LHC Newsletter Vol. 7, No. 4


By: Robert D. Hillshafer, Esq.

Although it is not necessarily a routine occurrence, an Association director going “rogue” and potentially wreaking havoc within an Association happens often enough that managers and board members should be aware of the possibility, and have potential strategies for controlling the situation and mitigating the harm which has been or could be caused by the rogue director.

A “rogue” director can be described as any director who is acting unilaterally without the consent, authority or approval of a majority of the Board of Directors on which he or she has been elected to, in a manner which is potentially detrimental to the Association or inconsistent with Board action or the Association’s governing documents. Such conduct is outside the normal course and scope of a director’s duties and responsibilities and is likely to violate the director’s fiduciary duty to the Association by creating potential liabilities for the Association and may ultimately not be protected by the Association’s errors and omissions insurance for directors.

What is “Rogue” Conduct?

Before you can deal with it, you need to have an idea of what constitutes “rogue” conduct. Some common examples of “rogue” conduct by directors include:

Making public statements concerning Association policies or actions which misstate or are contrary to the position of the Board majority or which create potential liability

Disclosing confidential information provided to the Board from legal counsel or related to contract negotiations, personnel matters or disciplinary action against members;

Unilaterally entering into agreements with Association vendors for services or materials without Board approval;

Disrupting Board meetings by combative, hostile, violent or inappropriate behavior;

Attempting to pressure or influence other directors when the rogue director has a conflict of interest on a particular matter of business;

Unilaterally imposing disciplinary action on members without due process and Board approval.

Unilaterally approving architectural applications without proper review.

Each type of conduct described above can result in the Association being liable to others for a director’s actions or can result in the Association losing business opportunities or being responsible for contractual obligations that harm it financially. The purpose of this article is to discuss what to do when a Board or a manager learns of such behavior or is concerned that it may occur. Unfortunately, many times the situation is one simply of crisis management after the fact and sometimes mitigating the situation is very difficult.

What Can or Should the Board Do?

It is obvious that there isn’t necessarily a simple or universal solution when this type of situation arises, but one thing the Board or a manager should definitely consider is contacting the Association’s legal counsel for assistance in dealing with the problem board member and developing a strategy to control the director and mitigate the damage caused. Apart from counsel having the legal background to provide solid advice on a case by case basis, using legal counsel to communicate with the rogue director has several distinct advantages. One is that the Association’s attorney can convey the seriousness and implications of the conduct to the director with authority, including an explanation of the potential consequences of the conduct which may and should grab the director’s attention and make them concerned about possible personal liability for the conduct. A second advantage is that it removes the other individual directors (board majority) and management from the role of directly communicating with the hostile or adverse director and forces the director to deal with someone that should not be easily swayed or intimidated. Experienced general counsel will have dealt with most types of rogue director situations and should have reasonable recommendations for handling them.

Censure Letters

Depending on the nature of the rogue behavior, the responsive action will vary significantly. For example, when the behavior doesn’t necessarily have widespread impact or damage, such as poor conduct during meetings or misstating Board policies or positions, a “censure letter” may suffice to control the situation. A censure letter is generally written by legal counsel to the rogue director and copied to the rest of the Board and it outlines in detail the offensive conduct and explains why such conduct is inappropriate and unacceptable for any director on the board. The censure letter will usually explain what the legal and fiduciary obligations of the director are in the context of demonstrating undivided loyalty to the corporate entity and to undertake no actions which could potentially expose the Association to risk of claims against it. Censure letters are confidential and should not be made public.

Such letters will also discuss the potential liability implications for the Association and the individual director, including the possibility that if claims are asserted against the director or Association, liability insurance coverage may not cover the claim or provide a defense. Finally, the censure letter will advise the rogue director of the consequence of not ceasing or correcting such behavior in the future, which will be discussed below. Sometimes, depending on the severity of the action, a censure letter will include a demand that the director resign or be subject to public action to address the rogue behavior. The effectiveness of this approach is directly related to the personality of the rogue director.

Removal of Director from Board Office

Note that I am referring to removing a director from a board office, not the removal from the Board as a whole. Unfortunately, there are very limited instances that a Board majority can actually cause a director’s removal from the Board itself, which are usually set forth in the Association’s bylaws, and which are often limited to being convicted of a crime or being judged incompetent. However, upon a majority vote of the Board, a director may be removed from holding a particular office, such as president, secretary or treasurer. Often the “rogue” director is the Board president, in which case the removal as president, which necessarily is disseminated to the membership, sends a significant message that can bring the director under control. But such a removal is largely a symbolic gesture by the majority that does not otherwise impact or impair the Director’s service on the Board, access to confidential information or records or voting on Association business.

Recall Elections

One of the most potent and direct manner of dealing with rogue behavior is to subject the director to a recall election by the members. Pursuant Corporation Code Section 7222 there are provisions for as little as 5% of the members to call for a special meeting of the members for the purpose of recalling an individual director from the board. In some instances, a single director or board majority has the authority to notice such a meeting wherein the members of the Association are asked to vote for or against the removal of a particular director. In Association’s which utilize cumulative voting, there is a somewhat arcane formula which is used to determine the requisite percentage that is necessary to remove a director from the board which can make it difficult. However, the fact that a recall movement is commenced necessarily means that the reason for the recall (actions of the director) is going to become very public, which may prompt a resignation to avoid public humiliation from disclosure. Care does need to be taken that the factual description of the Director’s conduct be scrupulously accurate. A recall election is conducted with the same formality and under the same rules as an election of directors, with secret ballots opened at a noticed meeting by appointed election inspectors, to avoid claims by the recalled director that the process is suspect.

Lawsuit to Remove Director or Restrict Conduct

Another potent remedy which is available to individual directors or a group of members, is provided in Corporation Code Section 7223 and involves filing a lawsuit to have the court remove a director based on conduct including dishonest, fraudulent or gross abuse of authority or discretion. Unfortunately this remedy is rarely used because the Association really cannot fund the cost of the litigation, as the Association must be named as a defendant in such an action, meaning that individuals must pay to prosecute the action.

Communications to Members and Others

Primarily in terms of damage control/crisis management, it is imperative that the Board Majority attempt to effectively and accurately communicate with the membership in the event misstatements by a rogue director are made to prevent reliance upon the misstatements. Such communications should be focused on being accurate, not merely blaming the rogue director. The goal is to prevent damage, not create a scapegoat.

In situations where a Director has improperly interacted with a vendor, the vendor should be contacted by legal counsel in an attempt to unwind whatever agreement was made without authority or ameliorate any other issues created. The vendor should be reminded that all official actions have to be approved by the Board and are to be communicated through management, not a single director.

Where a director has undertaken unilateral actions without authority of the Board, such as imposing discipline or approving an architectural application, the Board should attempt to address the situations in person, rather than with a one-dimensional written communication. With architectural application issues, the Board should use pragmatism in determining whether it can or should reasonably attempt to “unwind” what the director may have approved, particularly if the approval was in written form.

Parting Thoughts

If you serve on a board long enough or manage associations, you will undoubtedly encounter a rogue director whose agenda is completely different than the norm. In my 27 years of representing associations, I have encountered directors that didn’t like my opinions actually circulating confidential privileged communications to the membership. I have had to “unwind” contracts in which directors have hired their brother in law to perform hundreds of thousands of dollars of construction work without telling the rest of the Board. I have also seen a “Jerry Springer Show” break out during a board meeting with the police being called to remove combatants. Although it shouldn’t be this way, Boards and managers have to be cognizant that these types of conduct can and will occur and be ready to act swiftly and decisively in the manner discussed above to control the director and mitigate the harm.