Whether you’re brand new to the board or a staple in your community, it’s critical that everyone on the board understands the role they play in building a great community. Though specific roles and responsibilities vary by position, there are some overarching principles that every board member should adhere to.
In this guide, we’ll walk through the duties and actions that board members should remember throughout all facets of HOA management.
Roles and Responsibilities of the Board of Directors
The Board of Directors bears the ultimate responsibility for operating the community association on behalf of its owners. It is the role of a Board to set the policies, standards, procedures, programs, and budget of its Association. A Board may implement its own decisions for its association or delegate implementation to a manager, committees, or an independent contractor.
Ultimately, there are a number of segments of responsibility that the Board holds.
The general duties and responsibilities of Officers and Directors are quite similar to, if not identical to, those found in the ordinary not-for-profit corporation. In most cases, the Officers and Directors will be the same individuals.
The Officer needs to remember that they do not make policy "on the spot" but rather implement the Board-made policy. The Board Member needs to remember the necessity of establishing and publishing rules and regulations which afford clear guidelines and assistance to the Officers, General Manager, and Staff Members who are in daily contact with the HOA’s challenges.
The fiduciary duty of an Officer or Director is, in reality, divided into two levels of performance, one more stringent than the other. All Officers and Directors owe their associations a duty of care. In addition, Directors owe a duty of “undivided loyalty and honesty.”
Duty of Care
The first part of the Officer’s or Director’s duty is to observe the Business Judgment Rule.
As with other negligence tests, a Director will not be liable for decisions or actions which result in losses to the Corporation, so long as he or she exercises the same degree of care and skill as an ordinarily prudent Director would exercise under similar circumstances. Lack of supervision and over-delegation are areas fraught with probable liability.
A court will neither interfere with the internal affairs of a corporation nor substitute its judgment for that of a corporation or that of the Directors or Officers, so long as they arrive at a decision for which there is a reasonable basis. In applying the "duty of care," courts have considered both subjective, as well as objective, factors. The nature of the enterprise (Association), whether the Director’s job is full-time or part-time, and whether or not he or she has a special background, are also among the factors a court will consider.
The fact that a Director is a part-time volunteer without a special background does not excuse them from exercising due care; it simply helps define what the standard duty of care should be in a particular case. Basically, the rule is protective. The one challenging a Director’s actions must carry the burden; the Director does not have to prove he or she acted properly. The Business Judgment Rule protects a Corporate Director’s actions unless a plaintiff proves one of the following four elements:
- The Director failed to make any decision.
- The decision by the Director was uninformed.
- The Director was not disinterested or independent (this is where all Association questions require some tailoring)
- The Director was grossly negligent, or the action by the director was unauthorized. “Unauthorized” means outside the Association’s powers which are set out in the Declaration and the Bylaws
Courts consider the process the Board followed, rather than the wisdom of the Board’s decision. The fact that what a Board does is unwise or inexpedient does not matter under the Business Judgment Rule.
Protective Measures: Under the Business Judgment Rule, to protect yourself as a Director you should (1) be informed about the Association’s business (2) attend and participate in meetings or, if absent, have the minutes reflect the reason;(3) register a dissent in the minutes when in disagreement with the Board’s actions; and (4) be knowledgeable about the Declaration, Bylaws, Corporate Charter, and other Association documents.
When making a business decision, a Director must act in good faith pursuant to a free, honest exercise of judgment not influenced by personal or other considerations, except for the welfare of the corporation. At this point, the fiduciary duty of good faith, fair dealing, and loyalty comes into play.
The fiduciary duty mandates a good faith effort to work for the Association’s benefit and not to use the position of "Director" to enhance one’s personal interests. This duty is “most sensitive,” and courts will closely scrutinize any action which appears to involve self-serving.
The duty to act with good faith and with diligence, care, and skill does not apply only to “business” decisions, but also to the governmental or regulatory decisions that Board Members must make, such as rule enforcement, assessment collection, review of architectural changes, and many others. Failure to discharge this duty can subject the Director to personal liability.
The Director can also be liable for illegal or tortious acts of the Board or of the Association if he or she participates in the decision or knowingly fails to take steps to avoid the action. Reliance upon one to whom authority has been delegated does not thereby relieve the Director of responsibility. Failure to exercise supervision that permits mismanagement or non-management is an independent ground for finding a breach of fiduciary duty. Supervision is not the same as micro-management which itself can be an improper action
Duty of Undivided Loyalty and Honesty
The first part of the Officer’s or Director’s duty is related to undivided loyalty and honesty. This more stringent duty or rule of conduct arises in those areas involving self-dealing, conflicting interests, or other such issues.
Not every conflict is real, however, and it is important to realize that in an Association in which the Directors are also owners, all decisions will affect them both personally and in their official capacity. Consequently, as the United States Court of Appeals for the Second Circuit has said, the standard for what is a conflict should be flexible. When there is a conflict, the decision is once again tested by the Standard of Reasonableness.
When an Officer or Director is able, because of their position, to exercise a controlling influence over the rights, interest, and property of another, they are in a position of trust and confidence with respect to the other person and is held to a higher standard of conduct.
In summary, Board Members have the responsibility to:
- Fulfill their fiduciary duties to the community and exercise discretion in a manner they reasonably believe to be in the best interests of the Community
- Exercise sound business judgment
- Balance the needs and obligations of the Community as a whole with those of individual owners/residents Understand the Association Governing Documents and become educated with respect to applicable state and local laws
- Establish Committees or use other methods to obtain input from owners
- Conduct open, fair, and well-publicized elections Welcome and educate new members of the community
- Encourage input from residents
- Encourage events that foster community
- Conduct business in a transparent manner
- Allow owners access to appropriate community records
- Collect all monies due from owners and non-owner residents
- Provide a process residents can use to appeal decisions affecting their non-routine financial responsibilities or property rights
- Provide complete and timely disclosure of personal and financial conflicts of interest related to actions of community leaders
Set Your HOA Board and Community Up for Success
These duties and responsibilities can make HOA management a burden for some. If you need additional assistance managing your community, our team at HOA Management Solutions is ready to help! We specialize in management so you don’t have to. Get started today by reaching out to our team!