Board Governance Series – Part I of V

How to Build an Effective Board of Directors
Part I: Know Your Role

Congratulations, you are a new member of the board of directors. Now what? Often directors are thrown into the proverbial hot [board] seat without an understanding of their roles and responsibilities. Misunderstanding the board’s role or directors’ duties produces a dysfunctional board, characterized by micromanagement, director disengagement, rogue directors, or lack of synergy. This article, the first in the board governance series, “How to Build an Effective Board of Directors,” will explore the fundamental role and responsibilities of the board and individual directors.

Directors’ legal duties
Directors’ legal duties and responsibilities are defined by state law and the board’s internal governance documents, including its certificate of incorporation or bylaws. The law recognizes that directors hold a special relationship with the association (and in the case of public charities, with society), and therefore imposes additional duties upon directors called “fiduciary duties.”

The fiduciary duties of nonprofit directors are the duties of care, loyalty, and obedience. Generally, the duty of care refers to the level of attention required of each director to the business of the organization. It requires directors to carry out their duties in good faith and with the care of an ordinarily prudent person in a like position under similar circumstances. The duty of loyalty requires directors to act in the best interests of the organization, and not in their own personal interests. And the duty of obedience requires directors to ensure that the organization operates in furtherance of its mission and in compliance with its governance documents, policies, and all applicable laws and regulations.
Directors may be subject to liability for breach of fiduciary duty for failing to exercise their fiduciary responsibilities.

The role and responsibilities of the board of directors
Under New York law, the board of directors, as a single body comprised of several individuals, is responsible for managing the organization. No single director has the power to take any action on behalf of the organization, unless the board as a whole has given such authority to the director. That happens in several ways.

The board may appoint or elect specific individuals to serve as officers of the board (i.e., president, treasurer, and secretary). Those directors have the authority identified in the governance documents and under applicable law for each office. In addition, the board may appoint directors to serve as committee chairs, and those directors may have specific powers related to the role of the committee. Finally, the board may vote to authorize any director or officer to take any specific action. But unless the board cloaks a director with specific authority, the director is just one limb within a larger body.

To effectively manage the organization, the board must serve three core functions: oversight, strategic planning, and ambassadorship. If the board is not consistently focused on those three things, it is not doing its job.

The board’s oversight role
The role of the board is to oversee the organization in every respect, including its finances, infrastructure, and human capital, all of which are essential resources of the organization. The board must ensure that the organization and its day-to-day managers are appropriately stewarding those resources. To be effective in this role, the board must obtain and review accurate and detailed information about the status of the organization’s resources and develop a plan of action to ensure resource preservation. The board must also ensure that there are clear policies in place by which management/staff is guided, and systems in place for monitoring compliance and accountability.

The board’s oversight role also includes self-regulation. The board must establish rules and procedures to hold itself accountable to the organization. This includes evaluating the board’s structure to ensure alignment with the organization, training directors to understand the board’s role and duties, and identifying areas for improvement. Part V of this board governance series explores the importance of board self-regulation and assessment in greater detail.

The board’s strategic planning role
A significant role of the board is to establish the organization’s mission and vision, and to develop a strategic plan for the organization to accomplish them. A strategic plan charts the future course of the organization and identifies the specific actions that will move the organization forward along that course. Cyclically, the board should be developing a strategic plan for the organization or overseeing the implementation of an existing strategic plan. If the board is doing neither, it is not doing its job effectively.

The board operates effectively when its actions and the organization’s operations are aligned with the specific strategic priorities that the board has established in consultation with management. Without strategic planning, the organization may be stagnated, unproductive or disorganized.

The board’s ambassadorship role
The role of each director on the board is to represent, promote, and advocate for the organization, and to ensure that the organization is reflected in the best possible light. The board’s ambassadorship role occurs largely outside of the boardroom. It requires directors to use their personal resources to raise awareness about and in support of the organization.

But ambassadorship also means that directors understand and realize that what they say and do outside of the boardroom reflects upon the organization. This includes speaking negatively in public about the organization, fellow directors, or specific board decisions. Although directors are just one limb in a larger body, understand that when a limb is infected, the infection may spread and affect the entire body.

The role of the board in day-to-day management
As the board operates from a bird’s-eye vantage point, it is not involved in the day-to-day management of the organization. Rather, the board hires an executive officer to be responsible for day-to-day operations (such as hiring and firing staff and monitoring finances) and implementing the board’s mission, vision, policies, and strategic plan. In comparing the role of the board and that of the executive officer, the board’s role is often analogized with a family vacation. Whereas the board is responsible for determining the destination and the budget for the vacation, the executive officer is responsible for determining the route and the mode of transportation, to arrive at the destination within budget.

Board micromanagement
Although boards should not be involved in day-to-day operations, it happens. One director calls a staff member directly for a copy of a report. Another director pops into the office to say hello, casually making random suggestions. Yet another director emails staff making a number of requests.

Such interference with day-to-day operations, often by rogue directors, can be very disruptive to the organization and can lead to inappropriate micromanagement. Micromanagement occurs when directors assume tasks or make decisions that should be left to the executive officer, management, or employees. This often includes giving direction, instructions, or orders directly to personnel rather than through the appropriate chain of command within the organization.

Incessant board interference in day-to-day operations evokes the fable of the eagle who thought it was a chicken. As the story goes, a chicken farmer found an eagle’s egg and put it with his chickens. The egg hatched and the eagle was raised surrounded by chicken and did as chickens do – it walked around all day, clucking and pecking at the ground. The eagle lived out the rest of its life and died believing it was a chicken, never fulfilling its purpose as an eagle.

Directors who roam the organization’s offices clucking demands at staff and management are like eagles behaving like chickens. Instead, directors are meant to soar high above-ground where they have a full and broad view of the organization, and should not be on the ground micromanaging staff. Indeed, directors should not act independently from the board.

Key takeaways
• To build an effective board, directors must have an accurate understanding of their roles and fiduciary responsibilities and operate within that understanding.
• The primary roles of the board are to (i) oversee the organization’s assets and operations, (ii) strategically plan the actions that lead the organization to operate within and fulfill its mission, and (iii) act in furtherance of the mission of the organization both inside and outside of the boardroom.
• The board should perform its duties from a bird’s-eye view of all of the organization’s operations, and leave the day-to-day operations to the executive officer or management.

For more information contact:

Nancy Durand
ndurand@sbjlaw.com

This article is Part I of V in the Board Governance Series: How to Build An Effective Board of Directors
Read the summary HERE

NY’s New Paid Sick Leave Law Now Effective

New York State’s new Paid Sick Leave Law went into effect Sept. 30, 2020. Employees can start accruing leave now and can start using that accrued leave on Jan. 1, 2021.

The new law requires employers to provide time off for employee physical or mental illnesses, family illnesses and preventative care. In addition, the law allows time off for “sick leave” if an employee has been the victim of domestic violence, stalking, a sexual or family offense or human trafficking. The law covers four broad categories of employer: (i) Employers with 4 or fewer employees and a net income of less than $1 million must provide 40 hours of unpaid sick leave annually. (ii) Employers with 4 or fewer employees and a net income of more than $1 million must provide 40 hours of paid sick leave. (iii) Employers with between 5 and 99 employees must provide 40 hours of paid sick leave regardless of net income; and (iv) Employers with 100 or more employees must provide 56 hours of paid sick leave annually regardless of income.

The new law includes many details covering accrual, use, recordkeeping, carryover and more. Employers should amend their employee handbooks and other written policies to comply with the new law.

For more information, please contact:

Jack Malley
jmalley@sbjlaw.com

Board Governance Series How to Build an Effective Board of Directors

Being a board member of a nonprofit entity is an awesome responsibility undertaken by volunteers (often with other full-time commitments) who are driven by a desire to contribute meaningfully to their community, industry, or society at large. Whether you serve on the board of a nonprofit corporation, foundation, or housing entity, you are a fiduciary who has been entrusted with the care and management of an organization that serves an important purpose. With that trust comes the responsibility to remain actively engaged in the business of the organization and to make informed decisions in the best interest of the organization.

Over the next few months, Special Counsel, Nancy Durand  will be presenting a five-part board governance series called “How to Build an Effective Board of Directors,” comprised of articles designed to help boards function more effectively, in compliance with directors’ fiduciary responsibilities. The following summarizes each part of the series:

• Part I, “Know Your Role,” will discuss the role of the board of directors as compared with the role of management or staff and the pitfalls of board micromanagement.

• Part II, “If it Can Wait, Delegate,” will discuss the best practices for using committees effectively for oversight, accountability and information gathering, making more effective use of regular board meetings.

• Part III, “Handling Conflicts of Interest,” will explain what constitutes a conflict of interest, when related party transactions are permissible, the components of a conflict of interest policy, and best practices for handling conflict of interest situations.

• Part IV, “Board Synergy,” will explore the impact of social or political dynamics on the role of the board, including the legal impact of operating without mutual respect, trust, or candor among board members or between the board and management or staff.

• Finally, Part V, “Self-Reflection,” will discuss the importance of board evaluations in building an effective board, while summarizing the prior parts in the series.

To find out more information contact:

Nancy Durand
ndurand@sbjlaw.com

Socially Distanced Closings

The COVID-19 pandemic has greatly impacted the closing process in the real estate industry. Many offices that used to host typical real estate closings now prohibit or discourage in-person closings, and closing participants are reluctant to spend extended periods in conference rooms that can seem cramped and unventilated. The Covid-19 pandemic has forced the NY real estate industry to adapt and incorporate new procedures and methods to achieve social distancing to address its longstanding in-person, “wet” signature closing process.

Major changes to the pre-Covid-19 closing process have impacted preclosing preparations. Normally, once a closing date is confirmed, financial closing adjustments are made and title is cleared. However, due to the pandemic, in addition to the above, attorneys now need to plan the pre-signing of documents by their clients, draft escrow agreements and confirm the wiring of funds to the correct accounts.

Seller’s counsel, no matter the type of transaction, can have their client pre-sign closing documents, or counsel can act as Power of Attorney. When title companies are involved they can acts as escrow agent to accept and hold documents and checks until all requirements are met. Some title companies are even willing to send their title “closer” to the multiple offices to pick up pre-signed closing documents for recording, further streamlining the process. These pre-closing steps reduce the number of people needed to attend the closing and have the welcomed (but unintended) effect of saving time during the closing. Overall, these adaptations by the real estate industry have also led to a more efficient and streamlined closing process for both attorneys and their clients.

One lingering obstacle for closings with purchaser financing, however, is that most lenders still require in-person execution of loan documents by buyers/borrowers, with “wet” signatures on loan documents made in the presence of a notary public. The otherwise streamlined closing process is further slowed when lenders will not accept remote notarization in spite of the governor’s Executive Orders that specifically permit a remote notary.

CO-OP CLOSINGS

Cooperative apartment closings have been affected most by the coronavirus especially when the transaction includes new financing and the payoff of an existing loan. Due to office closures and related restrictions, the limitation of the number of people allowed in an office and the limited use of title companies in these types of transactions the closing process has been adapted to pre-signing documents when available and the use of escrow agents. The transfer agent along with lender’s counsel (if applicable) must be able to coordinate the execution of all documents to ensure a successful closing. If there is a mortgage payoff, the payoff attorney, seller’s attorney and transfer agent must coordinate the delivery of the existing lender’s collateral (i.e., the seller’s co-op stock and proprietary lease) as well as the wire of the payoff to the lender. This must all be done even if a traditional sit-down closing will not be taking place. Most payoff attorneys have entrusted the designated escrow agent to hold the collateral in escrow until the payoff amount is transmitted and received. Wiring the payoff and any other amount due at closing has in our experience proved to be a safe and effective way to make sure all parties are paid on the day of closing.

Recently, as social distancing restrictions have loosened and Covid-19 cases have decreased in the metropolitan area, traditional in-person closings are taking place more often. However, the ability of the real estate closing industry to adapt during the recent “shutdown” has ensured that remote and/or reduced attendance closings will still take place if another shutdown occurs.

For more information contact:

Michael Coppa
mcoppa@sbjlaw.com

Court resolves battle between New York City government bodies and a developer caught in the middle

Municipalities of all sizes have varying agencies whose determinations must be sought in the land use process. However, whether presenting before a planning board, seeking a variance from a zoning board, or satisfying the concerns of a community preservation board, a developer can get caught in the middle when municipal agencies challenge each other’s respective authorities and processes. New York City, as is often the case, provides an example of extreme proportions.

In one recent case*, a developer applied to the New York City Planning Commission (CPC) to construct four large towers in lower Manhattan between the Brooklyn and Manhattan Bridges, dubbed the Two Bridges Neighborhood. After the CPC determined that a special permit was not required, which would have subjected the proposed development to the Uniform Land Use Review Procedure (ULURP), the New York City Council and Manhattan Borough President filed a petition challenging the CPC’s determination.

The State Supreme Court granted the petition, holding that a special permit was needed because the proposed towers would constitute a “huge” change to an existing approved site plan, and therefore, that the requirements of the ULURP could not be waived. On appeal, the Appellate Division disagreed, reversed the lower Court and held that the CPC properly acted within its authority when it granted the application without requiring a special permit.

Among other things, the Appellate Division held that if the City Council had intended for the New York City law to be interpreted in the way the City Council argued, and not how it was expressly written and applied by the CPC, the City Council could have amended the law. The City Council also could have altered the zoning classifications within the affected neighborhoods, which would have either precluded the development or required the developer to satisfy those special permit requirements the City Council was arguing should be imposed by the Court.

Most land use development projects will not face such litigious circumstances. But the interplay between municipal agencies, and how they interpret governing codes and ordinances, is something developers need to consider when seeking approvals. Developers should not assume planning, zoning and/or architectural review boards will act in unison, on the same schedule or have the same concerns. Often, they do not. Working cooperatively with these governing bodies is key to a successful land use development process.

Upcoming presentation:  Jacob Amir will be presenting at the annual conference of the Associated General Contractors, New York State, on the topic of “Preparing for and addressing subcontractors’ failure.” The conference will be held virtually from December 8 – 10. More information to follow.

For more information contact:

Jacob Amir
jamir@sbjlaw.com

*In re Council of the City of New York, et al. v. Department of City Planning, (App. Div. 1st Dept., 8/27/20)

Update: Condo Board Collection of Unpaid Common Charges in the Face of COVID-19 Regulations

With all of the Executive Orders from Governor Cuomo and the Administrative Orders issued by the Chief Administrative Judges of the State and City of New York in response thereto, Condo Boards and Managing Agents are justifiably confused as to what, if anything, a Condominium Board can do to collect unpaid common charges.

Currently, no Executive Orders or Administrative Orders prohibit Condominium Boards from commencing legal action to collect unpaid common charges. Boards can file liens for unpaid common charges and prosecute foreclosure actions in Supreme Court for the same. Boards can also commence money actions for the collection of unpaid common charges in the City and Civil Courts. The only Executive Order that currently applies to common charge lien foreclosure actions and condo money actions is Executive Order 202.60 signed by Governor Cuomo on September 4, 2020, which extends the tolling of statutory time limits, including the time to file an answer, to October 4, 2020.

While the Courts are moving forward with the cases, conferences are being held virtually but judges are adjourning cases for several months where the defendants have not appeared or are not represented by counsel. Due to the enactment of EO 202.60, we also anticipate that courts will not entertain motions for default judgment until at least October 5, 2020. Further, it has been our experience that the courts have been reluctant to issue decisions on pending non-default motions in foreclosure actions as well, effectively staying cases for the time being.

For more information, contact:

Ryan Houck
rhouck@sbjlaw.com

Burlington Coat Factory’s $19 Million “Manager” Overtime Settlement, Another Big Employee Misclassification Hit

Companies of all sizes have taken big lawsuit hits for misclassifying managers as exempt employees – not entitled to overtime pay, merely because they are paid a salary. Under federal and New York law, in order to assert an exemption from paying overtime to its employees an employer must be prepared not only to show that the employee is paid a salary, but also that the salary is of a certain minimum amount and that the employee meets the “duties test.”

In New York City, for example, the minimum salary requirement to trigger the overtime exemption is $1,125 per week. If that threshold is met, the employer should consider whether the manager meets the duties test under either the “Executive Exemption” or “Administrative Exemption”.

To satisfy the duties test under the Executive Exemption, the employer bears the burden of establishing that a manager has the authority to hire or fire employees, regularly direct the work of two or more employees, and regularly exercise discretionary powers, such as formulating policies or practices and committing the employer in matters that have significant financial impact.

Under the Administrative Exemption, the manager’s primary duty must consist of the performance of office or non-manual fieldwork directly related to management policies or general operations; the manager must customarily and regularly exercise discretion and independent judgment; and the manager must regularly and directly assist an employer or employee employed in a bona fide executive or administrative capacity.

A recent example of exposure employers face for misclassifying employees as exempt from overtime pay involved Burlington Coat Factory. In two cases filed in a New Jersey federal court, which were eventually consolidated, Burlington assistant store managers alleged that they were entitled to overtime pay even though they were paid a salary because they did not regularly exercise independent judgment and discretion in their job. Rather, according to the managers, their work activities were limited to building displays, stocking shelves, assisting customers, stacking merchandise and unloading trucks. Earlier this summer, after several years of extensive discovery, Burlington agreed to pay a total of $19,613,900 to over 1,000 assistant store managers.

Misclassification claims can be particularly devastating to small and midsize companies, who do not have the resources that a company like Burlington does. Bottom line, employers must be careful that their managers meet the salary requirement and the duties test to avoid an overtime lawsuit disaster. See, Goodman v. Burlington, Case No. 11-cv-04395 (U.S. District Court, New Jersey); Kawa v. Burlington, 14-cv-2787 (U.S. District Court, New Jersey).

For more information contact:

Jack Malley
jmalley@sbjlaw.com

The New Discussion About Remediation — What is Really “CLEAN”?

The phrase “How clean is clean?” used to dominate all environmental remediation. Responsible parties, or as they are often called, “Potentially Responsible Parties (PRP’s) asked, “What are we going to do about the contamination in the soil or water once we test if its toxicity value exceeds the standards set by either the Federal Government or by the State in which the contamination exists?”

Often the only possible remediation is whatever can be done to reduce contamination to a value that is acceptable because it is not a health risk to be exposed to it, or (in the worst possible scenario) a child who is compelled to eat dirt. To address this, the EPA set up the Integrated Risk Information System (IRIS) Program in 1985 to provide an internal database of human health assessments for chemicals found in the environment. The goal of the IRIS Program was to foster consistency in the evaluation of chemical toxicity across the Agency. Since then, the IRIS Program has evolved with the state of the science as an important public resource to produce high-quality evidence-based assessments and to provide an increasing number of opportunities for public input into the IRIS process.

For at least 35 years, the EPA and many states (including New York and New Jersey) have used IRIS values to determine air, water, waste, and other regulations. Furthermore, many chemical and other manufacturers which use toxic substances in the manufacturing process rely on IRIS values to decide how to manage chemicals in their facilities and maintain a healthy workplace for workers in the facilities.

For the first time, the EPA will be releasing its own toxicity values, as part of the risk evaluations required by the amended Toxic Substances Control Act (“TSCA”). The new numbers are expected to clash with other toxicity values under IRIS which are decades old. The real question is which will be the applicable limit applied for remediation of hazardous substances.

Some writers think that if there are dueling EPA Chemical numbers for the health risks of the same contaminants, PRP’s will shop for lower numbers to allow less expensive methods of remediation of RCRA and CERCLA cleanups. Another school of thought simply points out that two sets of numbers will inevitably lead to hard discussions as to whether the older or newer data is more accurate. Some industry groups are praising the EPA’s chemical office for producing long-overdue updates based on sound science. But other writers indicate that some former agency scientists are criticizing EPA for deliberately producing numbers that favor industry and underestimate risks of toxic substances for health-based remediation.

The smart money is expecting that multiple toxicity numbers for the same chemical will lead to “venue shopping” to get the number that does what you wanted it to do for the placement of facilities with processes that are impacted by the toxicity numbers. Companies also will consider less expensive methods of cleanup to achieve the easier toxicity numbers.

In practice, though, the concerns of commentators may be overstated. One writer has noted that the EPA has already issued final heath-based numbers under TSCA for two chemicals. There does not appear to be much difference from the previous IRIS program and the new TSCA health based numbers, which does not give any insight as to how much the TSCA values will change previous IRIS values. In an article from the American Chemical Council Penelope Fenner-Crisp, a private consultant who worked in the agency’s water, pesticide, and chemical offices 20 years ago, also compared the IRIS values to similar numbers in the first 10 draft or final TSCA risk evaluations, and found them fairly consistent.

If a company is faced with a cleanup of a hazardous substance, the new TSCA value for the substance of concern may not have been developed , so the effective field-based requirements will remain the long- standing IRIS standard until another is adopted under the new TSCA review. Essentially, the existing IRIS standards will continue in force unless the EPA develops a new standard. There is no reliable way to predict when this will happen for any hazardous substances. Planning to apply old numbers and perhaps use new technology is a possibly cost-effective approach while waiting for a new value being adopted by EPA.

For more information contact:

Mark Manewitz
mmanewitz@sbjlaw.com