Whether a board is too large or too small, size matters. A look at who serves and how they get there.
Is the size of your board of directors too small, so that directors are overworked and cannot attend to important problems? Is your board too large, so that discussions last for hours and nothing gets accomplished? Is any age or economic group of shareholders not represented by an elected member of your board? If you answer “yes” to any of these questions, it is time to examine the size and make-up of your board.When determining whether to change, ask yourself, “How many members do we need? Who should serve on the board? And how can we organize the board so that it represents all shareholders, works efficiently, and preserves the knowledge obtained by existing board members?”
The bylaws of most cooperatives provide the mechanism for change. A typical provision reads: “The number of directors shall not be less than three and not more than seven. The first board elected by the shareholders shall consist of seven members. The number of directors shall be determined by the shareholders from time to time at any annual or special meeting of shareholders called for that purpose, and the number so determined shall be the number of directors of the corporation until changed by further action of the shareholders, provided, however, that the number of directors shall not be decreased to a number less than the number of directors then in office, except at an annual meeting of shareholders.”
Cooperatives with this type of provision can reduce the number of directors by passing a shareholder resolution. This is done at the annual meeting by majority vote of those present before the actual election. A typical resolution would read: “Resolved, that the number of directors to be elected at the corporation’s annual meeting of shareholders held on [date] and at each annual meeting thereafter shall be seven, until changed by resolution of the shareholders.”
If the shareholders wish to increase the number, that can be done by resolution (similar to the one discussed earlier) and can be adopted at any annual or special meeting. If the shareholders enlarge the number of directors at a special meeting, then the language would read: “Resolved, that the number of directors to be elected at the corporation’s special meeting of shareholders held on [date] and at each annual meeting thereafter shall be nine (9), until changed by resolution of the shareholders.” At a special meeting, the shareholders could also elect the additional directors to fill the new seats created. A resolution decreasing the size may be adopted at a special meeting for application at the next annual meeting of shareholders. It may not be immediately effective, for it may not eliminate seats of directors whose terms have not expired.
Some bylaws establish a set number of directors, such as seven, and do not provide a mechanism for changing that figure by shareholder resolution. If your cooperative has such a bylaw, then you can only change the number of directors by amending the cooperative’s bylaws. Most bylaws permit amendment by a super-majority vote of the shareholders, often two-thirds of the then-issued and outstanding shares. This is usually very difficult to obtain and requires much lobbying of shareholders before the annual or special meeting where such an amendment is to be proposed. The language or the substance of the proposed amendment must be inserted in the notice of the annual or special meeting.
Directors and shareholders often ask, “How many directors should we have?” The answer depends on at least two factors. First, do you want to have a staggered board of directors, which is a board that has a “class” of its members (usually consisting of three or four directors) elected in one year and the balance of the board comprising another “class” elected in the following year. The members of each “class” are often elected for two-year terms, so the use of a staggered board permits continuity of service. Buildings with five- or seven-member boards have two “classes” of directors, each elected to serve for a two-year term. Some buildings have nine-member boards, consisting of three “classes” of three directors, each serving for a three-year term. In those buildings, three directors are elected at each annual meeting to serve for three-year terms.
The second question to be answered is “How large is your building?” It makes little sense to have a nine-member board in a small (less than 20 units) building, and no sense if there are less than nine apartments. Conversely, a large building with a small board often suffers from overworked board members and shareholders who are disappointed in not having the opportunity to serve on the board. You should have enough people so that the work of the cooperative can be accomplished without causing directors to “burn out” from overwork.
My preference is for five members at buildings with up to 50 units, seven for buildings of up to 200 units, and, in larger buildings, nine. In all cases, where possible, I recommend a “staggered board.” In that case, new board members who are at the beginning of their board “learning curve” can draw upon the knowledge of other members whose terms of service are not set to expire for one or two more years. In very large developments consisting of multiple buildings with more than a thousand units, the cooperative should consider having at least one representative from each property; in those cases, the boards may have more than nine members.
The work of a co-op or condo is often divided into such subject areas as finance, building maintenance, legal issues, insurance issues, apartment transfers and subleases, apartment alterations, and communications with shareholders. Having a larger, rather than a smaller, board enables it to create committees consisting of several board members who can report their recommendations for action to the entire board.
The third issue that is often debated is: “Who should be allowed to serve?” Most bylaws of business corporations require only that a board member be over a certain age (18 or 21). Cooperative corporations have other factors to consider. Should there be a requirement that all board members be shareholders? Should spouses of shareholders or fiduciaries of trusts that own shares or officers of corporations or members of limited liability companies that own shares be allowed to serve? It is prudent to have people with a financial stake in the future of the cooperative to serve. Also, many bylaws require that directors be shareholders or spouses or fiduciaries of shareholders.
Should the directors all be residents? Residents care very much about the operation and management of the building and have a first-hand view of how the building and staff are functioning. They can more readily attend to cooperative and building issues. Sponsors, holders of unsold shares, and other investors often object to such a provision because they believe they should have a board seat to protect their investment. Bylaws can be created that require board members to be resident-shareholders, except for those elected by the holders of unsold shares (usually the sponsor and investors). That will generally satisfy both constituencies and result in a board that represents the point of view of both residents and non-residents.
David L. Berkey is a partner at Gallet Dreyer & Berkey.