Board Members and Privacy An Issue of Confidence

 As the leaders of a private corporation in which shareholders own stock that  entitles them to live in an apartment within the corporation’s building, residential co-op board members have a lot of responsibility. Along  with this responsibility comes questions about what can and cannot (as well as  what should and should not) be openly discussed among board members,  management, and non-board shareholders.  

 Certain processes and decisions are more appropriately made behind closed doors,  while others benefit from total transparency and the light of day. What's okay  to discuss? What's not? What can building administrators do to foster open  communication and trust? These are issues that conscientious building  administrators must consider and take seriously.  

 Doing Business

 On its face, a cooperative apartment building in Tribeca might seem like it has  little in common with an investment bank headquartered in the Financial  District—other than the fact that both happen to be in Manhattan. The latter’s objective is to make as much money as possible and to enrich the coffers of  the shareholders; the former’s concerns are to run a residence as efficiently as possible and to enrich the  quality of life of the shareholders. Plus, you can buy stock in an investment  bank—you can only buy the units, shares in a co-op and with board approval, that is.  In the eyes of the law however, they are both more or less the same animal:  business corporations, with shareholders, and a detailed set of operating  procedures.  

 “The Business Corporation Law (or BCL) governs the management of cooperative  affairs in general,” explains Bruce Cholst, a partner attorney with Rosen Livingston & Cholst in Manhattan. The said BCL “does not mandate that board meetings be open to shareholders. Actually, the  standard operating procedure of any cooperative corporation is that board  meetings are not open to shareholders.”  

 If Joe Smith logs onto to Ameritrade and buys a single share of stock in Exxon,  for example, this allows him a voice (however miniscule) in elections, and the  opportunity to attend the annual meeting—plus a small share in profits and losses. If Joe Smith attempted to crash a  meeting of Exxon’s board of directors however, explaining that his stock share permitted his  attendance, he wouldn’t get very far—and he certainly wouldn’t be privy to the decision-making process of the board.  

 It may be helpful to imagine a co-op or condo board in the same way. Yes, the  board president is Dave from 2B and he's not necessarily a well-heeled suit  with a yacht and a Swiss bank account. But the same principles apply. If Dave  refuses to give you the inside scoop on why the board didn’t let Madonna buy into your building, he isn’t being a jerk—he’s doing his job.  

 “Especially in co-ops, a board member’s first duty is to the corporation,” says Attorney Daniel Altman, a partner with the Manhattan-based law firm of  Belkin Burden Wenig & Goldman LLP. “Even though board members may have an inclination to share certain topics with  shareholders—or not—their first obligation should be to the cooperative corporation, to keep things  confidential.”  

 Not all board members can handle that, of course. On occasion, a disgruntled  former board member—usually one who's been ousted from his or her seat—will grumble a bit too loudly about information that should be kept  confidential.  

 “That’s a vexing problem,” Cholst says, “one that perennially arises, and one to which there is no effective cure. You  can’t put a muzzle on them to get them not to talk.”  

 Is it a breach of fiduciary duty for even a former board member to disclose  information gained in confidence? Sure. Did they take an oath to keep their  mouth shut? Yup. But appeals to duty are sometimes not enough to silence angry  ex-board members—and the law can’t put the proverbial toothpaste back into the tube either.  

 “If you get a court order, it’s usually too late,” Cholst says. “And how do you enforce it?” In theory, divulging information gained while on the board is certainly a big  no-no. In practice however, “people talk until they're blue in the face.”  

 Transparency vs. Reality

 Indeed, “sunshine” and “transparency” may seem inherently good—so much so that certain states—including, most recently, Connecticut—have passed laws mandating more openness in co-op and condo boards'  decision-making processes, and more input from shareholders and unit owners.  But there are plenty of reasons for keeping certain decisions and information  under wraps. And contrary to popular belief, one of the reasons is not “so we can rule the building with an iron fist like despots of old.”  

 For one thing, board members, unlike their counterparts at Exxon, are not in it  for the money. They’re acting in the best interests of the corporation, and they are doing so with  professional input from attorneys, accountants, and property managers. Opening  up every meeting would put them constantly on the spot, having to defend their  actions to shareholders who may not be as familiar with the history of the  issue as they are.  

 “These are the leaders of the corporation,” says Altman. “You don’t want shareholders to second-guess. They may take things in a different way, or  out of context.”  

 The lion’s share of business discussed at board meetings involves money. As such, there  are sensitive pieces of information that not only should not be made public,  but could open the building up to potential lawsuits if they were.  

 “Arrears,” says Cholst, “is a precise example of something you do not want to disclose to others because  it's confidential. Suppose there’s an accounting error, and someone’s good name is tarnished?”  

 Think of it this way: there’s no good reason why your nosy neighbor needs to know you’re two months behind on your maintenance payments. Unless said neighbor is noted  investor and philanthropist George Soros and he wants to give you the money,  which is unlikely.  

 “Ditto admission committee reports,” Cholst continues. Those are discussions best left under a rock, because, Altman  adds, “they are typically a major source of litigation.”  

 “If you have celebrities, or people well-known in a certain field, you don’t want to let out that they’re even in the building,” says Rosemary Paparo, director of management at Manhattan-based management firm  Buchbinder & Warren.  

 Another example of things that should be kept mum: ongoing investigations that  are not yet conclusive. “Suppose there are allegations of misconduct against a building staff member that  are still under investigation,” Cholst says. You don’t want the entire building to know the doorman was accused of stealing and then  have it turn out he is the paragon of virtue. The board, however, must discuss  the accusation at the meeting.  

 Many big financial decisions are best kept private as well, such as “whether or not a board should assess shareholders for capital projects, special  projects, fuel surcharges, maintenance increases,” Altman advises.  

 Of course, there are certain issues that do benefit from shareholder  involvement: building-wide renovation plans; building-wide refinancing;  revisiting the pet policy, the admissions policy, the sublet policy, or  changing the quality-of-life bylaws in some marked way. But even then, a board  should be judicious, and not broadcast its every remark and thought process to  all the world.  

 “I don’t think it’s a good idea to throw sunshine out there unless the board has reached a  consensus,” Cholst says.  

 Open Doors?

 Most New York co-ops and condos do not allow shareholders to attend board  meetings ever, under any circumstances. But some do allow a certain amount of  openness.  

 “A few boards that I have will allow shareholders to sit in as spectators or  observers on aspects of the meeting that pertain to the public domain,” Cholst says. “These boards will go into what they call executive session when they reach  matters they don’t want exposed to the public.”  

 Paparo has a similar experience. “We have a few boards that invite shareholders to meetings if they want to  attend, but they can’t participate,” she says. “In a number of smaller lofts, they can enter into the general discussion, but  don’t have the ability to vote.”  

 Even in buildings that allow that kind of openness, it is rare for a shareholder  to attend for the simple reason that most folks have things they would rather  be doing in the evening that sit through an egregiously-long board meeting.  Although there are those rare residents who want to stick their beak in every  pie—offering garrulous commentary as they do—in most buildings, apathy is more of a problem than nosiness.  

 “My experience has been that if people are satisfied with how their building is  run, you’ll have trouble getting turnout for the annual meeting,” Paparo says, to say nothing of a bi-monthly or quarterly board meeting.  

 Board members are like umpires in baseball—you really only notice them when they make a mistake. Paparo offers a different  analogy: “The staff, management, board—they’re not on people’s radar screen. It’s like getting in your car. You turn the key and you go. If you turn the key and  nothing happens, then you pay attention to it.” 

 Greg Olear is a freelance writer and a frequent contributor toThe Cooperator.

Related Articles

The Business Corporation Law: A Primer

Why the BCL Is Relevant to Co-ops

Keeping the Beat

The Importance of Meeting Minutes

How to Be a Great Board Member

The Top Do's and Don'ts

 

5 Comments

  • In my experience it's shareholder apathy that keeps them away from annual meetings. They are apathetic when the existing Board doesn't encourage shareholder involvement not because they are satisfied with how their building is run.
  • I am a board member and have concerns regarding our President's unobliging to our sublet policy and using areas in the building to store personal items when there are storage units for rent. Also, major concern with income to the building that has not been represented on the year-to-dates. In both sitatuions I have addressed the board, managing agent and other board members and there is either no reply or empty promises made with no outcomes. This has been going on for several months. What are some suggested next steps I can take.
  • How can you get board members who just sit there to become active. They mean well but do ablsoluely nothing to contribute to the well being of the cooperation.
  • Ask why they are on the board? If to take space and not contribute they are doing nothing for the shareholders who voted for them. They should resign if its not what they want to do.
  • Does this mean that Boards can make major financial decisions without input from shareholders? We are an 11 unit building with a 4 person board - but many of us don't get along.