Does Ethics Have A Seat On Your Community Association Board?

  • May 23 2013

By Roy Schneider, Esq.

Board members of community associations juggle three different hats. One is the “I am a homeowner hat”.  Another is the “I want to be a good neighbor hat”, and the third is the “I am a board member hat”. It is sometimes difficult for board members to always know which “hat” they are wearing at which time. Even when not physically at a board meeting, a director must consider which “hat” he or she is wearing when speaking with other homeowners, making notes about issues of concern to the community, writing an article for the community newsletter, and the like. It is easy for a director to feel badly for a neighbor who may be having tough financial times and wish to extend some hardship accommodation, as a good neighbor might want to do. However, what about the owner who no one likes, isn’t suffering a financial hardship, but is looking to play the angles and wants a similar accommodation? This is a not an altogether uncommon dilemma. This is where an understanding of not only the statutory duties imposed upon a director is essential, but also having a framework for making the correct ethical choice as well.

The California Corporations Code at Sections 7231 et. seq. outlines the fiduciary duties of due care, loyalty and avoidance of conflict rules applicable generally to directors of California Mutual Benefit Corporations, such as community associations.  Most directors are familiar with these statutory pronouncements and the protections afforded by the business judgment rule, codified at California Corporations Code Section 7231.5.  Ask most board members and, while they may not be able to cite the applicable statutes, will tell you in general terms that they understand they have fiduciary duties to the community.  Certainly, board members who have managers involved with CAI will have been taught these basic obligations.  Nevertheless, boards and individual board members continually make wrong, improper and unethical decisions.  It may be time for boards and their managers to develop a Code of Ethics.  This has nothing to do with one’s personal ethics.  Instead, it is an opportunity to understand and create an ethics for the organization.   By having such a Code, board members and their managers may better be able to make the tough choices and to catch themselves before going astray which could lead to a violation of the Governing Documents or the law.  The services of the board of directors require honesty, impartiality, fairness and equity.  But more is also required.  The board of directors must also perform under a standard of professional behavior that mandates adherence to the highest principles of ethical conduct and decision-making.

Before undertaking the task of developing a meaningful Code of Ethics, it is important to understand what organizational ethics is and why an organization, made up of otherwise decent, honest and ethical people, can make clearly unethical and imprudent decisions.   For example, in the 1970s, Ford Motor Company desired to produce a car that could effectively compete with the Japanese cars at the time.  Lee Iacocca pushed forward with the development of the Ford Pinto, a car that could be made, distributed and sold out the door for under $5,000.00.  Shortly before completion, engineers advised the board of directors and key executives, that there was a structural design defect which allowed its fuel tank filler neck to break off and the fuel tank to be punctured in a rear-end collision, resulting in deadly fires from spilled fuel.   If the car was struck in the rear by a car travelling 30-40 miles an hour or more, the housing would rupture and the gas tank would spill out gasoline, causing the car to explode.   The cost to correct the defect was $11.00 per car.  Ford anticipated selling 11 million Pintos and 1.5 million trucks with the same design.  The leadership of Ford decided not to spend the $137 million it would take to correct the problem.   One of the tools that Ford used to argue against delaying production to correct the defect was a “cost-benefit analysis” of altering the fuel tanks. According to Ford’s estimates, the unsafe tanks would cause 180 burn deaths, 180 serious burn injuries, and 2,100 burned vehicles each year. It calculated that it would have to pay $200,000 per death, $67,000 per injury, and $700 per vehicle, for a total of $49.5 million. However, the cost of saving lives and injuries ran even higher: alterations would cost $11 per car or truck, which added up to $137 million per year.

A young woman and her cousin were driving their new Pinto when they were struck in the rear in a plainly non-serious manner.  Gasoline poured into the compartment of the car causing an explosion and the women were quickly burned to death.   Quite naturally, the jury was outraged when all the facts came to light.  The jury awarded the family of the young women more than $100 million in punitive damages (the highest amount ever awarded up to that time).   Assuming the leadership of Ford Motor Company was made up of “regular” people, who worked hard, loved their families, went to their kids’ soccer games and attended church regularly, what is it about an organization such as theirs that could cause these people to make an obviously callous and unethical decision?  Sociologists, psychologists, ethicists and academics have studied this case and the other myriad of cases just like it over the years and, through analysis and experiments have come up with reasons for such organizational unethical behavior.  This paper can only provide brief conclusions.

First of all, it is important to know that organizational ethics basically is the study of what constitutes right and wrong behavior, or good and bad, human conduct in the organizational context.  It is a simple definition, the analysis of which takes up volumes.   But even this simple definition doesn’t answer one essential question:  Is ethical behavior “black or white” or are there areas of “grey”?  If, like most of us, you don’t consider “white lies” made on occasion or good negotiating skills (think, “this is my best price”) to be unethical, then you probably realize that ethical behavior as something not always readily identifiable.  As mentioned above, a starting point is to understand why people in group settings make unethical choices. 

NO ACCOUNTABLILITY – In most organizations, no one person makes all the decisions.  It is often difficult to identify the actual person responsible for the poor choice.  If there is no accountability, people tend to make riskier and less responsible decisions.

THE CONFORMITY CONCEPT – In university studies where people are asked to choose which 2 of 4 lines are the same size.  A and C are the same size.  30 students are asked to participate.  1 student is the test subject and the other 29 are in on the experiment.  The 29 students pick B and D as the same size.  94 out of 100 test subjects also pick B and D. 

When asked why, the answer is always:  “Well, I figure I’m not seeing it correctly.  I must be wrong.  All these other people can’t be wrong”.   The point is, people in an organizational setting often lack confidence to “buck the group” and believe that if other people are seeing something a certain way or feel strongly about a certain matter, they must be right.

GROUP THINK – There is always pressure for unanimity within a highly cohesive group, such as a community association board of directors.  It is difficult for a board member to go against the majority when everyone else is “high-fiving” their wonderful decision. 

BYSTANDER APATHY – This concept arose from the 1964 Kitty Genovese murder in New York.  A young woman was abused, beaten and stabbed to death over a 34 minute period right in front of her apartment building with more than a dozen windows facing the scene.  Notwithstanding her screams and people looking out their windows, no one called the police or made any effort to help her.  There have been many similar instances of these phenomena, even within the last year, which has made headlines.  The studies have shown that the more people who are witness to something bad happening, the less likely any one person will do anything about it.   This translates to organizations such as community association boards as well. 

It is important for boards and their managers to understand how unethical decisions are made and to be alert to potential causes.  So, what is the next step in determining how to make ethical decisions?  One is to follow the law.  The Davis-Stirling Act and the Corporations Code provide guidelines and requirements for acting in an ethical manner.  For example, the Corporations Code details how to handle conflicts of interest.  However, it doesn’t necessarily answer the question of “when is there a conflict?”  Sometimes it’s obvious, such as a board member selling his or her services or products to the association.  Other times, it is not so obvious.  For example, a board member has a good friend who is a painter and recommends the friend for a painting project, or a board member dating an employee of the association, or a board member uses the association email to fish for clients.  In short, compliance with the law does not always satisfy all ethical considerations.   A good example in the business context is the law prohibiting “deceptive advertising”.  Suppose a potato chip manufacturer makes a “Large Size” bag of potato chips.  Now suppose the same manufacturer makes a “Giant Size” bag which costs $.80 cents.  What if the Giant bag has one more chip than the Large bag?  Is that deceptive?  For sure.  What if it has two more chips, ten more or twenty?  We can’t really know.  So, since the law can’t tell you how many more chips are needed to make the sale of the Giant bag non deceptive, the manufacturer must rely upon ethical principles.

Organizations can rely on one or more of number theories for making correct ethical choices.  Much depends upon the culture of the association as developed over the years and the expectations which have evolved as well.  The major organizational theories of ethics are defined as follows:

ETHICAL RELATIVISM – This is a theory which teaches whatever is “right” for my organization or industry group is right.  It limits moral criticism of other organizations.  There is no absolute ethical standard.  The board will look to its history, culture of the community and standards in the industry in determining what a right decision is.

DEONTOLOGICAL – This involves establishing a set of inviolate rules that are never broken.  For a community association, it might be something like:  “We treat all delinquent homeowners the same.  If our policy is a pre-lien notice or attorney letter goes out after 3 months of delinquency, then we do that each and every time, with no exception.”

TELEOLOGICAL – This view making ethical choices based upon a cost/benefit analysis and in determining whether or not the choice will be beneficial to the most people.   In a community association, this approach could be used in deciding to impose a special assessment for major improvements to the community knowing that such assessment will cause severe financial hardship on several of the homeowners.

In sum, a board of a community association owes to the members a high standard of fiduciary duties.  In addition, it is incumbent on all board members and their managers to make each decision in a fair, responsible and ethical manner.  One way to help assure this is to have each board member execute a Code of Ethics, which addresses the director’s duties of care and loyalty; commitment to avoid personal gain and to avoid conflicts of interest; to protect the association’s confidential information; to observe appropriate behavior toward employees; and to be as transparent as possible and never make false or misleading statements to the members.  The process of writing a Code of Ethics is as valuable as the Code itself.  Does ethics have a seat at your board?

Roy Schneider is a partner with Schneiders & Associates, L.L.P., an Oxnard-based law firm where he provides comprehensive legal services for community associations and has been practicing for over 20 years. His expertise in real estate, non-profit law, corporate law, employment law and the Davis-Stirling Act combine to provide the most effective and efficient representation of his HOA clients. As a business attorney Roy strives to resolve all issues in a business-like manner.

Roy is highly experienced in the field of ethics and is called upon to assist companies in resolving ethical dilemmas. Roy is also a nationally recognized attorney in non-profit law and speaks regularly before attorneys, accountants and non-profit boards and organizations.

Posted in: Homeowners Associations & Non-Profits

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