Q&A: Board Ethics

Q Can the president of a co-op board be in business with the management company’s owner without divulging it to the shareholders or other board members? The board members were recently notified that the owner is one of the board of directors and principal owners of a new bank that the co-op has refinanced through. Our board president who is dealing with the company owner is also an investor in this bank. I think the relationship between the management company’s president/owner has compromised the board president’s fiduciary responsibilities to the shareholders. I do not believe the board president has pursued problems allegedly related to the managing company’s poor performance since he wants to be on the good side of the very wealthy and connected owner. As of this time, the shareholders have not been informed of the board president’s business dealings with the owner of the management company.

—Unethical Relationship

A “Your inquiry contains multiple parts; therefore, I will address each of your issues separately and to the best of my ability with the limited information you have provided,” states attorney Nancy A. Cifalino, with the New Jersey-based law firm of Celentano, Stadtmauer & Walentowicz, LLP.

“The first question in your inquiry suggests that your co-op board president is involved in a business venture with the owner of the co-op’s management company. However, the balance of the paragraph describes this relationship differently. It appears that the only involvement that the board president has is in the nature of having purchased bank stock where the management company’s owner is a principal in the bank. That relationship, without more, does not appear to create a conflict or mandate disclosure. I note, however, that you have failed to indicate the amount of stock the board president has purchased and whether he or she is a minority or majority shareholder. The fact that the co-op’s president has stock in a bank that the management company owner is also a principal owner appears too remote to create a conflict.

“Undoubtedly, board trustees have a fiduciary duty to the co-op shareholders. Siller v. Hartz Mountain Assoc., 93 N.J. 370, 374 (1983), cert. den. 464 U.S. 761 (1983). As such, the trustees must insure that the interests of the shareholders are served. Billig v. Buckingham Towers Condo, 287 N.J. Super. 551, 563 (App. Div. 1996). Thus, the co-op’s president has an obligation to act within the association’s governing documents, which likely includes addressing performance problems of the management company. The bare allegation that the board president is not doing so, in order to “be on the good side of the very wealthy and connected owner” of the management company, without more is just that - an allegation. Such speculative statements are irrelevant without a factual foundation or documentation to support same.

“Another issue is the co-op’s loan refinance at the bank where the management company’s owner is also a principal owner. If, in fact, the bank offered the most attractive terms, the refinance may have been prudent. However, if the co-op board overlooked substantial problems with the management company in order to obtain favorable refinance loan terms, a potential conflict could have existed. If that was not the case, the refinancing, in and of itself, would not be prohibited.

“Is it possible that you can attend a board meeting, or even write to the board, and question the board directly as to why the problems with the management company have not been addressed? You might also want to review a copy of the association’s bylaws, particularly the sections regarding the management company, as well as the sections regarding what each board member is required to disclose in terms of potential conflicts-of-interest.”

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