relatively quiet, there tends to be a tremendous amount of complacency, so they need to vote.”
Board members can avoid major mistakes and have a better chance at ensuring their reelection by educating themselves. “There are many trade associations that one could speak with,” says Picaso, “like The Council of New York Cooperatives & Condominiums (CNYC). But most boards need to understand that when they engage a management company, they should not simply settle for the person that the director of management assigns to them if they are not comfortable with that person.” Landi urges boards to get someone who can be proactive and come to them with creative solutions to their problems.
All this is not to characterize the board’s job as a minefield of mortal difficulty, says Picaso. “Usually, boards don’t make truly horrible decisions. I don’t know of many occasions where one has done something that’s so bad for business that it would have to be counteracted.” He says boards are usually advised by seasoned legal and financial professionals, which makes it difficult for them to make a really bad mistake. Even if the worst-case scenario does happen, there are strategies for surviving the blow and making the situation right.
If an egregious error should occur, Landi recommends first consulting with legal counsel to discover the best and easiest way to report to the shareholders without exposing themselves to any negative repercussions. “Nothing should be buried in paper because ultimately the shareholders will discover that there has been an impropriety—whether it’s deliberate or by accident,” says Landi, “and they have a right to know, because they own the corporation.”
Everyone makes mistakes, but by keeping it in the boardroom and keeping your building professionals in the loop, you can be sure that your building will prosper and your position on the board will be safe and productive.
Michael McDonough is a freelance writer living on Long Island.