Over the last couple of years, the concept of “transparency” has taken off in the co-op and condo community. Shareholders demand it; new board members promise it; and even the judiciary has started siding with residents in lawsuits. But what does transparency actually mean?
“‘Transparency’ is the buzzword of the moment,” says attorney Steve Troup, partner at Tarter Krinsky & Drogin. “To me, it means advising unit-owners of all board transactions and what’s happening around the building that might inconvenience them.”
However one might feel about the word, though, it doesn’t change the fact that owners are demanding more of their boards – and they don’t always know what they want. “It’s the perception that counts,” Troup says. “In my experience, while owners say that they want full transparency, very few exercise their rights to obtain it. Knowing that they have that right is satisfying to most. As long as there are no pending issues that negatively affect their lives, most are happy.”
What can conscientious boards do, then, to keep their residents satisfied with their level of transparency? There are four areas in which boards can become transparent: at monthly meetings; when taking minutes; in granting access to documents; and in disclosing conflicts of interest.
Board meetings – as opposed to the annual meeting – can be a minefield for a board striving for transparency. The basic decision is deceptively simple: open or closed? Closed meetings can be quick and efficient, but suspicious shareholders can accuse you of hiding things. Open meetings, on the other hand, can be chaotic and lead to information spreading out of the board’s control. How do you discuss sensitive issues like arrears, or potentially controversial issues like a maintenance hike, when the people you’re discussing are sitting right in front of you?
There is, however, a third option.
“A suggestion I’ve made,” says attorney Theresa Racht, “is to hold informal, unofficial owners’ informational meetings, where the board addresses concerns and provides updates.” The benefit of such meetings is that the board gets to control what information is presented to the shareholders, and the board can also prepare for questions beforehand.
Open board meetings can take away some of that control. With shareholders present for the board’s every discussion, official business can take longer to conduct, maintaining residents’ privacy becomes an issue, and an audience’s vocal opinion might sway board members’ decisions. “I am absolutely opposed to such meetings,” says Racht, who recalls being invited to a board meeting where chairs for the audience were set up, and the shareholders were actually taking notes.
Those notes can come back to haunt the board. Open meetings allow shareholders to know exactly how board members vote, which could cause animosity because everyone knows who is responsible for an unpopular decision. With a closed meeting, however, the minutes may simply note, “Resolution passed: four votes aye, three nay.”
Open meetings don’t have to be a complete free-for all, though. Attorney James Glatthaar, partner at Bleakley Platt & Schmidt, prefers “open” board meetings that shareholders may attend without actively participating. “Personally,” he says, “I’m not crazy about a board letting someone interject in the middle of a discussion.”
While an open-but-quiet meeting prevents shareholders from expressing concerns in the moment, it doesn’t solve the issue of discussions becoming public or provide a solution for privacy concerns. Some of Troup’s buildings, however, have found a compromise: shareholders are allowed to attend meetings but are not allowed to sit in on discussions that involve personal details, such as owners in arrears or “problem residents.”
If your board chooses not to have open meetings, shareholders may try to access the minutes to see what happened. However, depending on what the minutes actually say, that may not be useful. Minutes can be used to back up a board’s controversial or unpopular decision, but only if they have the right information. Finding that balance between under- and oversharing can be tricky. It can be a clear case of less is more.
“The minutes do not have to discuss in detail how anybody voted,” says Racht. “They simply need to be a statement of what the board had before it and what their decisions were. I’m always dissuading boards from going into too much detail on discussions.” Minutes should not contain details about why a shareholder’s circumstances have put them into arrears. Anyone reading the minutes does not need to know that Mrs. Abell in 3A lost her job and can no longer pay her maintenance.
A board can always go beyond what the law requires, says Glatthaar. For instance, the Business Corporation Law requires that the minutes of an annual meeting be provided to anyone who asks, but a savvy board would keep those minutes sparse to avoid giving an irate shareholder an excuse for a lawsuit.
Access to Documents
If deciding what to put in the minutes is difficult, choosing who gets access to those documents can be even worse. Most boards do make their minutes easily available – to buyers. But shareholders aren’t always granted the same access. “It seems kind of odd that a board would allow a potential shareholder – or even worse, a potential shareholder’s lawyer – to read minutes, but not allow the shareholders themselves to read them,” says Glatthaar.
Two court cases in the last couple of years have dealt with that issue. In 2016, an appellate court granted condo owners broad rights to examine the condo’s books and records, including minutes, invoices, and financial records. The decision was the culmination of a case brought in 2011 by Brenda Pomerance, who wanted to examine the records at the Link Condominium at 310 West 52nd Street. In Musey v. 425 East 86th Street Apartments Corp. in early 2017, the State Supreme Court affirmed that shareholders in a co-op are entitled to “broad access” to building records, including minutes, residents’ personal information, financial records, and information about trusts.
“It’s a fine line,” says attorney Stewart Wurtzel, a partner at Tane Waterman & Wurtzel. “There’s a lot of things that boards do that are confidential.” But if a resident really wants to inspect the financial records, Wurtzel thinks boards should grant access. “I don’t think it’s that big a deal to take a look at and take digital photographs,” he says, as long as the requests don’t cause a disruption for any building employees who have to supervise the shareholder.
Even with the allowances granted by the Pomerance and Musey decisions, the board still has the right to take a step back and examine the reasons behind any request for documents. “Depending upon the reasoning and circumstance behind it,” says Wurtzel, “there’s comes a time where we need to say, ‘We think that this is not a good-faith request – get a court order.’”
Conflict of Interest
On January 1, 2018, a new state law went into effect that requires all co-ops to prepare annual reports of all contracts they decided on in which a board member had – or appeared to have – a financial interest. The report has to be signed by all the directors, and it must include information on the recipient; the amount and the purpose of the contract; a record of the board meetings in which the contract was voted upon, including attendance and how each member voted; the date of the vote; and the effective date of the contract.
The purpose of the law was to help boards avoid even the appearance of conflicts. But according to numerous attorneys, the law was was broad and poorly written. A recent amendment has helped clarify it – including condos and explaining more clearly what needs to be in the report – but it’s still too early to determine how boards and residents will incorporate the reports into their business.
And yet, not everyone thinks it’s a bad idea. “I think [the report] is certainly a good thing,” says Wurtzel, “because there’s always concern about conflicts and self-dealing. I don’t see any downside to it at all.” Wurtzel adds that, in addition to holding boards accountable, filing a report doesn’t actually change bad behavior. “It doesn’t prohibit conflicted transactions,” he says. “It’s just a question of a disclosure, and I haven’t had any clients call up and say, ‘Well, if I have to disclose this, I’m not going to do it.’”
But what about the very nature of the disclosure? Appearances are everything, and while shareholders may rebel against the idea of a conflict, that may not be an appropriate reaction. “Conflicts are not necessarily a bad thing,” says Wurtzel. “If you have somebody on the board who works for a company which has the skill set that the co-op needs, and they’re getting a good price, yes, it’s a conflict, but it doesn’t mean that they shouldn’t go with it. They don’t need to pay more money simply to avoid the conflict. The way around that is simply disclosing.”
But for some owners, even that isn’t enough. Take, for example, the board that assumed any time its manager recommended a professional, it was a conflict of interest, and the board couldn’t use those people. What can you do with that? “They’re not afraid of a conflict of interest; they’re afraid of kickbacks,” says Racht. “And to a certain degree you are never going to avoid [kickbacks] completely. It’s no different than getting a referral. And if you are concerned that there’s a kickback, have your attorneys draft an appropriate document for everybody to sign.”
Are there any straightforward directions for boards looking to satisfy those demanding more transparency? The short answer is no. Like Leo Tolstoy’s unhappy families in Anna Karenina, each board is different, and what works for your neighbor may be a terrible choice for you. Boards have to decide for themselves how much they want to reveal, not in the interest of hiding anything but simply to maintain everyone’s privacy and to keep the building running at optimal efficiency. Boards need to consult with their attorneys and managers to determine what exactly they can – and should – share, while maintaining the privacy that they and their residents are entitled to.
And if an owner complains? Ask if you can sit in on his or her family meetings.