As in many relationships, boards and management companies part ways when things don’t work out between them. What goes wrong? Is there a common denominator?
Usually it is because the board and management company are not “on the same page.” A termination letter is sent to the management company instead of sitting down, defining roles, and discussing expectations.
When a change occurs, a vast amount of on-the-job experience is lost and the new management company will have to begin at square one. After terminating the management company, the board has to conduct a search for a new management company, and then spend the time and effort to bring the new management company up-to-speed on the association. Life would be more productive and easier for both the board and the management company if they tried to get on the same page by discussing the reasons for dissatisfaction and made improvements in their relationship instead of just parting ways.
Every management company loses business from time to time. Sometimes it just isn’t a good fit, but 80% of the time, the cause for separation has a common denominator.
Based upon my thirty-eight years in the common interest community association business, I believe that common denominator of why relationships fail between the board and management is because the roles and duties of the board and management company are not clearly defined.
Board members do not buy into a common interest community so they can have the opportunity to serve on the board. Serving on the board is probably the last activity to which a new owner aspires when at their closing. The new owner may eventually join the board, but usually it is because he or she is really upset about something or someone. Most people probably don’t even refer to the function as “serving on the board,” but rather think of it as holding the power in the association!
When an owner joins the board, he often has little knowledge regarding the duties and responsibilities of a board member. He joined because he was upset about something and wanted change; now he finds himself a director in a legal corporation, responsible for potentially millions of dollars of assets, and owing a duty to all of the other homeowners who reside there.
Very few new board members know that the Illinois Condominium Act and the Common Interest Community Association Act supersede their governing documents. They often do not know what a limited common element is, and what a reserve fund is, let alone the proper method of funding it. Because managing a common interest community is complicated and specialized, most boards hire a management company to run the business affairs of the association.
There are two basic kinds of boards: a working board and a governing board. A “working board” performs most of the day-to-day operations and makes a majority (if not all) of the decisions relating to the running of the association. A “governing board” allows an individual or company (usually management) to perform the day-to-day operations and functions, and provides direction and instruction to that individual or company.
Here’s where the relationship often starts to run aground.
The board (elected by the owners to govern the association and retain all authority per the governing documents) hires a management company to run its business affairs. What are the duties of the board, and what are the duties of the management company? If these respective roles are not clearly defined, there will be either overlap of responsibilities, or there will be items that fall through the cracks between the board and management company.
Two cooks cannot make an omelet. One prefers adding milk, while the other only uses water. One likes onions; the other, not so much. Conflict is bound to follow. Eventually one of the cooks mentally “checks out” and withdraws. That cook is usually the management company, thereby walking away from their responsibility and allowing the board to run things (the board has the authority –so why interfere and invite conflict?). This approach is usually a disaster as most board members do not have the professional expertise to manage the association. In addition, in that situation, decisions are made by the board that management often has no knowledge about. Conflicting information may get passed to homeowners, vendors, etc. from both the board and management. The day will come that the board will ask themselves “We are pretty much running and managing the association, why do we need a management company? Or should we look for one that will do more of the work? Should we find a cheaper management company because we are doing some or most of the work?”
I have seen this happen many times; a well-meaning board tries to “help” the manager run the business side. Sounds like a good partnership on paper, but just as two cooks cannot make an omelet, only one person can steer the association ship. If the board and manager both have their hands on the steering wheel – watch out for the rocks!
Policy Based Governance (PBG), as conceived by John and Miriam Carver, is a complete set of principles on how the best boards function when a professional staff (i.e., management company) has been employed. According to Carver, “the best way for a board to get its work done is by writing and enforcing policies. These policies include mission, strategic goals and the results the association is trying to achieve.” With PBG, the board sets the responsibilities and expectations of management.
Beside defining roles and setting policies, PBG is very well suited for the recent Palm court ruling. As a result of the ruling in the Palm case, boards will have to conduct proper board meetings to make decisions on most everything, or else delegate those business decisions (especially the day-to-day decisions) to management (refer to the article in this issue for more information).
The board is where all authority in the association exists… unless delegated. The wise board delegates the authority for the day-to-day governing and certain decision-making tasks to a management company via written policies. The term Policy Based Governance…is governance through policies. As the final responsibility generally does rest with the board, the board would still have the duty of reviewing and approving/vetoing tasks performed and decisions made by management or committees.
I believe that the best-run associations should develop and adopt policies for the management company. Besides complying with the Palm decision, written policies will properly communicate the way they want the association to be managed.
After the board has developed a set of policies, it is the role of management to comply with those policies (if sound and reasonable), and it is the role of the board to monitor the results to make sure that the management is carrying out the established policies. PBG also allows the board to measure, review, and evaluate the effectiveness of management (you can’t improve something that you can’t measure). This allows the board to free itself from the operational details and tasks of the association, allowing it to focus on mission, strategic goals and results (a governing board).
Does your association have a working board or governing board? If it is a working board combined with a management company, expect turbulence from having two cooks in the kitchen. Strive to be a governing board via a set of written policies so roles and duties are clearly defined.
In summary, the following three steps are believed to contribute to a successful relationship between a board and their management company:
- Develop policies and procedures which clearly explain expectations and define roles and responsibilities of management (the cook). This is the core of policy based governance.
- Get out of the way of the “cook in the kitchen”.
- Monitor and measure the goals and the results of the policies. Provide regular feedback to management.
If you are a working board and not a governing board, it is recommended that you consider changing or adapting your model for the sake of continuity, efficient and customized management of your association. Wise words have advised: “It’s best to work smarter and not harder.”
It is hoped that this article will lead to more improved “dating relationships” between boards and their managing agents. It would be heart-breaking if the relationship ended over a simple misunderstanding that could have been avoided or resolved over a “dinner date.”