Does Your Board of Directors Adhere to the Business Judgment Rule?

by admin on April 8, 2010

in Board of Directors, Operations, Statutes

Good Business Practices

Board of Directors in community associations are protected from liability in the course of operating and making decisions by what is known by the “Business Judgment Rule”.  The Business Judgment Rule requires that the Board act within a reasonable manner and take the necessary steps to justify their decisions. If the Board did not use good business practices in their decision and something were to happen or be challenged, it could then be argued that they did not use good judgment. Generally, the burden of proof in establishing the impropriety of the Board’s decision is on those who are challenging the decision. 

How does a Board of Directors ensure that they will be protected under the Business Judgment Rule?  If they follow good business practices and if they are not experts in certain areas of their operations they should use good business sense to obtain the proper information from related professionals in that field, prior to making decisions in their fiduciary responsibility to their association.

Take for instance; an association has need to repair construction defects or the need to refurbish their buildings due to spalling.  Did the Board hire engineers, architects and other experts to provide reports or opinions on these jobs?  Did they seek opinion from their CPA and attorney on funding and compliance with state statutes with this project?  Was the association’s insurance company and agent contacted to see if current insurance policies were adequate for this work or do the policies need to be altered?

All of this type of information should be garnered and disseminated to the Board Members prior to the collective Board making its decision on this project.  When it is all said, and done, the Board, with confidence, can then say that they used good business practices with their decision and they should be covered by the Business Judgment Rule, in case something were to be questioned after the fact. 

Additional information on the Florida Business Judgment rule can be viewed here in the Florida Statutes 617.0830

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