The question I wanted to discuss today is one that comes up frequently for condo, co-op and hoa board members, especially where finances are concerned. Should board members be making decisions based on their own best judgment, or responding to the will of the majority of owners in the association? Or, put differently, what exactly is the duty of a democratically-elected representative?
Of course, this issue is not unique to Shared Ownership Communities. It frequently arises in national politics as well, especially as politicians are paid representatives, and therefore have a vested interest in making their constituents happy. It is the main impetus for pork politics. Even the President, despite being elected by the nation as a whole, is not immune to public opinion politics. A good example is the current discussion of the military’s “don’t ask, don’t tell” policy. President Obama promised, during the election campaign, that review and reconsideration of this policy would be a priority of his presidency. However, nearly a year later no action has been taken, due mostly to public discomfort with the concept of gays serving in the military. Whichever way you come out on this issue, this is a prime example of a politician supplanting his own judgment to satisfy the perceived will of a majority of his constituents.
That said, how do such issues translate to the world of condos, co-ops and hoas? Since it’s the end of the year, let’s look at decisions concerning budgeting for 2010. Despite a modest recovery, the economy is still in rough shape. Most people have fewer discretionary funds today than they did 3 years ago. However, many costs have risen as well. As fuel prices rise, so do the costs of electricity, gas and building materials (which raises not only utility costs but also the predicted costs of reserve savings). Insurance has also risen dramatically, especially in coastal states that have seen significant storm activity in the past few years.
Therefore, even though many people can afford less, the cost of operating an association have risen, and continue to rise. Most laws require association boards to prepare a budget that accurately predicts the costs of ownership, and that assesses 100% of that amount to owners. Still, you can expect that many owners, even a majority in some communities, may demand that their board members either maintain an identical budget to prior years or even reduce the budget by some specific percentage.
This creates a real issue for board members. Directors have a fiduciary duty to maintain the common elements of the community and often a statutory duty to collect sufficient funds for operation. But a majority of owners, that majority having the ability to recall the board members at will, often demand that the board members ignore those duties and prepare a budget that, in some cases irresponsibly, reduces collections below what is necessary.
Now, certainly decisions can be made that may legitimately reduce costs without breaching a board member’s duty to constituents. Optional services can be cut, fat can be trimmed, and alternative service providers can be considered. But even when all that has been done it is common for owners to demand further cuts in maintenance, citing the economy (loosely) or simply the gut concept that maintenance is “too high”.
It is at this point that board members often split between those who feel their duty to their constituents is limited to using their best judgment, even if that judgement results in a decision that is different from the will of the majority of owners, and those directors who feel that their directorship is essentially a rubber stamp of the majority. Unfortunately, due to the nature of shared ownership these decisions are often colored by personal relationships, and a desire to be viewed favorably by one’s neighbors.
Edmund Burke, an Irish politician and theorist, stated that “Your representative owes you not his industry only, but his judgement; and he betrays, instead of serving you, if he sacrifices it to your opinion.” That is, Edmund Burke was a firm believer in the idea that representatives owe their constituents their judgement and hard work, not their agreement. Such a philosophy translates directly to decisions made by SOC directors, and especially those made at budget time. Often, individual owners will have little knowledge of the finances of the community, despite having open access to the books and records and despite having been sent one or more drafts of the budget (just as in national politics, it is sadly rare for the “public” to take the time to educate themselves thoroughly on important issues, and I applaud those of you who do, as it is a critical aspect of community involvement). They may fail to attend finance committee meetings (which by many laws must be open to all owners) and often fail to prepare detailed arguments on how to solve the association’s financial problems. Yet despite this, there are board members in associations throughout the country who ignore their own research, industry and judgement in making budgetary cuts that are harmful to the long-term health of their community, simply based on the will of inactive but vocal owners. It is these board members, in my opinion, who are not adequately representing their constituents, as they are allowing community pressure and personal issues to override their duty to the association as a whole. I strongly agree with Mr. Burke’s philosophy, and I recommend that all board members, while making sure to listen to the concerns and suggestions of their neighbors, ultimately make decisions that they know to be for the good of the neighborhood. In the end, that is the best way to serve your community.