What is Fiduciary Duty?

A strict standard of care is imposed because association board members represent a public rather than a private trust.  Your residents depend on their association to maintain, protect, preserve, and enhance the common areas, which as a result protects property values.

Specific duties:

  • Protecting the association from liability through the purchase of insurance against both foreseeable and unforseeable risk
  • Maintaining the common areas
  • Adequately funding a reserve for the repair and replacement of major components
  • Promulgating reasonable rules and following fair and reasonable due process enforcement procedures
  • Adopting policies to collect assessments
  • Administering the affairs of the association
  • Ensuring that a system of internal financial controls is in place
  • Excercising fiscal responsibility (adopting an annual budget and independent audit)
  • Review and understand periodic financials

Fiduciary Standard – The law imposes fiduciary responsibilities to ensure that power is excercised conscientiously.  Thus the fiduciary standard demands that board members possess good communication skills, plan carefully in advance, delegate work to qualified committees or advisors, excercise initiative and independent thinking, work well together, and always act in the best interest of the community as a whole.

Business Judgment Rule – A more specific fiduciary benchmark is the Business Judgment Rule, which imposes on boards the responsibility for understanding association operations and researching every business decision they make before acting.  It also offers some protection, because essentially the Business Judgment rule states that if board members act in what they believe to be the best interest of the association – in a thoughtful deliberative, prudent manner, after reasonable inquiry –  then they’re not liable, even if the decision turns out to have been a poor one. The Business Judgment Rule additionally requires board members to exercise two more fiduciary duties:  the duty of care and the duty of undivided loyalty.

Duty of Care – Under the duty of care, board members are expected to act in accordance with both the law and your associaton’s governing documents; and to use the care and skill that a prudent person would use in similar circumstances.  Board members can also rely on information, opinions, reports, and statements prepared by their committees, management company, legal counsel, and other advisers – provided they use this input to act in good faithy, with no knowledge their actions are inappropriate.  The duty of care applies to board members in very tangible ways:

  • Active participation. A board member must actively participate in the governance of the association by attending meetings, voting on issues, evaluating financial reports, reviewing minutes, providing frequent communications to the membership, and so on.
  • Board actions. Board members who are present at a meeting when an action is approved by the board are presumed to have agreed to the action unless they vote against it or are prohibited from voting because of a conflict of interest.  Board members should not abstain from voting just because they do not want to hurt a colleague’s feelings.  They were elected by the owners to vote on their behalf; good board members vote in the best interests of the association.
  • Books, records, and governing documents. Board members should have general knowledge of the books and records, including the governing documents, maintenance records and accounting statements, and make them available to residents who wish to inspect them.  They must also ensure that association records are accurate.
  • Minutes. State laws usually require associations to keep accurate minutes of any meetings, including board, membership and commitee meetings.  Good minutes allow a board to research past issues and decisions.  Plus, in the event that a board decision becomes a legal issue, the associations attorney may need to review the minutes to verify that the board followed proper procedure.
  • Restrictions. Among your board’s many important fiduciary duties is covenants enforcement. As fiduciaries, board members are obligated to enforce all provisions in the documents and to ensure that they, themselves, are in absolute compliance.  When the documents provide flexibility with regard to enforcement (“may” rather than “shall”) must take into consideration many factors when deciding whether to take enforcement action against a member.  If the board makes a business decision not to enforce a particular violation because it’s unpopular or will affect a large number of people, it must appreciate the consequences of that decision.  It may establish a precedent that would make it difficult for future boards to enforce that same restriction or other restrictions.  The board could face potential liability for failing to discharge its fiduciary responsibilites.  Remember, the fact that a restriction is unpopular doesn’t absolve the board of its duty to enforce that restriction.  The only wat to legally avoid enforcing a governing document provision is to remove the provision through the amendment process.  Alternatively, if the violation pertains to an architectural guideline or requirement, the governing documents may provide the board the authority to grant a variance through the special resolution process.

Duty of undivided loyalty – Undivided loyalty is the most stringent duty the law imposes on board members.  As a fiduciary, a board member cannot in any sense be in conflict with the association; he or she must act for the sole good of the association at all times.  To exercise its duty of undivided loyalty, a board obviously should avoid conflicts of interest, which occur when board members permit self-interest to interfere with their duty to the association.

Example: Consider the board that votes to employ the president’s son as the community manager, or contracts a board member’s company to replace the roof.  In each case, meeting the duty of undivided loyalty would, at the very least, mean that involved board members should fully disclose these relationships and abstain from voting and the board should solicit additional bids.  Only then would the liability arising from a potential conflict of interest be abated.