Leadership Under the Law: Ensure your board knows its fiduciary duties.
by Ralph Holmen
Surely your members understand their fiduciary duty to their clients, but do they understand that they also have a fiduciary duty to the association when they assume a leadership role? Furthermore, do they fully recognize that they have legal obligations in the way they carry out their responsibilities?
Here we provide an overview of fiduciary duties so association leaders and executives can ensure that they satisfy those obligations.
1. What kind of legal duties do elected association officers and directors have?
Members elected or appointed to service as association officers and directors owe fiduciary duties to the association by law. In addition to attending to the affairs of the association as they would their own businesses, elected or appointed leaders are required to make a genuine and diligent effort to carry out their designated responsibilities with the intention of advancing the association’s interests.
2. To whom are the duties of officers and directors owed?
Association officers and directors owe their fiduciary responsibilities to the association itself, rather than to any single person, member, or group of members. With that in mind, they are legally obligated to pursue the course of action that promotes the highest interests of the association as a whole.
3. What kind of fiduciary duties are there?
There are both general and specific fiduciary duties. General fiduciary duties include the responsibility to act at all times in good faith and in the best interests of the association.
Specific fiduciary duties include care, loyalty, and obedience:
The duty of care involves discharging one’s responsibilities in a reasonably attentive and diligent fashion. For example, it requires directors to prepare for, attend, and pay attention during directors’ meetings. A director who is distracted by his or her BlackBerry or otherwise attending to real estate business during meetings may not be adequately satisfying his or her fiduciary duty of care.
The duty of loyalty requires always acting in the best interests of the association, rather than in the interests of oneself or another person or entity. For example, if a proposal before the association’s board of directors is good for the association and its members generally, but not helpful to a director’s business, the duty of loyalty requires that the director support the proposal.
The duty of loyalty also includes avoiding and declaring conflicts of interest and abiding by the “Corporate Opportunities” doctrine. This doctrine requires that if a member learns of a business or personal opportunity in his or her capacity as association leader, the member may pursue it only after the association has elected not to do so.
The duty of obedience requires leaders to abide by the bylaws, policies, and other governing documents of the association, and to support decisions of the association’s board of directors. For example, even if an association director votes against an issue before the board of directors, once that decision is made, the director must support it. A director who “badmouths” or otherwise undermines the board’s decisions is probably violating his fiduciary duty of obedience and loyalty.
Other specific duties include the duty to disclose relevant information, protect as confidential other information, and to safeguard and preserve the association’s assets by ensuring that proper procedures and controls are adopted and followed.
4. How should leaders handle conflicts of interest?
As fiduciaries, association leaders are obligated to avoid or resolve conflicts of interest.
Typical conflicts involve transactions between the association and entities in which the leader has an interest. For example, listing the association’s building for sale with the association president’s real estate firm could be a conflict of interest if the terms or conditions are more favorable to the president’s listing firm than another listing firm might be expected to offer. Resolution of such a conflict may require that it be approved by the association’s board, but that the president—the party enjoying the benefits of the transaction—not vote or otherwise participate in approving the transaction.
Another type of conflict can occur when a leader awards benefits to certain members or groups of members. For example, if a motion proposes to provide lavish benefits to association officers, those officers should recuse themselves from the deliberations, and abstain from voting on the motion.
The key to resolving conflicts is to identify them, preferably as early as possible, and to resolve them so that an association leader does not participate in an action that may afford him or her unique benefits (or appear to do so) at the expense of the association. Ultimately the standard for determining whether a conflict has been adequately resolved is whether the best interests of the association are served, and whether the transaction or other action is objectively fair to the association.
5. Do these duties and obligations mean that association leaders are responsible for performing their jobs perfectly?
Fortunately the answer to that is no. Even these principles of law imposing fiduciary duties don’t require perfection. The “Business Judgment Rule” protects association leaders by taking their intent into consideration. For example, as long as association leaders have acted in good faith—that is, seeking the best interests of the association—they will not be held liable for mistakes. Leaders might be held liable for association problems only if they intentionally or negligently failed to satisfy their fiduciary responsibilities.
Ensure that your elected leaders are well aware of their fiduciary duties to the association by offering frequent and consistent education at your leadership training, strategic planning sessions, and even board meetings. Invite your association counsel to present a discussion and field questions about fiduciary duties, or contact the NATIONAL ASSOCIATION OF REALTORS®’ legal department for additional guidance. n
Ralph Holmen is associate general counsel at the National Association of Realtors® in Chicago. He can be reached at 312/329-8200 or firstname.lastname@example.org.