Anne Ward is a big fan of staggered terms for co-op boards. An attorney with Ehrlich, Petriello, Gudin & Plaza, she says there are so many complicated situations facing boards that it’s essential to maintain some institutional memory.
“Right now I’m dealing with a co-op that has a shareholder causing all sorts of problems,” Ward says. “He’s going down to the management office and screaming at the property manager. He’s suing the board president for harassment in municipal court – not for anything the board president did but because the board wouldn’t give him a parking spot. This has been going on for a whole year, and the board has been working with me on how to deal with this.”
Thanks to the board’s staggered terms, there are always incumbents on the boards along with newly elected members. “If all the board members were to disappear tomorrow, and I had to start from scratch explaining this to the new board, it would be a huge task,” Ward says. “And a lot would be lost in translation.”
In most New York City co-ops, every seat on the board of directors is up for grabs every year. That’s typically a provision that was written into bylaws during the flurry of conversions in the 1980s. The sponsors creating the offering plans used the same boilerplate language requiring annual elections of the entire board.
Now, many lawyers say, it’s worth taking a harder look at that provision. Is it really in the co-op’s best interest to potentially replace its entire board every year? Would it be better to space out the turnover? One way to do that is to switch to staggered terms.
Shareholder Vote Required
Staggered terms limit the number of seats up for grabs in any given year. That requires revising the governing documents to set up sections within the board, explains attorney Howard Schechter, a partner at Montgomery McCracken Walker & Rhoads. These must be as nearly equal in size as possible, with each section coming up for election in different years.
"So, for example, if the board is divided into two sections, each would come up for election in alternating years. On a five-member board, everyone would serve a two-year term, with two seats open for election one year, and the other three open the following year. Likewise, setting up three sections would stagger terms over three years.
“The provision can be in the certificate of incorporation or in the bylaws, but either way, revising it requires a shareholder vote,” Schechter says.
Steve Hyatt, senior vice president for FirstService Residential’s CityLine Property Management Division, says that, by slowing the replacement of sitting board members, staggered terms preserve continuity. “You maintain a frame of reference, a pool of knowledge about the building’s history, previous projects, and why decisions were made,” says Hyatt.
Staggered terms also make it easier for new board members, who can look to sitting members for guidance as they learn the ropes, adds Robert Ferrara, president of the Ferrara Management Group.
Another reason to switch to staggered terms is to guard against a “revolution” at the annual meeting, says Schechter. Carving the board into two or three sections may make it impossible for an insurgent group to clean house and take control in one year.
But some shareholders might see the prospect of such a revolt as the principal benefit of annual elections. “If you have a board that is perceived as corrupt or doing a terrible job, why would you want to keep any of them in there?” asks attorney Richard Klein, a partner at Romer Debbas. Facing election every year, he says, can help hold members’ feet to the fire.
Case in point: a co-op managed by Ferrara’s company voted out all but one member of its board last May. “The previous board wasn’t making the best business decisions, and it was creating some problems for the community,” he says. In this case, the mass turnover hasn’t proved to be a problem. Ferrara reports that things are running more smoothly and shareholders are happier.
Entrenched Is Not Always a Dirty Word
If complaining about the board is a favorite pastime in co-ops large and small, running for the board is not. A dearth of candidates usually results in long-term service by a handful of stalwarts. While this can lead to problems, “entrenched” is not always a dirty word. When competent, long-serving members are forced out through staggered terms or strict term limits, there’s no guarantee that an equally competent and dedicated member will step in.
“I was on the board at my co-op for 28 years,” says attorney Allen Brill, a partner at Brill & Meisel. “I had to stay on until we could find someone else willing to run.” For this reason, he says, many boards are “self-perpetuating.”
Board members who have served a while should voluntarily rotate themselves off if other people are interested in coming on, suggests Schechter. Establishing term limits doesn’t give them the choice, which isn’t necessarily in the building’s best interests.
“Boards that have adopted term limits sooner or later come back to me and say, ‘We’ve got so-and-so, who is the most important person on the board, and now he has to step down. How can we keep him on?’” Schechter says. “If you’ve adopted term limits, you can’t.”
Ultimately, staggered terms may be better suited to some buildings than others. There’s one way to find out if they’re right for yours. “Put it out there as a bylaw amendment at an annual meeting,” says Hyatt of FirstService. “I think it’s something all boards should entertain.”