The roll of the Board of Directors and management in planned communities is a concept that is often unclear and not well understood. In this paper, I hope to put some of the concerns in perspective. Evan McKenzie, a University of Illinois-Chicago lawyer and political science professor and author of the book Beyond Privatopia: Rethinking Residential Private Government, recently explained:
“There’s no training or actual requirements for board positions, which means that the people in charge often don’t understand the most basic requirements of governance. Many homeowners don’t, either.”
The review of a detailed explanation of the Board of Directors roles is basic to understanding this form on unregulated governments. The following caveats apply to those roles:
- Boards of Directors do not have discretionary authority to exceed the provisions contained in the governing documents. Arizona case law is clear regarding a Boards’ fiduciary duties and they may not act in an arbitrary and capricious manner in applying the governing document provisions. The monetary penalties to homeowners can be severe as have been reported in past cases.
- Likewise, Boards are bound by the provisions contained in the applicable AZ state statutes, ARS Title 10 and ARS Title 33 and as well as the applicable Arizona case law decisions.
- Finally, Boards and management cannot engage in selective enforcement of the provisions contained in governing documents, state statutes and applicable case law.
- Full and complete transparency is paramount to the detection and prevention of widespread Association fraud on the part of Directors and management. Serious fraud cases have been prosecuted under RICO, the Federal Racketeering, Influence and Corrupt Organizations Act.
Because planned community governments are unregulated by any governmental authority in many states, (including Arizona) the ‘system’ can be exposed to a culture of corruption and does not work the way it should. David Feingold, a California attorney with Ragghianti Freitas in San Rafael, Calif., who’s handled association disputes, says:
“You’re mixing your home, your money, your family and you’re putting your neighbors in charge of that. So it’s a pretty volatile mix.”
Philosophy for Change
Those calling for change in community associations face two initial challenges.
The first challenge is to reconcile or to resolve community associations’ negative aspects. This requires a candid admission that negative aspects exist. Too many in the industry have for too long resisted this admission and have refused to engage in constructive dialogue with those who assert otherwise. It is time, however, to acknowledge those negative aspects so that meaningful discussions and change can occur.
The second challenge is to recognize the current governance concerns, to anticipate the future needs of community associations and to develop responses to those needs. Inherent in such an analysis is a fair amount of intellectual risk-taking because the future is always uncertain, and the primary players in the game are risk-averse boards, attorneys and community managers.
Also required is acknowledgement that community association law as it predominately is practiced may not be sustainable because that law has been almost exclusively regulatory and controlling. There is a limit to the acceptable extent of control and to its productive results.
When discussing governance change, it is important to recognize the impact governance has on the various facets of community association living. There should be the obvious concern of balancing the rights of the community with the rights of individuals residing in that community.
We have all heard the horror stories of individual homeowners being victimized and terrorized by the bullies on the board, their legal henchmen and management. Change is not easy, nor does it come in a smooth and linear way. Community association governance also presents broader societal concerns. Should the public become convinced that community association living is a lifestyle of conformity, control, constraint and disfunction, buyers will avoid it.
Transparency is the Key to Change
Operational transparency and budget transparency are the full, accurate and timely disclosure of information. Unless the board of directors and management promote a culture of transparent communications, they will fuel the ‘rumor mill’ and never develop the necessary level of trust and confidence in their efforts. Through communication we share, inform, educate, motivate, and more importantly, listen. It is through this pattern of communication that we begin to develop a mutual understanding.