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BOARD AUTHORITY & DUTIES

BOARDS ARE REQUIRED
A "Board of Directors" is the elected body that governs a common interest development. The Corporations Code defines "directors" as:

natural persons designated...elected or appointed...to act as members of the governing body of the corporation. A person who does not have authority to act as a member of the governing body of the corporation, including through voting rights as a member of the governing body, is not a director... (Corp. Code § 5047.)

"Board of Governors" is an older term that is rarely used today. It was used in early common interest developments when they were unincorporated associations. As the industry evolved and the Department of Real Estate required that developers incorporate all new associations, they added bylaws to their CC&Rs and boards were defined as "boards of directors" instead of boards of governors.

Governed by Boards. Associations are governed through elected boards of directors who have general duties and authority to govern. (Civ. Code § 4080.) Corporations are required to have a board of directors:

Each corporation shall have a board of directors. . . . the activities and affairs of a corporation shall be conducted and all corporate powers shall be exercised by or under the direction of the board. . . . the activities and affairs of the corporation shall be managed and all corporate powers shall be exercised under the ultimate direction of the board. (Corp. Code § 7210; § 300.)

Without a board, a corporation cannot conduct business, which means insurance coverage will lapse, maintenance ceases, rules enforcement ends, the association's corporate status lapses and lawsuits cannot be answered. This exposes each owner to potential liability. Resignations by all directors without appointing replacements may also be a breach of the resigning directors' fiduciary duties.

Number of Directors. The number of directors elected to a board is established in an association's articles of incorporation and repeated in the bylaws. The number is almost always an odd number so as to avoid dead-locked boards. The number of directors is usually five. Very small associations sometimes call for three directors and very large associations may have seven or more. See Changing the Number of Directors

ASSOCIATION'S AUTHORITY
"Unless the governing documents provide otherwise, and regardless of whether the association is incorporated or unincorporated, the association may exercise the powers granted to a nonprofit mutual benefit corporation, as enumerated in Section 7140 of the Corporations Code." (Civ. Code § 4805(a).) Corporations are required to have a board of directors who conduct the affairs of the corporation. (Corp. Code § 300.) Because of their positions of authority, boards (and individual directors) are held to a higher standard as fiduciaries. Unless the governing documents provide otherwise, boards can:

BOARD LIMITATIONS
 The role of a board of directors of a condominium or homeowners association is to oversee operations and set policy. Just as boards have limited authority, so do individual directors.

  1. Vendors. Directors do not have the right to individually contact vendors or give vendors instructions or sign contracts without board authorization. Allowing multiple directors to interact with vendors will result in higher costs to the association, conflicting instructions to vendors and potential loss of vendors. It also creates the potential for ultra vires acts by directors. The proper procedure is to direct matters through the president to the association's vendors or through its managing agent to vendors. Directors who violate these procedures and disrupt operations may be censured by the board and may be subject to personal liability for their acts.
  2. Personnel. Directors are similarly restricted in their ability to interact with employees. Individual directors do not have the right to direct or discipline employees. That function is reserved to the board as a whole or delegated to the president, manager, or managing agent. To allow individual directors to take such actions is to invite potential liability via Labor Code violations, harassment issues, and constructive termination actions.
  3. Records. Directors have a right to review books and records of the Association but that right is limited. Individual directors' access to owner's records should be limited out of respect for an owner's privacy. Even though Corporations Code § 8334 gives directors the absolute right to inspect all records, that right was modified by the courts. In Chantiles v. Lake Forest II. Tom Chantiles ran for the board and won but thought his friend should have won as well. He wanted to inspect the ballots and proxies to see how people voted. The board refused and he sued. The court agreed with the board and limited a director's inspection rights. The court imposed a balancing test regarding the right of privacy vs. the right of a director to inspect records.
  4. Board Review. Even though individual directors cannot rummage through members' files or personnel records, the entire board could review an owner's or employee's file related to a pending disciplinary action, maintenance issue, etc.
  5. Volunteer Limitations. To maintain their protections as volunteers, directors cannot receive pay for serving on the board. To limit exposure to the association, directors must be cautious about the activities they undertake for the association.

BOARD DUTIES
When a homeowner becomes a board member, he/she assumes certain obligations as a director that must be carried out in the best interests of the association.

  1. Fiduciary Duties. Boards of Directors are held to a higher standard and must fulfill their duties of loyalty, due diligence & confidentiality.
  2. Attend Board Meetings. Directors must attend and participate in meetings so they can be informed about the association's business.
  3. Maintenance. Boards must maintain the common areas on behalf of the membership (Civ. Code § 4775)
  4. Enforce Governing Documents. Boards must enforce the governing documents.
  5. Operational Management. Boards manage the day-to-day operations of the association. This includes retaining (as needed) management services, legal services, landscape vendors, pest control, operating amenities (pools, tennis courts, clubhouses, equestrian facilities, golf course, etc.), purchasing insurance, etc.
  6. Financial Oversight. Boards must exercise reasonable care when overseeing the association's money. Following is a summary of their obligations:

Review Financial Records. Boards must maintain accurate financial records which can be used to generate annual financial statements for the membership.Beginning January 1, 2019, boards of directors must review their association's financial records on a monthly basis. (Civ. Code § 5500.) Review can be interpreted by its ordinary meaning, “to go over and examine critically or deliberately.”  (Websters Dictionary.) Directors should review financial statements critically and ask questions whenever something looks amiss or does not make sense. For example, if the check register shows checks issued to a roofer but no roof work has been authorized, the board should investigate. Embezzlement may be occurring. Some association boards only meet quarterly or miss monthly meetings because of holidays or for other reasons finances need to be reviewed between meetings, making it difficult to meet the statutory requirement to review financial records monthly. Fortunately, Civil Code § 5501 allows the review requirements to be met when: (1) Every member of the board reviews the monthly documents and statements (described above) independent of a board meeting and then ratifies the review at a subsequent board meeting, or (2) A subcommittee of the board consisting of the treasurer and at least one other board member reviews the records and ratifies the review at a subsequent board meeting. The ratification must be reflected in the minutes of the board's meeting. Review includes:

  • a current reconciliation of the operating accounts,
  • a current reconciliation of the reserve accounts,
  • the current year's actual operating revenues and expenses compared to the current year's budget,
  • the latest bank statements for operating and reserve accounts,
  • an income and expense statement for the association's operating and reserve accounts, and
  • the check register, monthly general ledger, and delinquent assessment receivable reports.

Limited Transparency. Because a board's primary duty is to protect the corporation and its assets, complete transparency with the membership is not feasible. There is some information that must be kept confidential, which is why the Davis-Stirling Act provides for executive session meetings that allow boards to review matters in confidence. For that reason, minutes of these meetings are not subject to review by members.

DELEGATING DUTIES
Boards can delegate many of their duties to others. For example, boards can hire a managing agent to conduct the association's day-to-day operations.

The board may delegate the management of the activities of the corporation to any person or persons, management company, or committee however composed, provided that the activities and affairs of the corporation shall be managed and all corporate powers shall be exercised under the ultimate direction of the board. (Corp. Code § 7210.)

[D]irectors may delegate their authority to a committee (Corp. Code, §§ 300, subd. (a), 311, 7210, 7212, subd. (a)). (Finley v. Superior Court (2000) 80 Cal.App.4th 1152, 1161.)

There are various types of committees--any of which the board can delegate authority or make advisory only. If a board delegates authority to a committee, there should be a record of the delegation. Normally, that would be in the board's meeting minutes. While boards can delegate duties, they remain responsible for the actions taken by managers and committees who act at their direction.

Nondelegable Duties. There are some duties that association boards of directors cannot delegate, i.e., they cannot be assigned or transferred to a person or committee. They include the following:

Judicial Deference. Courts will defer to board decisions, even if the decisions are not the "best" decisions, provided the board made a reasonable investigation and its decision was in good faith with the best interests of the association in mind (Business Judgment Rule). Members who are unhappy with board decisions always have recourse.

Additional Information. See Selecting Officers, and the Open Meeting Act

Membership Rights. See Membership Rights and Responsibilities

ASSISTANCE: Associations needing legal assistance can contact us. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.

Adams Stirling PLC