All housing cooperatives either have a requirement that all members of the Board are to also be members of the corporation, or, that at least a majority of the Board must be members of the corporation. Not all housing cooperatives, however, have any requirement when it comes to how the members themselves are qualified to be on the Board of Directors.
It is unavoidable that there will be family members who also reside in the cooperative as members in their own right, or a joint membership between a husband and wife, etc. It is also unavoidable that there will be decisions made based upon how it will impact a family member or, even worse, related board members that find an opportunity to wreak havoc on the corporate business activities. The former can be thwarted by requiring all Directors to sign a conflict of interest policy which requires him or her to abstain from decisions in which he or she has an interest. The problem with this is that it fails to address the secondary issue of nepotism.
In the cooperative world, nepotism is the practice of showing favoritism toward one’s family members or friends in economic or employment terms. A good example is using the Director position to give special dispensation to certain individuals or even hiring a friend or relative in a position with the cooperative. This not only has a damaging effect on the overall operation of the cooperative, it also erodes the membership trust and may ultimately lead situations where elections are fixed, member issues are ignored, and/or members who speak out are intimidated, or worse, embezzlement of corporate funds.
Nepotism is a very real and damaging phenomenon in the cooperative world. In recent years I have witnessed flourishing cooperatives that only discover that the relationships between employees and board members have destroyed member confidence in the Board and even resulted in tens of thousands embezzled due to cover-ups and favoritism towards family members and friends. In short, Directors should not be related by marriage or blood to other Directors or employees.
Board members should remember that they have fiduciary obligations to the corporation first. If he or she is unable to put the needs of the cooperative as a whole first, then he or she should not be serving on your Board. The best way to prevent these scenarios is to implement not only a conflict of interest policy, but an anti-nepotism policy which precludes certain individuals from obtaining a position on the Board of Directors or an employment position for the cooperative. In addition to the anti-nepotism policy covering both the Board and employee positions, the cooperative should consider adopting a policy containing requirements and expectations of Board members which must be signed at the beginning of each term. These policies should also include a confidentiality provision, the violation of which will subject the offending Director to removal or even litigation against the Director enjoining him or her from divulging any other information.
Policies involving nepotism also serve a dual purpose in providing additional requirements for conflicts of interest, such as defining the conflict of interest. Conflicts of interest policies will require Board members and even your cooperative staff and management to identify their business interests outside of your cooperative. For example, your management agent knows a fantastic broker who can assist with your membership transfers and her fee is quite reasonable. Many Board members do not look any further than a glowing recommendation the hired management professional. But what if the “fantastic broker” who operates under their own business name, is also the management agent’s daughter? What if the daughter is assisting with the transfers but a fee is going back to the management agent as well? What if the daughter really is a fantastic broker and the fee structure is competitive? Having a policy in place that requires even your management and staff to advise of potential conflicts is essential to an open and transparent Board governance because if something goes south, it isn’t the management agent the members will be calling for, it will be you.
Erosion of member trust in the elected individuals is destructive to the cooperative purposes and the continuance of the corporation. The only way to ensure that the loyalty of Directors is first to the cooperative is to create checks and balances through implementation of policies which reiterate the fiduciary obligations of the Directors with his or her acknowledgment and affirmation.
I strongly encourage Boards contact their legal counsel to discuss implementation of these policies and, if you already have them in place, they should be reviewed for conformity with not only your governing documents, but with applicable state law.
Please note this content is provided to our readers for educational purposes but it is not intended and should not be regarded as legal advice. Readers are encouraged to consult with competent legal counsel for personalized guidance.