“Back to the Basics,” and the feature article of the magazine will be about fiduciary duty of board members and the business judgment rule. The goal is to remind board members of the best basics of our industry – i.e. what they should be doing to discharge their fiduciary duties and protect themselves under the business judgment rule.
BY:
Business T
Judgment Rule and You: How to be an ordinarily prudent person
he board is the governing body for a homeowners association, and California law recognizes that boards are made up of regular people who are volunteer- ing their time (i.e., working for free). For this reason, California law does not expect an association’s board members to make perfect decisions, and
when a board makes a decision that is less than perfect, the law provides a safety net in the form of the Business Judgment Rule, which shields directors from liability if certain minimum standards are met.
Imagine a homeowners association as a bus, the board of directors as the bus driver, and the homeowners as the passengers. Te passengers may have their own ideas on where the bus should go, but ultimately it is the board’s responsibility to pick a destination and get the passengers there safely. If the homeowners do not like the direction the associa- tion is going or the way it is being run, they can install a new board through the electoral process or challenge the legality of a board’s decisions. If the owners do not challenge the board’s decisions, the bus will continue on the Board’s selected path until the destination is reached.
At one point or another, almost every board will face a challenging decision. When this happens, it is important to remember that doing nothing is not an option. An informed decision to take no action on a particular matter, after performing an inves- tigation of the circumstances and soliciting the advice of association experts, is vastly different than ignoring an issue without investigation and hoping it will go away. From a legal standpoint, the decision to take no action would, at a minimum, be reflected in the board’s agenda and meeting minutes, which would include a board resolution to either take or not take action. Tis means there would be documented evidence that the board was actively engaged in managing the situation, as opposed to neglecting its duties to oversee the association’s affairs, which could result in legal or financial consequences.
Te law recognizes that volunteer directors will be faced with difficult decisions that cannot be ignored, so the law does not require perfect decision-making. Rather, a board is expected to make decisions in accordance with the Business Judgment Rule, which provides as follows:
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