BOARD OF DIRECTORS - DUTIES

Board Defined. 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.

Board Required. 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. 

Rights and Powers. See Rights of Members and Associations. 

General 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 and due diligence.
2. Confidentiality. Boards have a duty of confidentiality, i.e., there are matters that directors must keep in confidence.
3. Board Meetings. Directors must attend and participate in meetings so they can be informed about the association's business.
4. Maintenance. Boards must maintain the common areas on behalf of the membership (Civ. Code § 4775)
5. Enforce Governing Documents. Boards must enforce the governing documents.
6. 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.

Financial Oversight. Boards must exercise reasonable care when overseeing the association's money. Following is a summary of their obligations:

• Bank Accounts. Boards must set up separate operating and reserve accounts. 
• Reserve Funds. Boards must establish and properly fund reserves for the future repair and replacement of major common components.
• Approve Fund Transfers. Depending on the amounts, boards must approve the transfer of funds from operating and reserve accounts. 
• Make Prudent Investments. Boards should obtain a reasonable return on the investments without jeopardizing capital.
• Internal Controls. Boards should establish internal financial controls to prevent embezzlement.
• Insurance. Boards are required to purchase a fidelity bond and cyber crime insurance to protect against loss. 
• Budget and Assessments. Boards must budget for the association's financial needs and then assess the membership sufficient to meet their obligations.
• Collection Policy. Boards must establish and follow strong collection policies.
• Taxes. Boards must file annual tax returns.

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.) This 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.

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.

Review Between Meetings. 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.

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.

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:

• Appointing executive committees or their members (Corp. Code § 7212(a)(6));
• Approving large transfers of funds;
• Approving settlement agreements (Elnekave v. Via Dolce);
• Attending board meetings;
• Voting on motions at board meetings;
• Electing officers (Corp. Code § 7213(b));
• Filling vacancies on the board (Corp. Code § 7212(a)(2));
• Reviewing the association's finances (Civ. Code § 5500);
• The decision to record a lien for delinquent assessments (Civ. Code § 5673);
• The decision to foreclose on a lien (Civ. Code § 5705(c));
• The decision to file a lawsuit (Finley v. Superior Court).

Oversight Required. While boards can delegate duties, they remain responsible for the actions taken by managers and committees who act at their direction.

Officers. See Selecting Officers. 

Director Limitations. See Limitations on Directors. 

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