Governance
What Fiduciary Duty Actually Requires
Every board member has fiduciary duty. Most understand it vaguely. Here is what fiduciary duty actually requires and how to prove you are fulfilling it.
As an HOA board member, you have fiduciary duty to your community. The term is used constantly. What it actually requires is often misunderstood.
This article explains fiduciary duty in practical terms: what it means, what it requires, and how to prove you are fulfilling it.
What Fiduciary Duty Means
A fiduciary is someone entrusted to act in another's interest. As a board member, you are a fiduciary to the homeowners. Their interests, not yours, must guide your decisions.
Fiduciary duty has three components:
Duty of Care: Act as a reasonably prudent person would in similar circumstances. Make informed decisions. Exercise appropriate oversight.
Duty of Loyalty: Put the association's interests above personal interests. Disclose conflicts. Recuse when conflicted.
Duty of Obedience: Follow the governing documents, state law, and proper procedures. Operate within authorized powers.
Breach of fiduciary duty can result in personal liability. Courts have held board members personally responsible for negligent or self-dealing conduct.
What Care Actually Requires
The duty of care is where most fiduciary failures occur. What does "reasonably prudent" look like?
Attend meetings: You cannot make informed decisions if you are not present.
Review materials: Read the financial statements, contracts, and proposals. Do not vote on things you have not reviewed.
Ask questions: If something seems wrong or unclear, ask. Silence is not prudent.
Verify information: Do not assume staff or management has done everything correctly. Verify key facts.
Document decisions: Minutes should reflect that the board considered relevant information before deciding.
"I trusted the management company" is not a defense if the management company was doing something wrong that reasonable oversight would have caught.
Learn about audit trails and documentation
What Loyalty Actually Requires
The duty of loyalty prevents self-dealing and conflicts of interest.
Disclose conflicts: If you have any personal interest in a matter, disclose it before discussion.
Recuse appropriately: If the conflict is material, do not vote. Leave the room for discussion if appropriate.
Avoid related-party transactions: Contracts with board members or their relatives require extra scrutiny and often disclosure to members.
No personal benefit: Do not use your position to benefit yourself or family.
A common loyalty failure: hiring your nephew's landscaping company because "he gave us a good price." Even if the price is fair, the process is compromised.
Fiduciary duty is fulfilled through actions and documentation. Systems can support both.
Support for Care: Access to Information
Prudent decisions require accurate information. Systems should provide: - Real-time financial data (not just monthly reports) - Trend analysis and variance reporting - Delinquency status and aging - Reserve funding position
Information delayed is information denied for fiduciary purposes.
Support for Care: Documentation
When questions arise later, documentation proves appropriate care: - Who approved what, when - What information was available at decision time - What discussion occurred - What alternatives were considered
Systems that capture approval workflows automatically create this documentation.
Support for Care: Controls
Prudent oversight includes implementing controls: - Segregation of duties (different people handle different functions) - Approval thresholds (large expenditures require board approval) - Reconciliation requirements (bank accounts reconciled monthly) - Access restrictions (not everyone can see everything)
Systems should enforce these controls, not just suggest them.
Support for Loyalty: Transparency
When conflicts exist, transparency provides protection: - Disclosure documented in minutes - Recusal recorded in meeting records - Related-party transactions flagged for review
Systems that track these events create audit trails that demonstrate proper handling.
Support for Obedience: Enforcement
Following rules is easier when the system enforces them: - Reserve expenditures validated against reserve study - Assessments posted according to governing documents - Late fees calculated per collection policy - Budget limits enforced on spending
Violations are prevented, not just recorded.
What Obedience Actually Requires
The duty of obedience requires following the rules that govern the association.
Governing documents: CC&Rs, Bylaws, and Rules set the boundaries of board authority.
State law: HOA statutes vary by state but typically govern meetings, voting, records access, and reserve requirements.
Board resolutions: Previous board decisions that are still in effect.
Contractual obligations: Agreements the association has entered.
A common obedience failure: spending reserve money on operating expenses without the member vote required by CC&Rs. The spending might be well-intentioned but still violates governing documents.
Proving Fiduciary Compliance
If challenged, you must prove you fulfilled your duties. This requires documentation:
- Minutes showing informed deliberation
- Financial records showing appropriate oversight
- Approval trails showing proper authorization
- Disclosure records showing conflicts handled correctly
- Audit reports showing controls were in place
The best defense is contemporaneous documentation. Recreating history after a challenge is difficult and suspicious.
The Board Member's Checklist
Before each meeting: - Have I reviewed the financial statements? - Have I reviewed the agenda materials? - Do I have any conflicts to disclose?
At each meeting: - Am I asking questions when things are unclear? - Am I ensuring decisions are documented? - Am I voting based on what is best for the association?
Ongoing: - Am I verifying that controls are working? - Am I following up on concerns I raised? - Am I documenting my oversight activities?
When to Seek Advice
Fiduciary duty does not require you to be an expert. It requires you to get expert help when needed.
Seek professional advice for: - Legal questions about governing documents - Complex financial decisions - Potential litigation - Construction defects or major projects - Employment matters
The cost of professional advice is almost always less than the cost of getting it wrong.
See how CommunityPay supports fiduciary governance with real-time financial access, automated approval workflows, and complete audit documentation.
How CommunityPay Enforces This
- Complete audit trail of all financial decisions
- Segregation of duties enforced by system permissions
- Approval workflows documented automatically
- Real-time access to accurate financial data
CommunityPay · HOA Accounting Platform