Risk Management Guidelines for Directors and Officers

Most recently, I have been blogging about California community associations (aka homeowners associations), so I thought this would be a good time to offer some general risk management guidance for members of the boards of directors of such organizations.

The structure and constraints of board membership can be difficult for community association directors to get comfortable with.  Particularly in small community associations (10 units or less, for example), the formalities of board meetings, minutes, financial reporting, and generally complying with the myriad statutory requirements imposed on community associations seem needlessly complex and frustrating.  The board of directors of an association which is large enough to use professional management can rely on the association’s management professional to handle the nuts and bolts, leaving the actual work of corporate governance up to the board members.  The directors of small associations without professional management, on the other hand, often abandon any effort to follow California’s non-profit corporation laws and the Davis-Stirling Act (the part of California’s Civil Code which pertains specifically to community associations) in the interest of easier “self-management”, not realizing that abandoning the “formalities” of corporate governance leaves the association, the individual board members, and in some instances even the association’s members (the homeowners) vulnerable to legal liability against which they would otherwise be shielded.  Similarly, the small business owner who forms a business entity (a corporation or LLC) in an effort to shield him or her self from personal liability, but then ignores corporate guidelines and formalities, is vulnerable to personal liability. 

From my standpoint as an attorney representing these entities, establishing procedures and internal controls to maintain the corporate entity as a shield against personal liability is well worth the effort and, if necessary, expense.  A good first step for the new board member (or small corporate business owner) is, of course, to get educated.  In this digital age, what better place to begin that education than for free, on the internet?  With that in mind, I would recommend two publications from Chubb & Son, a division of Federal Insurance Company, which can be downloaded free of charge.  The first, Directors & Officers Liability Loss Prevention Guidelines for Not-for-Profit Organizations, is good for board members of community associations.  The second, Loss Prevention Guidelines for Independent Directors, while not directly relevant to community association or small business board members, is Chubb’s most recent publication on the topic, and includes a section, Corporate Governance Best Practices (pages 17-28), which contains valuable information for any director.

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