Respnsibilities of Making Corporate Decisions by Brian Blackwell
Fiduciary Responsibility and the Business
Judgment Rule : First and foremost , a board of directors should understand that a community association is a non-profit corporation where the board of directors view their role as decision makers , acting in the best interest of all its investors ( the owners who elected the board ), and in protection of its assets . Each director has a responsibility to the entire corporation .
The Corporations Code provides that officers and directors are fiduciaries ( defined as “ One , such as an agent of a principal or a company director , that stands in a special relation of trust , confidence , or responsibility in certain obligations to others ”). The law provides protection for Directors , even if they make poor decisions that result in damage or loss , IF they performed their duties : a ) In good faith , b ) In a manner which the director believes to be in the best interests of the corporation , and c ) With such care , including reasonable inquiry , as an ordinarily prudent person in a like position would use under similar circumstances .
Corp . Code § 7231 ( c ) This is known as the “ Business Judgment Rule ”. It is vital that a board of directors utilizes their experts , keeps in touch with common sense , and strives for fairness when making all decisions .
In other words , let ’ s say a decision is made by the board – the board agrees to repair pin-hole leaks in the common area plumbing by rehabilitating the inner infrastructure of deteriorated or failing water piping systems using an array of cured-in-place epoxy pipe lining solution . This option , based on the recommendation of an expert - the plumber in this case - is contested by an owner who experiences a flood inside their unit following completion of the pipe lining . Claiming that the board failed in their responsibility by not replacing the pipes – and the complaint eventually makes its way in a court of law before a judge . A good judge will ask the members of the board how they came to the decision that was made . The judge is looking for three things : 1 ) The board acted in good faith 2 ) In a manner which the directors believed to be in the best interest of the corporation 3 ) And with reasonable inquiry – based on the opinion of an expert , in this case a plumber .
In addition to the judge ’ s favor on choosing the filler rather than replacement of the pipes , utilizing the Business Judgment Rule also ensures that the board ’ s directors and officers “ D & O ” insurance will back up their decisions in the event the owner were to file an insurance claim against the board for perceived negligence .
Contributed by Brian Blackwell , CCAM , CEO / CFO and John T . Barnes , CCAM / President West Coast Management Firm , Inc . 619.704.7393 • bblackwell @ westcoastmanagement . com or visit them at www . westcoastmanagement . com
Summer 2017 | Issue # 18 | The HOA Board Quarterly | 3