New York's Cooperative and Condominium Community
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Steps to take when a director goes rogue.
Serving on a board of directors should be a congenial affair, but people being people, you usually have to deal with egos, agendas, and the fact that some people just want things their way.
The managing agent remembers it well. There had been an incident in a co-op she managed that caused some damage to the building. She advised the board that, based on her experience, it would not be to the property’s advantage to file a claim with the insurance company.
“It was not significant enough, and if we filed, it would raise our premiums,” she says now. “I thought everyone was in agreement on that.”
Everyone apparently was – except for The Board Member Who Knew Better. He took it upon himself to contact the insurance carrier himself and file a claim. When the manager and the rest of the board heard about it, some heated words were exchanged – and the agent ended up calling the carrier and withdrawing the claim.
Serving on a board of directors should be a congenial affair. After all, you’re working with your neighbors for the common good of the building – your home. But people being people, you usually have to deal with egos and agendas, protocol and procedure – and the fact that some people just want to have it their own way.
Like the board member who opened his own line of communication with a contractor, or the one who revealed to his neighbors which shareholders were in arrears. Or the director who went around inspecting and giving orders to the staff. Then there’s the director who sent out dozens of e-mails on pet issues, exploded with anger at meetings, and made racist remarks to the board president.
Managers and attorneys admit that the majority of the buildings they advise have some variation of the difficult board member. But rather than curse the darkness, many professionals are offering their boards flashlights to find their way home.
Shine the Light
Often, board members go rogue out of ignorance of their roles. When attorney Bruce Cholst first got on his co-op board – years before he specialized in cooperative and condominium law, currently as a partner at Rosen, Livingston & Cholst – he was excited by the changes he believed he would soon bring to the building.
New to the board, Cholst quickly learned that his power was constrained by the bylaws, proprietary lease, and case law. “That was surprising to me,” says Cholst, who took away a lesson from his dashed great expectations. It is important to offer a training session to board newbies so that they know what is expected from them and what limits there are on their powers. Consequently, his firm (as do many others) offers 90-minute seminars for new board members to educate them about their roles.
“A lot of people on the outside are critical because they don’t know what’s going on in the inside,” Cholst notes. “In my seminars, I stress the need to educate yourself.” Education should begin at the first meeting after the election. Cholst says that the board president “should start off with a somber message that being on the board is a great responsibility that carries with it discretion and confidentiality. And that means whatever discussion that occurs stays within the four walls of the board room. He should stress that it’s a fiduciary responsibility. He should try to discourage them [from breaking the rules] by having a candid discussion up front.”
Boards might also deal with aggressive newcomers who come in with an agenda or criticism by giving them responsibilities that make them a part of the team, rather than treating them as outsiders.
“If they want to be involved in negotiating with contractors, put them on a committee to do just that,” says attorney Steven Sladkus, a partner at Wolf Haldenstein Adler Freeman & Herz. “That should satisfy their need to be involved in that area while still letting the board have some measure of control.”
Cholst’s board let a forceful newcomer head up a newsletter committee, where he worked with shareholders and was also monitored by a board member as they put together the newsletter. He was praised for any positive actions he took – and constructively criticized for wrong steps. “We basically had an open discussion and gave his ideas full debate, and when we voted some of them down, we gave him positive reinforcement and a pat on the back. You want to be subtle about it,” says Cholst, “but the idea is to get them on your side.”
Code of Conduct
To avoid having board members releasing what should be private information – such as arrears information or data about sales prices – attorney Steve Wagner, a partner at Porzio Bromberg & Newman, suggests the board make them aware of its code of conduct or code of ethics. This includes a series of ethical promises: no kickbacks, full disclosure of any connection with the vendors, no self-dealing, and so on.
“It’s not legally enforceable until it’s put in the form of a bylaw amendment, but it’s a good idea,” says Cholst. “If new board members agree to a code of ethics, it gives them some sense of how important the role is. It gives them something to think about.”
You can also have them sign a confidentiality agreement, which guarantees instant expulsion if they reveal confidential information. “There is no actual provision for a confidentiality agreement in the Business Corporation Law,” says Jeffrey Reich, a partner at the law firm of Wolf Haldenstein Adler Freeman & Herz. “Nothing says that everything that goes before a board has to be confidential. But you can adopt such a provision. In a co-op, you can make it more binding and amend the bylaws to say if the code of ethics is breached, that is grounds for dismissal from the board.”
One board member from a co-op on the Upper East Side of Manhattan says that he refused to sign such an agreement. His reasoning? “If the board was self-dealing or the president was not paying maintenance or the board was doing something that was wrong, I wanted to have the option to speak out,” he explains. “The confidentiality agreement may have been at odds with my responsibilities as a director, so I refused to sign it.”
Wagner says that the lesson from that is that your confidentiality agreement should have a caveat: “You can put an exception in the agreement allowing you to speak out if there is fraud, misconduct, and/or a breach of fiduciary duty.”
If none of these measures work, you may be forced to bring in the heavy artillery. If a board member is disrupting meetings by bullying his fellow directors, for instance, the board can set up “executive committees,” or go into “executive session” – essentially excluding that abusive member from the meetings so the board can get things done. But be warned: if the rogue member finds out about it (as he undoubtedly will), there will be even more trouble.
A severe step to take, too, is sending out a letter to contractors telling them who is authorized to negotiate contracts for the board. “If the contractor relies on anything that an unauthorized person said, it could possibly bind the cooperative,” says Wagner, “because as a board member that person has apparent authority to negotiate. So, it’s important any time something like that happens that you notify the contractor as soon as you learn of it.”
You can also vote to remove the person from office. “They stay on the board, but they are no longer an officer. This step should convince them how serious the issue is,” says Sladkus.
If the activities of the rogue director get very bad, you can move to expel the troublesome board member – though this is tantamount to starting a civil war in your building. “I hate that approach,” Cholst says, “because it airs the board’s dirty laundry in public, and it’s a drastic step.”
Your final method of dealing with the rogue is to defeat him at the polls. Running your own candidate against him or her is the best way to solve the problem. Just be sure that your new candidate has the votes to get elected and (good luck!) is not a new source of problems.
Learn all the basics of NYC co-op and condo management, with straight talk from heavy hitters in the field of co-op or condo apartments
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