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Are You An Effective Board ?

Are you an effective board – or merely an efficient one? You can be very efficient in doing things for your building, but they may end up being the wrong things. “Efficiency and effectiveness are sometimes confused. They’re not necessarily the same thing,” contends Mark Shernicoff, an accountant and partner at Zucker & Shernicoff. “You can be very efficient and totally ineffective. You might get lots of things done, but none of them mean anything. That’s not to say efficiency is not good. But effectiveness is much more important than efficiency.”

Being truly effective means solving a co-op’s problems. “When people get elected, they usually get elected for a reason,” says Gerard J. Picaso, a principal in the Gerard J. Picaso management firm. “The hallways need to be done, the mortgage needs to be refinanced, things like that. And if you can, in a year or two, solve the problems, then you’ve been an effective board. Where the boards fall down is when they try to do too many things at once.”
“An effective board is a board that has the ability to make good business decisions in an objective fashion,” observes attorney Bruce Cholst, a partner at Rosen & Livingston. “An effective board is one that can see the big picture, doesn’t engage in excessive debate and hand-wringing, will seek opinions, and not shoot from the hip and come to decisions prematurely.”

To be effective is to have a building in which people want to live. “Effectiveness is both objective and subjective,” explains Herb Cooper-Levy, director of RPJ Housing Development, a major non-profit housing group. “The most objective is market rate. Is your cooperative competitive in the marketplace? Are people willing to pay top dollar to live there? If the answer is “yes,” then that’s an external sign of your success.”

Is there a way to rate your board’s effectiveness? While some measures are subjective – to a few owners, the board will always be the “landlord” (i.e., the enemy) and can never do enough – there are questions you can ask and steps you can undertake to improve the effectiveness of your board. To develop this list of questions and steps, Habitat talked with professionals (managers, accountants, attorneys) and volunteers (board members), asking them for their insights and advice as to what constitutes an effective board. If you answer “yes” to 12 out of the 15 questions that follow, consider yourself effective. Everyone else: there’s always room for improvement!

Opportunity Knocks

1. Does your board take advantage of educational opportunities? The late Charles Rappaport, the former president of the Federation of New York Housing Cooperatives & Condominiums, was fond of saying, “An informed board is an effective board.” How informed are you?

Professionals say it is important to research topics – through books, magazines, and seminars – so that you know your limitations. Having such knowledge is important because part of your job is to seek out the best possible solutions to a problem and to not rely blindly on the advice of any one person. By the same token, having abundant knowledge makes it easier to sell a difficult decision to the apartment owners. Observes Picaso: “Just saying to somebody we’re doing this because it’s good for the building is not necessarily the best sales point. It’s better to be able to point to facts and figures.”

2. Do you actively seek out and utilize advice from your professionals? Effective boards understand how to use a lawyer, an engineer, an accountant, and a contractor. You need professionals so you do not have to reinvent the wheel every time an issue arises.

“Know what you don’t know, and know when you need expert help, and what experts you need,” says Shernicoff. “If you’ve got a managing agent, your managing agent is the first expert to start with.” But remember: the agent is not an accountant, a lawyer, or an engineer. He or she may know a little about each of those areas but is not the expert.

“Whenever they have the big capital projects a lot of boards just either don’t realize that they should get their lawyer involved, or they don’t want to spend the money to get their lawyer involved,” notes attorney Robert Tierman, a partner at Litwin & Tierman. “And I have found that many of the more effective boards are getting beyond that and realizing that if they spend the time and money getting input from their lawyers at the beginning stages, they can gain a lot of insight that can help them save much more money and grief later on.”

Arthur Davis, a business consultant to corporate boards, recalls a 162-unit Manhattan building that did not have an ongoing relationship with an attorney because its board was trying to save money. “If you don’t consult an accountant and a lawyer on a regular basis, and you do not get them involved in the process and the organization of your building, they can never really keep you informed,” Davis explains.

“You want the lawyer to be involved in some of your newsletters,” he continues. “You want the lawyer to be involved with some of the minutes of the board so that you show them what’s going on, so that when you call them up they have some sort of a legacy of understanding of what you’re doing. You don’t want to go calling up lawyers and accountants and just start a conversation in the middle of something, unless it’s an emergency. You want to keep them informed and involved.”

3. Does your board delegate? Sharing the burden of the work is a way to avoid burnout and also create a more effective working environment. In short, a board is effective when it knows how to delegate tasks to the managing agent, other members, and committees.

“Delegating is really important,” says Warren Schreiber, who has been president of his 200-unit Queens co-op for three years. “I have somebody really, really good who’s head of our physical plant committee, which basically oversees most of our capital projects. I have a terrific treasurer who’s also the head of our legal committee. I have a terrific resale person, who’s head of that committee. That means that I can ask them to do something and I can be confident that it’s going to be done. I’ve seen a lot of boards, both in co-ops and in industry, where you have a president or a chairperson and they try to do everything. It’s impossible to do 28 things well.”

Utilizing a committee also enables the board to delegate responsibility to interested residents and, by using non-board members, keeps the other directors from becoming overworked. “The board can get a lot more done,” Cholst says. “It’s a great tool. You can operate very efficiently with committees when they have a clear purpose and a clear mandate.”

It is important not to misuse committees, however. The function of a committee should be to accomplish a task and report back to the board. Members should not go off on their own tangents, and should not take power that is not theirs.

“The important thing about committees is to tell them exactly what their charter is, what their mandate is,” explains Cholst. “So, if you’re going to have a committee – a lobby committee, for example – tell them, ‘We would like you to narrow down the options for us, and come back to us in X number of days with options or with potential decorators.’ So the committee does the heavy hauling on either non-controversial things or things where they can operate more efficiently than a board and make the board’s job easier in terms of narrowing down.”

Also, committees must be set up wisely. If you rely excessively on committees then you are diffusing power, especially if you involve too many people. If you have 20 members, the committee itself will never reach a consensus or get its job done.

4. Does your board take advantage of the expertise of its board members? An effective board is one that contains a variety of skill sets. A board is even more effective if all the members can participate with some sort of expertise.

“You need people with varied backgrounds,” observes John A. Lipuma, president of JAL Diversified Management, “maybe accounting, legal, general business – people that are used to making business decisions. Because if you can get a group of three or four of these people that could genuinely discuss the issues, use logic in solving the problems, or ask the right questions, that always makes for a better board.”

“If you were going to do the hallways over it would be nice if you had somebody on the board who was in that field, or a designer, or contractor [to interact with the professionals you eventually hire],” says Picaso. “If you were attempting to pass a flip tax it would be nice if you had an attorney on the board who could speak with the building attorney.”

Nonetheless, people should not be excluded just because they don’t have real estate-related experience. For instance, Cholst notes, “if they’re good business people and have a lot of inherent common sense, or [are] good communicators. I think, for example, teachers are very good communicators. And so you would want at least one good communicator on the board, irrespective of what their occupation is. It’s a great idea to recruit people who can add to particular board functions, but don’t use their occupation as a way to exclude them – just because they don’t have specific real estate experience.”

5. Do you restrict the use of professionals who happen to serve on the board? Experts warn that you should not rely on residents who are attorneys, accountants, engineers, architects, or contractors instead of your paid professionals. Besides possible conflicts of interest, they may not have the expertise required. “They could be trial lawyers for all I know, or they could be patent lawyers,” warns Davis. “You want to get a person for whom this is a specialty. You would not go to a general practitioner for a broken arm.”

There are liability questions, as well. “They’re personally involved, and there’s no way for them not to be personally involved,” Davis says. “As directors of a board, you want that unbiased opinion because it basically gives you an opinion you wouldn’t get from someone on the board. Plus, it protects you litigiously. You could say, ‘Look, we have a lawyer on the board, but we thought this was important and we took it to an outside lawyer, who is on a retainer – or we bought an hour of his time, and this was his opinion, and we’re following that opinion.’”

Works Well With Others

6. At meetings, are your board members able to compromise and find consensus? Communication is a crucial element of effectiveness. How the board members communicate among themselves is an indication of how effective the board will be in coping with the issues of the property. “You want people with good human relations skills,” says Cooper-Levy. “It goes back to their kindergarten report card: do they work well with others?”

The president of the board is usually the one who organizes and inspires the other board members. Explains Davis: “It is the president’s job to make everybody on the board as productive as possible. The co-op board needs to be run in a style that’s very positive, very constructive, and very well-organized. That is the job of the president: to facilitate productivity.”

The art of politics – and of having an effective board – is the ability to compromise. Strong personalities can stir up debate, but they can also lead to impasses.

Most say that having strong opinions on the board can be a good thing, since it presents alternative ideas. “Strong personalities are good because, even if it leads to some conflicts, issues get aired much more,” observes Tierman. “But if you have tons of ‘yes men’ on the board or people that don’t care enough or are too shy to express their opinions, then the shareholders are not getting good service.”

Yet compromise and consensus are the essence of communication among board members. Observes Cooper-Levy: “People usually think [the word ‘strong’] means ‘forceful, opinionated.’ A person who’s got a strong opinion in a room with six other people with strong opinions is not going to be effective because they are all going to butt heads. There is a different kind of strength that I look for – it is the strength to be weaker, the strength to not have to be the prevailing opinion, to come to if not consensus, but a common approach to the problem. That way things don’t size up as two sides, or three sides, or seven sides. It takes a certain strength to check your ego at the door.”

“It’s just having people that you can work with, or people who are willing to work with one another,” notes Melvin Doby, vice president and a five-year veteran board member of his 200-unit, two-building Queens co-op. “Of course, it’s like with a marriage, you’re going to have your bumps in the road. But being able to get beyond that, which we do, is important. And, at the end of the session, everybody’s going home laughing. That’s how we get it. If there’s no compromise you don’t have a relationship, you have a dictatorship. And guess what gets done? Absolutely nothing.”

7. Does your board stand publicly united after a decision is made? “Divided we debate, united we stand” should be the motto of all boards. “Factionalism and internal debate are very good things, and shouldn’t be stifled,” Cholst says. “But once a consensus is reached, then the entire board should realize that they’re in the same boat together and that the primary goal is moving forward as one. All too often, I’ve seen individual board members not know when to stop the internal dissension and get behind the team and grow as one in unison.”

8. Do you have a mechanism in place (newsletter, regular informational meetings) to communicate regularly with the shareholders? An effective board is one that knows how to communicate regularly and clearly with its shareholders and unit-owners, so that they know what the board is up to. The board could be doing the best job in the world, but if the owners are not kept informed on a regular basis then there will always be complaints, inquiries, and skepticism about the board’s motives and abilities.

Doby’s building is a case in point. “Five years ago, there was no communication,” he recalls. “Every time we had our annual shareholders’ meeting everybody was up in arms, yelling – this guy’s screaming, that person is screaming. But at the last shareholders’ meeting, we couldn’t get finished with the meeting fast enough so they could eat the donuts. That was all they wanted to do.”

The difference? Doby authored a regular monthly newsletter, keeping everyone informed. Not only that – for the last three years, the board staged annual “Greet and Meet Your Neighbor” sessions in the common room. “Everyone just comes down and we socialize,” says Doby. “It gets larger and larger with time, each year. And they love it.”

9. Does your board prioritize tasks? Where the board can fall down is when it tries to do too many things at once. Not only does this stretch a board’s resources but it also makes it harder to sell the new projects to skeptical owners. “People in general have a hard time accepting any change,” Picaso notes. “And the more you throw at them, the less receptive they will be. So, to be effective you should probably focus on one or two [major] items at a time.”

Prioritizing can be done in conjunction with your professionals, and should be based on capital needs and financial resources. This also means setting the so-called “big picture” goals and leaving the day-to-day operations to your manager and staff. “They can’t get into too much minutia,” says Lipuma. “The board itself has to be able to direct – directing the operation as opposed to being involved right up to your armpits.”

Lipuma recalls a board president who wanted to test his staff by dropping a cigarette butt in the corner of a stairwell that wasn’t utilized often. “He then used that as a reason to tell me that the super wasn’t doing his job because that butt was there for a week. Well, understandably, he’s not going to clean it every day because it’s not used. It’s a secondary stairwell. But they get into this kind of detail to prove points.”

Goals and Plans

10. Do you set goals that can be met within your budgetary and time constraints? An effective board does not set its sights on the impossible; it designs goals that are attainable. These are decided upon after consultation with its professionals – particularly its manager, who presumably has the experience to help the board draw up a workable plan.

“A board should have an agenda, it should have realistic goals that it could achieve in some given time period, whether it’s capital expenses or changing policies, or making up guidelines, or in whatever fashion they want to do,” Davis says. “A board has an agenda, a board has goals, a board has a responsibility to meet those goals. It has a responsibility to open channels of communication and aggressively search out what the shareholders’ best interests are.”

If you are unrealistic, that can have practical consequences. Observes Alvin Wasserman, director of Fairfield Property Services: “If you have some specific projects in mind, you get proposals for those that you have the means to carry out within a short period of time – within, say, the fiscal year. Because if you set contractors and vendors in motion on proposals for something that you know you can’t do this year – or you don’t know when you’re going to get it – and you keep doing that over and over you get a reputation as being someone who is seeking to get information all the time, but who doesn’t do anything. And contractors and vendors then will not give you their best prices.”

11. Do you have a capital plan for your building? Devising a plan for the coming year(s) should be part of every co-op and condo’s yearly agenda. It sets in place a budget and goals and, in effect, says, “This is our job’s mission, this is what we want to accomplish.”

Ideally, the most effective boards craft five-year plans, but practically, most are lucky to set up a one-year plan. Observes Shernicoff: “Even the most effective boards frequently don’t have long-term plans. I won’t say it’s day-to-day, but they rarely plan out more than a year or so. It takes time and energy. All the board members are volunteers. And sometimes looking long range is bad news because you have to deal with problems, and you have to finance dealing with the problems, and that may mean a maintenance increase. So, sometimes they put it off. But you’ve got to start thinking about when are you going to need to replace the roof? When are you going to need to do facade work? Thank God for Local Laws 10 and 11, because they make you – look at your building every five years. If they didn’t, most people would not look at the facades, they would deteriorate, and that would be the end of that.”

Still, an effective board is fiscally prudent and plans for its financial future. “From the financial perspective, what that means is that they take care of things that need to be taken care of,” notes Shernicoff. “They are aware of when the mortgage comes due, and they make sure that they refinance it in an appropriate time, in an appropriate manner. They review and approve contracts in an appropriate way. They deal with personnel issues in an appropriate way and don’t let them linger. Good folks are rewarded and bad folks are gotten rid of.”

In short, effectiveness is about sound financial planning. “The important thing is to make sure you do it often enough so that you have enough money to take care of what needs to be taken care of,” says Shernicoff. “The goal of the enterprise is to break even over time. That doesn’t mean you have to have a surplus every year. You can have a deficit in some years. But you can’t have deficits every year, and deficits can’t exceed the surpluses or else you’re going to run out of money.”

Shernicoff adds that there are many “boards that don’t set the maintenance at a high enough level. If they do it often enough and at such a level that the deficits are severe, they start running out of money. And then sometimes their solution is to borrow more money, which compounds the problem ultimately because then your debt service goes up – unless you happen to be lucky. A lot of buildings have been lucky because they’ve been able to refinance high-interest loans at low-interest rates.”

Being fiscally responsible also means looking at the budget realistically, and not trying to cut it to keep the maintenance low. According to professionals, that doesn’t work in the long run because most of the budget is not subject to control by the board.

“If it’s cold you’ve got to buy the oil,” explains Shernicoff. “If you’ve got a building staff, they’ve got to get paid. You’ve got to buy your insurance. You’ve got to buy your gas and electricity for the common areas. You’ve got to pay your mortgage. If you look at budgets, 80 percent of the budget is in those categories – mortgage, real estate tax, fuel, utilities, and insurance. And people are always trying to cut – ‘Oh, it’s not going to be that cold this winter. It’s not going to be this, it’s not going to be that.’ And then they run another deficit. They don’t set the maintenance at an appropriate level.”

12. Do you have reserve funds that your professionals feel are sufficient for your future needs? Having rainy-day money is essential. According to accountant Stephen Beer, a partner in the firm of Czarnowski & Beer, the health of the reserve fund is one of the three things a prospective co-op or condo purchaser inspects.

“The first thing a purchaser should look for is an operating surplus, sufficient to pay all the bills,” the accountant says. “That generally is reflected on the building’s income statements. The second is the amount of debt being financed. We use a per-unit basis, and that figure has been moving up with rising property values. In Manhattan, it’s probably $30,000 to $40,000 of average debt per unit, and from $25,000 to $35,000 in the outer boroughs. The third thing is the amount in the reserve fund – and that should be a bare minimum of $100,000 in any building.”

Beer says that the trick with estimating the necessary size of your reserve fund is to look at it on a per-unit basis, because co-op maintenance fees and condo common charges vary so much from building to building. He likes a figure of $2,000 per unit. “But that $2,000 number is a very thumbnail approach,” he adds. “The best way is to settle on the ideal size of your reserve fund is to do a long-term capital budget.”

“Another way to grow your reserve fund is through your maintenance,” notes Richard Smolin, an accountant and partner at Smolin & Yavel. “Your maintenance needs to cover operating expenses, but it should be adjusted a little higher to contribute to the reserve fund on an ongoing basis, especially if you’re below the $3,000 to $5,000 per unit level. You don’t have to boost it up immediately – you can do it gradually by having small increases in maintenance.”

13. Is your property maintained on a regular basis? Is there a plan for continuous physical upkeep and improvement of the community? Quality-of-life questions are very subjective, says Cooper-Levy, but, at the very least, an effective board makes certain that its public areas are maintained on a regular basis

14. Does your board take advantage of new technology (cell phones, e-mail)? An effective board is a technologically savvy board, employing e-mail and conference call technology to get more mileage out of its meetings.

E-mail, for instance, has meant a big difference in how a board communicates. Attorneys and managers report that boards are sending contracts and letters for review by e-mail, which allows for much more input much more quickly.

Practically, it is also getting more people involved. “I’ve recently found a lot of boards are using e-mail,” Tierman notes. “It’s much easier to copy people. I now keep formerly less involved board members more involved in the process of decision-making. And once in a while you’ll be surprised that they will send in some input, either to me or the other board members, by e-mail. So e-mail has created the possibility for a lot of informal board consultations among themselves and with their experts. And that’s great.”

There is also conference call technology, which enables more participation by experts and busy board members who may not be able to attend meetings in person. “I’ve found that lots of boards are using conference calls with me,” Tierman notes, “where several of them are getting on [the line] to discuss litigation strategy on a more regular basis than they otherwise might. It might be in the past that if you had a complex litigation, you might be asked to come to every third board meeting to give a report on it, or even less frequently than that. But now I’ve found that some boards are getting on with me on a regular basis – at least monthly in conference calls – to discuss where we’re going, and to make sure that everybody’s on the same wavelength.

“That’s important,” he continues, “because the sentiments on the board can shift regularly with regard to how hard they want to pursue a litigation and what certain strategies they want to pursue in reaction to action by the other side. The more you’re talking to them the better. And when there’s more than one board member on the phone it just makes it more likely that you’re acting on the basis of a consensus, rather than having just one board member unilaterally making a lot of decisions.”

15. Do your board members look out for the good of the community – or are they following personal agendas? Finally, an effective board is one that is able to set aside personal agendas and look out for the good of the property as a whole, not always easy to do when tempers and issues become heated.

“Hopefully, you’ve got a good working group, where everybody’s pulling in the same direction,” says Wasserman. “And part of being an effective board means that everybody on the board is on board, so to speak. Otherwise you end up with a dysfunctional board where they’re pulling against each other.”

“You have to be able to set aside your personal agenda and listen well and not be driven by the need to prevail,” observes Cooper-Levy. “I guess I’ll always be a 1960s idealist, driven by the common weal, but that should be the driving force: what’s good for the most people. Being effective means being good at problem-solving and that means working together. There’s no sense trying to get someone to play to your rhythm if no one else wants to play it. It’s a question of playing solo or setting aside your instruments so you can find some harmony rather than cacophony.”

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