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Board Dysfunction

Gerard J. Picaso is president of Gerard J. Picaso Inc., a management firm.

 

You are sitting at the annual meeting listening to the reports of the board members and the realization starts to sink in: These people are idiots! In a million years, you would never run your business the way they are running the business of your home. You have heard the rumors of the infighting, bickering, and dissension at the board meetings, and it is apparent that either they don’t know what they are doing or the fighting is hindering their decision-making. Since they are in control of what for most people is their biggest asset and are running it like a mom-and-pop candy store, this can be frightening. What can happen and what can you do about it?

Like every other commodity or person, buildings have reputations. Lawyers, accountants, managing agents, and brokers who work in this industry all know the reputation of a building. If the board is not conducting itself properly, then the building is not being run properly. This information is passed on to prospective buyers. Bad rumors or the bad standing of a building affects the price of its apartments.

If you are sitting on a board and it is not functioning correctly, you must know that every correct decision made or not made affects the quality of life of the residents and the value of their apartments. My company was involved with a building in which the board president ran the whole show. He was impossible to work with: a series of engineers had quit various jobs, and the co-op had seen three different managers come and go in the past six years!

This means that, outside of the president, no one knew the history of the building. Every engineer hired had to start at ground zero, which is costly and leaves the new agents without crucial background information. Many inquiries from shareholders were met with: “We don’t know. We will find out and get back to you.” Everything took an extraordinary amount of time because we had to sift through several companies’ records.

We resigned before the first year was finished because the president had ordered us not to follow the board’s decision regarding the implementation of a much-needed security system. If there was a security breach, we felt that this decision exposed the board – and us – to potential liability. So the co-op turned around and hired another agent, who is probably still sorting through the records as he tries to figure out what is going on. This obviously is not good for the reputation of the building or the quality of life for the shareholders.

The finances of a building are crucial for resales. We have seen incidents of boards that could not resolve their differences on the amount to raise the monthly carrying charges and did nothing! The next year, after running a deficit, they had to double the increase. Savvy buyers understand this and are hesitant to buy into buildings with “bad financial” reputations.

Thankfully, the dysfunctional board and building are not common. But, if you think you are in one or it seems to be going that way, how do you fix it? It is not easy. Some people say that term limits effectively eliminate bad boards and bad board members. Although this may be true, they also eliminate good boards and good board members. The only way to protect your investment is to get active in the governing of the building. This means coming to every annual meeting and coming prepared with intelligent questions that are asked in a respectful, thoughtful manner. There is nothing worse than an owner standing up at a meeting, waving a bunch of papers, and screaming questions and accusations at the board. Even if such questions have merit, their substance gets lost by the presentation.

Questions are fine and they enlighten other owners to the possible problems, but the most effective way to change things is to change the board. You have this opportunity at every annual meeting. Find out who the problem board members are and zero in on them. Get candidates who are qualified (including you) and who are political.

Research the voting mechanism and take advantage of it. If the board is so horrible that you believe it cannot be saved, then get out your bylaws and find out how a special meeting of all owners can be called. Usually it requires a petition of at least 25 percent of the owners to the board. In that way, you can force a new election. Any of these courses of action will take a tremendous amount of time and energy on your part as well as on other owners. But in the end, if you can be successful, you have taken control of your destiny…and your investment.

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