12/01/08

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In the beginning was The Board

If the complaining shareholder is the grease in the wheel of a co-op, then the board president is the axle around which those complaints revolve.

Seven years ago, Sylvia Shapiro was president of a red-brick postwar cond-op at Broadway and Ninth Street, where she heard quite a few of those misgivings. There were the little complaints - about the guy who went out in the hall every morning to get his paper - wearing nothing but a cowboy hat. Or the hate mail about the lack of lights on the building's Christmas tree.

Shapiro, a lawyer, started writing about her experiences, and her collection eventually became The New York Co-op Bible (390 pages; St Martin's Press), touted as a must read guide for anyone buying, selling or living in a co-op or condo. A revised second edition hit bookstores last month. Much has changed since Shapiro first put pen to paper in the late 90s: boards have experienced a power surge, and now have the power to declare shareholders objectionable and send them packing. Condo boards are trying to usurp some of the powers traditionally reserved for their co-op cousins. And such power has brought more responsibility, putting board members at risk for everything from verbal assault to criminal prosecution to punitive damages.

While mostly a practical guide to how a co-op functions with advice on how to navigate the legal maze of ownership, Shapiro takes a critical look in her last chapter at a system that puts the burden of running increasingly complex, multimillion dollar enterprises on untutored, unpaid volunteers, and proposes a new model of governance in keeping with reforms that have been sweeping post-Enron corporate America. Co-op boards are governed by the same New York State Corporation Law that governs companies, and should be held to the same standards, she argues. Some excerpts:

In a co-op, it's easy to blame the board for everything that goes wrong - but it wouldn't be fair. Like you, your co-op and condo commanders are both victims and enablers of a system that needs fixing.

Think about it: Where else do you have multimillion-dollar businesses run by unpaid volunteers? Every company I know, at least in theory, has a paid chief executive officer hired for her particular expertise (assisted by an in-house management team), a professional board to whom she reports, and shareholders (with financial interests) looking over their shoulders to be sure they're doing the right thing. They even have outside directors to lend an objective voice and help oversee the selection and performance of management.

And even with all those built-in checks and balances, there have been scandals galore over the past few years, from Enron on down, triggering stricter requirements for companies to improve their reporting and governance practices, including the need - now more than ever - for directors to be fully informed and on the case.

Few of these controls exist in co-ops and condos, which are also substantial ventures with significant cash flows and expenditures. It is a sui generis system that puts the burden of management on the shoulders of unschooled residents and gives them legal authority to carry out that role, but it doesn't require them to know what they're doing or give them the depth of management that does. Even though board members aren't required to have any business expertise, they get the benefit of the Rule [New York's Corporation Law, which applies to co-ops], just like those professional directors of public companies, which insulates virtually all their decisions from challenge.

But a little bit of knowledge and a lot of power can be a potentially dangerous thing, especially in a system where much of that power is parceled out to third parties. As you probably know, but never really focused on, the day-to-day task of running co-ops and condos is assigned by the board to a management company, whose name you can find on the brass plaque affixed to the façde.

Co-ops and condos parcel out almost all management functions, and that's the problem. Because there are so many tasks to perform, and so few set boundaries, it's often hard to tell where the board's role ends and the managing agent's begins, leaving the building caught in the middle. You may not realize it. The floors get mopped, the staff paid, the garbage collected. It's the bigger stuff where things break down. If there's a major project afoot - an elevator modernization, a roof replacement, a lobby renovation - who's responsible for what? Bet you don't know. Plenty of times it's not clear to me.

Boards figure they can count on the managing agent's superior industry knowledge to ferret out the right pros and filter the proposals through their personal information bank. Except, in reality, agents sometimes function more as conduits than as processors of information, so that neither party has negotiated the best deal for the building they both serve. This scenario is repeated many times over: whether the issue is handling sublets or apartment sales or real estate taxes, the way the system is set up, too many things can fall through the cracks.

[Most outside agents also] have to tend to the nitty-gritty details for multiple buildings, making it virtually impossible for them to do what's best for any one building.

One way to upgrade the system is to make the board president a paid position, requiring competence in exchange for a check. (Yes, you could say it's a self-interested solution, but I've been serving gratis for more than a decade.) Anyway, realistically it's not likely to happen anytime soon because co-op and condo bylaws prohibit directors and officers from getting compensation.

Another option is to establish a new role - let's call it a Coordinator: an objective and skilled professional, knowledgeable in co-op and condo governance but unaffiliated with either the inside building directors or the managing agent - to serve as a kind of functional CEO or COO.

The Coordinator, accountable to the board, would be able to implement its goals by delegating appropriate responsibilities to agents and other third parties, and overseeing their performance.

By tailoring governance to suit the characteristics of the particular co-op or condo, the Coordinator could help the building take a giant leap forward in rationalizing its business practices: establishing a workable organizational setup specific to the building's needs and the board's abilities and delineating lines of authority and responsibility, both among board members and between the board and managing agent.

As an added benefit, the Coordinator could serve as an in-house instructor, offering on-the-job training to board members in need, helping them understand the scope of their power as well as the restraints imposed by their duties - a grounding that will allow them to govern with more impartial consistency toward owners.

Moreover, the presence of such a credible and objective outside professional would serve as a buffer between board and shareholders (who often view empowered directors with instinctive suspicion), diffusing conflicts before they become costly legal wars.

Given that buildings are mini-republics with individual personalities, in addition to business ventures, no one-sized solution is right for all. But there is near universal need to professionalize and regularize how co-ops and condos are run so that they begin to approach the standards demanded for the rest of corporate America.

From The New York Co-op Bible by Sylvia Shapiro. Copyright 2005 by the author and reprinted by permission of St. Martin's Press.