Tuesday, January 14, 2014

Proxy Pox

In the midst of the annual meeting, one homeowner stood up and challenged the practice of homeowners collecting ten, twenty or thirty proxies and conducting block voting for electing members to serve on the Board of Directors.  While a few homeowner associations do restrict the number of proxy votes (perhaps to just two or three) a person may cast, most do not.

This is because of the other part of the equation that needs to be considered:  Quorum.  A quorum is the minimum number of homes that have to be represented in order for the community to conduct business.  If not enough owners are represented in person or by proxy, elections cannot be held, leaving the current Board in place.  This possibly leads to Board members selecting their own replacements without homeowner input.

The required quorum percentage varies widely.  Communities with more homes tend to have lower thresholds, while very small neighborhoods may require 50% or more of their membership to be present.  A 25% or 33% quorum is typical.

Very often quorum cannot be reached without large numbers of proxies being collected.   If quorum is reduced to a low level and proxies are capped, an avenue is created permitting a few discontented homeowners to frequently change the composition of the Board.  Careful deliberation is impossible in such an environment, and very little community business is able to be conducted.                

In one community of 200 homes, the quorum requirement was 5% of eligible (non-delinquent) homes.  Because of delinquencies, only 150 homes were eligible.  This meant that 7.5 homes, rounded up to 8, were required for quorum. 

Because of the high delinquency rate, the Board implemented a firm but fair collections program.  A group of five delinquent homeowners paid off their debt, met the requirements to demand a special meeting, and ousted all Board members, placing themselves in charge.  Their first order of business was to fire the collections attorney and management company, and then proceed to gut all other services, with the goal of slashing assessments in half.  Many homeowners, not considering the long-term impact of unrealistically low assessments, did not challenge these actions.  The result:  It was many years before any quality vendors would agree to work in the community, and less-savory vendors took full advantage of the situation.  Property values rapidly deteriorated along with the infrastructure.  It took the threat of condemnation by the county before homeowners took steps to reverse course.

While the above is an extreme real-life example, similar results occur with other communities operating under low quorum requirements.   Ultimately, everything boils down to apathy, the final part of the equation which must be balanced out with the right mix of proxy usage and quorum threshold.  With the advent of electronic balloting and social media, perhaps this mix can be adjusted, but communities should move carefully in tweaking voting regulations.   

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