Reflections on a Director's Duty of Loyalty
I have been teaching a series of workshops in the mountains focused on the Responsible Governance Policies (commonly referred to as “SB 100 Policies”) which homeowners’ associations (“HOAs”) in Colorado are required to adopt under the Colorado Common Interest Ownership Act (“CCIOA”). This week we talked about the role of directors in governing their communities with an emphasis on fiduciary duty. We reflected on the fiduciary duty of directors and how directors sometimes unintentionally - or with the best of intentions - breach this duty.
As Suzanne Leff wrote in a blog posting entitled Fiduciary Duty of Board Members: An Overview , directors of HOAs have the following duties to their associations: (1) Duty of Care; (2) Duty of Loyalty; and (3) Duty to Act Within the Scope of Their Authority.
Since Suzanne did an excellent job elaborating on the duties in her blog entry, I would like to reflect for a moment on the duty of loyalty directors have to their associations. Here are my thoughts:
● Directors have a duty of loyalty to act in the best interests of the association. This means when a director walks into the board room, they must take off their “homeowner hat” and put on their “director hat.” Directors must put the interests of the association above: (1) their personal interests; (2) the interests of their friends and neighbors; (3) the interests of their families; and (4) the interests of any other group or entity in which they are involved or have a financial interest. In short, directors must disclose potential conflicts of interest and comply with the Conflicts of Interest Policy adopted by their association.
● Directors should passionately and constructively debate issues in the board room. Directors should feel free to disagree and debate the pros and cons of issues prior to making tough decisions. However, once a decision is made, directors have the responsibility to speak with one voice. That means directors should not attempt to undermine the action of the board in the community. If a director does not agree with the ultimate decision of the board, the director should say nothing about the decision. If a director cannot keep quiet, the director should resign from the board prior to speaking out against the board action.
With annual meeting season upon us, we are seeing some communities struggle with civility and reasonableness. Directors should not contribute to the unrest by breaching their duty of loyalty to the association.