Why Do Boards Hide? Transparency Doesn’t Bite


When Boards Hide, What Happens?

How do you think that we have ended up with laws in California that require open meetings, liberal records review rights, homeowner forums and internal dispute resolution, and liberal annual disclosure of financial information, reserves, savings for repairs and replacement of major components, insurance policies, pending/ proposed litigation against developers, summaries of alternative and internal dispute resolution procedures and laws and architectural control processes?

It is because of “horror stories” presented to the legislators about “bad boards.” The majority of HOA boards are not “bad,” but many are secretive and do “hide” by meeting without notice to owners, conducting business by email, refusing legally required access to association records, keeping negative information close to the vest, and the like.

Directors are fiduciaries, meaning they are entrusted to protect the assets of the association members and be accountable to them; keeping secrets from the members can lead to legal and political ramifications. If any director is found to be intentionally hiding secrets or defrauding owners, that individual can lose the “legal protection” offered by Civil Code §5800 and Corporations Code §7231 to protect volunteer directors that act in good faith.

Directors could also conceivably be held personally liable for the $500 per incident penalties that can be imposed for failure to honor the open meetings requirements of Civil Code §4900- §4955 or records inspection rights granted to owners in Civil Code §5205. These fines can be imposed by a small claims court judge, and an owner does not need an attorney to pursue a cause. An owner can seek awards of up to $7500 in small claims court. This amount is considerable exposure.

And a lot more can happen when boards become secretive—owners get restless, demanding, accusatory, angry, resentful, frustrated and distrustful. And the more this happens, the more some boards want to do everything in secret to avoid confrontation. It is a vicious circle.

Why Do Boards Hide?

Abusive Owners

When board meetings turn into a circus or boxing ring, some board members resign and boards tend to go into hiding to make decisions, having closed meetings or taking action by email. But there are ways to deal with abusive owners. Here are a few things to try. There are no guarantees any of these will work, but a good faith effort should be made before choosing the most drastic ones (listed in priority from least to most).

  • Adopt a Meetings Policy: A good meeting can help promote organization and order. It’s harder to argue with a piece of paper than the president of the board.
  • Use Sergeant-At-Arms/ Robert’s Rules for Ejections: I might even recommend having two burley (but friendly) male owners stand by the door or a security officer present for difficult meetings for the sake of appearance, but I am not in favor of any physical contact.
  • Use Video or Audio Equipment as a Deterrent to Embarrassing Behavior. I have recommended that a board set up a video camera and announce to the members the board will be taping a meeting if difficulty is expected. The best policy, however, is to erase the tape after the meeting unless it is needed for evidence.
  • Close A Board Meeting And Revert to An Emergency Meeting: This is a desperate remedy that might be justifiable in the worst circumstances. And, there is always the alternative of calling a board meeting to have the association’s legal counsel present to discuss legal remedies and how to get the business done that needs attention.
  • Lawsuit Seeking Injunction: Some boards have had to resort to seeking a court injunction barring certain individuals. This would be a last resort. It is costly and sometimes a board has trouble with proof. Some judges assume that a board ought to be able to handle a difficult owner with the right structure to meetings.

Fear Of Letting Owners Know The Truth

Fear is perhaps the most common reason boards decide to conduct business in a secretive way. A potentially explosive problem is discovered and boards do not know how to approach it rationally. They have no training for this. They do not want to trigger a lot of questions for which they have no answers. Sometimes the directors think they can solve the problem without telling members. Maybe they don’t want to spark panic or a recall petition. Maybe they want to “get out of Dodge” before all heck breaks loose (bad news for everyone).

One of the biggest mysteries is why boards choose to bear the entire burden of a problem by keeping all the concern to themselves and then hitting the owners over the head with a hammer when the board can no longer hide the bad news. Trickling out bad news little by little while at the same time providing assurance the board is seeking solutions would surely soften the blow.

I can understand fear of being blamed for any mistake and fear of sharing very bad news with the members. When such discoveries are made, there is nothing wrong with delaying announcement to consult with the right kinds of experts who have the knowledge to help sort out the facts and offer the right kinds of resolutions and help with the disclosures. But waiting too long and purposely masking bad news can lead to dire consequences, not only for the board but all of the members too.

Not Wanting To Be Bothered

Some directors are plagued by ego and assume they know what is best for everyone, while others might have developed attitude, having given service for 20 years during which no one ever showed any interest. Directors often assume that no one cares and use evidence of apathetic behavior as an excuse that communicating with owners is an exercise in futility. Some directors simply want to avoid controversy or discourage nosy owners.

Penny Pinching

There are directors who ran on a campaign promise to “lower dues” or hold down costs. This is difficult when the economy is failing, and lawmakers keep adding requirements like detailed disclosures and more service-driven costs. And in these economic times, budgets are affected by hefty losses of income caused by owners “walking away” and bank foreclosures. As a result of all of this, some directors are loathe to share the negative financial records.

The Vicious Circle Grows

When a board makes decisions in secret meetings or via email and avoids notifying owners of any problems until they have escalated, the result is often that the board’s problems also escalate. It is hard enough for a board to deal with big problems such as the need for a large special assessment because of the discovery of serious problems caused by deferred maintenance, or a lawsuit that has been kept a secret, or some other tough issue. Add to that the burdens that pile up as owners get more and more angry or distrust abounds and these things happen:

  • Threats of lawsuits by current owners or recent purchasers for mismanagement or failure to disclose attorney demand letters or threats written on behalf of angry owners,
  • Collections efforts complicated by withholding of assessments and frustrated “walk aways,”
  • Recall petitions,
  • Escalated and comprehensive demands for records inspections,
  • Small claims actions for meeting or records inspection violations,
  • Having to deal with disruptive and angry owners at meetings.

Failure to cushion the blow of bad news by initiating discussions with members of the problems early on to let them know that the board is properly handling the difficult issues can exacerbate problems exponentially.

While excuses like those set forth above for being secretive may seem justifiable in the worst circumstances, the law says that HOA boards must: (1) open up meetings, (2) open up the books and records, (3) tell people when there is a big special assessment coming and (4) let the owners in on the overall financial plan. It is important to keep in mind that the laws will get more demanding if boards hide bad news. It only takes a few horror stories to a legislator to trigger a proposal for new and more onerous accountability requirements.

Beth A. Grimm is an attorney with a private law practice in Pleasant Hill, who serves homeowners association and homeowners throughout the State of California. Her practice is largely web based and telephone consultations are available. She is a frequent contributor to the Echo Journal and other similar publications in the State of California and on a national level. A wealth of information is available on her Web site at CaliforniaCondoGuru.