‘Code of ethics’ has legal implications
Signing this document could lead to a breach of fiduciary duty.
Question: After I was elected to the board, the association’s manager contacted me and said I can’t attend a board meeting until I sign and agree to a “code of ethics.” It reads like a laundry list of what a board director should and should not do, including instructing board directors not to speak up and only act as a unanimous body with one voice — or not at all. I believe this infringes on my rights as a homeowner and director.
My personal attorney tells me that I should not sign it because it is not required by the law or our association’s governing documents. He explained that it has the effect of prejudicing my actions as a board director and that if the board is ever sued the document could be used against me, the board and the association in general. But the manager said I can’t sit on the board unless I sign this. What should I do?
Answer: The manager is wrong and lacks authority to demand your signature on that document, let alone to say you can’t sit on the board unless you sign. You should not sign that document and as a director you have a duty to attend meetings regardless.
The so-called code of ethics creates a very real potential for liability as articulated by your attorney because it could lead to a breach of fiduciary duty.
Fiduciary duty is the highest standard of duty the law imposes on a relationship because fiduciaries are responsible for managing and maintaining other people’s assets and interests. This relationship is founded on the trust placed by one person in the integrity and fidelity of another. As such, fiduciary duties cannot be delegated.
This “code of ethics” gives the impression that the board’s only job is to agree unanimously, which raises suspicion that all actions taken by the board are contrived in advance of meetings. That would be a violation of a board’s fiduciary obligations.
Meeting fiduciary obligations as a board requires due diligence, which means directors must show they conduct adequate investigation of issues before them, leading to reasoned and principled decisions. Not following these procedures because of a prearranged agreement masked under a “code of ethics” could invalidate a directors and officers indemnity insurance.
Your fiduciary duty as an independent thinker acting in the best interests of the association includes acting reasonably and competently using all available information.
That may mean that you as a director speak up and dissent from the majority
Directors who exercise reasonable judgment are protected by the business judgment rule from liability for claims of breach of fiduciary duty. When a director signs a pre-written document stating what he or she can and cannot do while performing duties as a fiduciary, the business judgment rule is unavailable as a defense.
The association’s manager is a third-party vendor who was hired by the association to facilitate its operations at the direction of the board. Nothing about that relationship empowers the manager to determine who may sit on the board or under what circumstances they may act.
All directors in your association who have already signed the “code of ethics” should immediately disavow it, and the board should consider finding a new manager.