For Association Boards — What is Due Diligence?

Boards of community associations are tasked with the onerous responsibility of running their communities, and ensuring all facets of doing so are given their necessary attention. But how can boards make sure they’re attending to everything they’re supposed to, and doing it properly?   Boards are legally bound to exercise due diligence in their roles leading their associations, but what exactly is due diligence, and how can board members make sure they’re complying?

We spoke with Alexander DiSanti, an attorney and shareholder at Forbes Bender Paolino & DiSanti, PC, in Media, Pennsylvania, about how associations can ensure they are exercising their due diligence.

“Due diligence, a process of reasonable investigation and reasonable carefulness, is one of an association’s many fiduciary duties. It involves investigating a person or business before entering into contractual relations, hiring new employees, or bringing in professional advisors,” said DiSanti.

“When dealing with new hires or advisors, associations must investigate each individual’s experience, credentials, and references. Ask for proof — it is important to find substantiation for what each person says. Don’t take their word for it. Don’t take everything you hear at face value. Use due diligence to investigate and confirm,” he said.

Another tip to avoid being accused of due diligence—keep records. “In the case that an issue evolves later and an association is accused of failing to do its due diligence, it can take out its notes and papers to prove that it had,” said DiSanti.

“Due diligence should be used in almost every situation. It applies across the board, to almost everything that an association does. Of course, as the importance of the manner increases, the due diligence increases and the level of investigation or vetting increases proportionately,” he said.

According to DiSanti, while due diligence is not a bright line test or a black and white issue, here are some questions associations should ask themselves to ensure they are practicing due diligence: Do we have a good financial plan? Is cash flow projected to be adequate? Are our expenses appropriate? Do we have appropriate checks and balances to prevent errors, fraud, and abuse? Are we meeting guidelines of the community association laws? Are we sticking to the association governing documents?

“To ensure it is practicing due diligence, associations should keep digging further until they are reasonably satisfied that they found every answer they were looking for. If there is a question on their mind, board members have the absolute obligation to investigate it. They must ask questions until they’ve run the gamut, and there is nothing left to be asked. Having done this, they have arguably acted with due diligence,” said DiSanti.

What happens in the case that an association is sued for failing to exercise its due diligence? It is not uncommon for an owner to accuse a board of making the wrong decision and costing them a substantial amount of money.

“In the case of a lawsuit, due diligence is looked at on a case-by-case basis because there is no absolute guiding principle to determine its definition. If there is a really obvious gap in an investigation, the association may have failed to exercise due diligence. Associations should have director and officer (D&O) insurance, which will cover them in the case that they are accused of failing to exercise due diligence,” said DiSanti.

At the end of the day, board members must stay objective and remember that they have a responsibility to be honest and trustworthy. “Board members are acting on behalf of an association; therefore, they must exercise responsible care in regard to all decision-making. Board members must place the association above themselves at all times,” said DiSanti.