Fiduciary Responsibilities of Board Members
Board Members of CIRAs (Common Interest Real Estate Associations) have two basic fiduciary duties: the duty of care and of loyalty to the association itself and its members/shareholders. Directors must refrain from self-dealing and receiving improper personal benefits. Decisions, especially financial ones, must be made on an informed basis, in good faith, and in the honest belief that the action was taken in the best interest of the Association.
Although CIRAs are typically non-profit entities, they are nonetheless business, with basically the same responsibilities:
Management of the CIRA’s finances
Maintenance of the CIRA’s common properties and other assets
Services to be provided to the members/shareholders of the CIRA
Normally, a CIRA is governed by a board of directors or managers (the “Board”), which is comprised of community volunteers. These volunteers are elected by the members of the CIRA and are charged with a wide-range of fiduciary duties that must be executed in order to carry out the organization’s responsibilities to all its members. Since the Board is comprised of volunteers, they should engage independent professionals with experience in the CIRA industry to assist and guide them in executing their fiduciary duties.
The Role of the CPA
In order to accomplish these duties, it is important for the Board to have timely and accurate reports, and a working knowledge of the CIRA’s financial information. A community’s CPA should spend time reviewing reports in depth to ensure that Board Members have a thorough understanding of both the content of the reports and ways to improve the CIRA’s financial condition. Often times, it is helpful to have the CPA review the financial statements with the Board Members or attend a Board meeting, and the community’s annual meeting, in order to discuss the CIRA’s finances and potential pressing financial matters. Armed with the CPA’s guidance, allows the Board to make educated decisions involving items such as the annual budget, cash flow planning and overall administration of the CIRA.
The Role of the Lawyer
An independent attorney is needed to advise the Board on numerous topics that include: changes to the CIRA’s governing documents, enforcement of house rules, annual/special meeting documents and collection of member accounts receivable that are in arrears. However, the most important function of the CIRA’s lawyer is to help Board Members carry out the Duty of Care regarding legal matters. The Duty of Care states that Board Members are expected to act in accordance with both the law and the association’s governing documents, using the care and skill that a reasonable person would use in similar circumstances.
When a Unit Owner/Shareholder challenges a decision of the Board and makes a claim that the Board has breached its Fiduciary Duty, the Courts apply the Business Judgement Rule. The Court then inquires whether the challenged action was authorized, made in good faith and taken in the best interests of the association. This is why it is especially important that the Board take the advice of the professionals working for the CIRA. If the Board’s actions are based upon the advice of a professional (e.g. engineer, lawyer, accountant) those actions may be protected by the Business Judgement Rule, even if their action turns out to be wrong.
Exercising Fiduciary Duty
Shareholders, unit owners or homeowners place their trust in the Board Members. By acting in accordance with the law and the Association’s governing documents, as well as following the advice of the CIRA’s professionals; the Board of Directors exercises their Fiduciary duties in a prudent manner and minimizes their potential liability.
If you have any questions or require the services of a CPA or lawyer, please contact us.