I’m still at the NAR
Midyear Legislative Sessions and heading out to meetings soon, so this will be brief. By now, you know that NAR’s Finance and Executive Committees have approved RPR to become the platform for the hitherto-mysterious Project Upstream. Inman News has coverage of the decision.
Thing is, this decision highlights precisely what is problematic with governance of Organized Real Estate entities, both Associations and particularly MLSs. NAR’s DANGER Report released yesterday highlights governance as a major threat, and I know from talking to various attendees that governance and the decision-making process are two major complaints from rather powerful and influential people in the industry.
If I were one of the 800-ish Directors of NAR, I would seek legal counsel from my personal attorney on what personal liability issues arise from my voting to approve or disapprove the RPR-Upstream project. Let me explain, briefly.
What is the Deal?
Since the relevant facts as we know them are important, let’s start with the Inman story again. The key relevant parts for us:
Upstream is “deep into serious negotiations” with NAR, exploring ways that NAR subsidiary Realtors Property Resource (RPR) would support “key components” of Upstream, according to a blog post by WAV Group’s Victor Lund, a consultant for the project.
“Realtors Property Resource is the largest single data repository for listing content in the nation,” Lund said.
“It would make perfect sense for Upstream to leverage that Realtor member benefit to store and normalize listing records, agent records, office records, firm records, employee records, and customer records. And, who knows what other significant synergies might real estate practitioners benefit from in the future as a result of this logical collaboration.”
Once NAR’s board approves the partnership, Upstream and NAR would sit down to work out exactly how it will work, Cheatham told Inman. The initiative aims to create a “permanent high value benefit for Realtors,” he said. [Emphasis mine]
So NAR Directors are asked to approve a partnership whose terms have not been fully worked out, for a project that is not yet clearly defined, but one that could have enormous long-term implications for NAR, for REALTORS, for brokerages, for MLSs, and for the industry as a whole.
We know further that the Finance Committee and the Executive Committee approved the deal in the past couple of days, without any of the deliberations or details leaking out. This isn’t a bad thing; I mean, negotiating a business deal shouldn’t be done in the public eye. But it is to point out that the decision to put the issue before the Board of Directors was made yesterday.
First of all, the fact that Directors are asked to sign off on a Letter of Intent, which presumably moves the deal to the phase of negotiating the actual contract/partnership agreement, highlights one of the critical problems of governance. Why are they being asked to do that in the first place? NAR has very capable staff, from the CEO to Legal Counsel to CTO, not to mention RPR itself with its very capable people. They can’t negotiate a deal without going to the Board of Directors first? It’s ridiculous. Empowering the capable people who work for the Association/MLS needs to be one of the critical reforms in ORE governance.
But Personal Liability…
But this post is about personal liability. It seems like a real stretch, right?
Thing is, I know that NAR Directors see themselves (as do most Directors of most Associations and MLSs) as “representatives” of their “constituents”. The vast majority of Board are explicitly setup with X Association having Y seats as representation, and Big Brokers having seats and Little Brokers having seats and one seat for Commercial and so on. Frankly, they see themselves as legislators, not Directors, and one cannot blame them.
However, under corporate and non-profit law, they’re still Directors of a non-profit organization, not representatives to a city council. As a Director, they are fiduciaries owing certain duties to the organization. Two come to mind with this RPR-Upstream issue: Duty of Care and Duty of Loyalty.
Duty of Care
Duty of Care requires that a Director actually give a %&#$ and do the necessary work to make an appropriate independent decision. Here’s a good primer from Trusteemag.com:
Duty of care: A trustee has a responsibility to participate in decision-making on behalf of the organization, and must exercise independent judgment while doing so. These decisions must be informed, meaning that the board member should make efforts to become familiar with the relevant, available facts. For example, members should require management to provide sufficient information to make an independent decision. If board members find that the information is invalid or incomplete, they are expected to ask questions about it. Independent advice is required if the nonprofit is buying or selling significant assets, or is entering into a material contract. This is especially important if the organization is entering into a joint venture, sale or merger, or if the company presenting the information stands to benefit from the transaction, such as the continuation of a management contract when management is a company organized separately from the health care organization.
In this case, we have the organization entering into a material contract, one that could have far-reaching consequences for NAR, its members, and wide swaths of the real estate industry. What “independent advice” has been or will be offered? We know for a fact that Directors will have had two days worth of information at max, since the Executive Committee approved the deal just yesterday. Is that enough time to independently investigate and become familiar with the relevant facts?
Maybe. But if I’m asked to vote on this deal, I sure as hell want my lawyer telling me I’m in the clear. Two days worth of information would leave me feeling extraordinarily nervous, especially if the only people giving me the information are those who worked on the deal.
Duty of Loyalty
Duty of Loyalty requires that a Director, even of a non-profit, act for the benefit of the organization itself. Again, Trusteemag:
Duty of loyalty: When acting on behalf of an organization, board members must set aside their own interests, whether professional or personal, or the interests of any other organization. Simply put, the nonprofit organization must come first. A board member cannot seize an opportunity for his or her own gain. Even if it is only part of the organization’s future plans, the opportunity must be presented to the organization first. [Emphasis mine]
In this case, since Project Upstream itself was the creation of a group of large brokerages and national franchise companies, if I am a Director involved with one of those companies (as an employee, a broker, or even as an agent), I’d be extremely nervous about voting for the deal.
On the flipside, if I’m not a broker/agent/employee of one of those companies, then I’d be extremely nervous about voting against the deal. Maybe my company or organization stands to benefit somehow if RPR-Upstream is brought down.
Either way, it’s going to be tricky to prove that I was fulfilling my Duty of Loyalty to NAR when I cast that vote one way or another.
This dilemma highlights the other incredibly critical reform that is needed with ORE governance. Because that conflict that NAR Directors face is one that happens in virtually every single Association or MLS Boardroom every single month. Why? Because the industry practice is to treat being a Director like being a representative, when in fact the legal duties are completely different.
Personal liability may arise if a Director breaches either one of these duties. The law protects even bad decisions of Directors under the business judgment rule… but not if there is a breach of fiduciary duty. And for a non-profit, just about anybody (not just shareholders) can bring a lawsuit against both the organization and each Director individually. If I’m a pissed off member somewhere, I can easily bring a lawsuit against each one of the 800 NAR Directors individually alleging breach of fiduciary duty, and… while I don’t know the details of NAR’s D&O Liability Insurance, many such policies do not cover individual liability arising from breach of fiduciary duties.
I Gotta Go
So let me close with this. I have no particular opinion right now on the deal itself; I don’t know enough. Maybe RPR-Upstream is the best thing to ever happen to the industry; maybe it’s the worst. I just don’t have enough facts to form an opinion one way or the other right now. Maybe after wandering the halls today and doing lobby-con, I will.
But the fact that this issue is being brought before the Board of Directors strikes me as bad on so many levels, and highlights the critical need for governance reform across the board for organized real estate. One of the almost-never-discussed aspects of Directors-As-If-They-Are-Legislators problem is the fact that each individual serving as a Director may be open to personal liability for her decisions if she fails to fulfill the Duty of Care and Duty of Loyalty. That situation arises in the decision to be laid before the Board Saturday.
Good luck, but I’d call a lawyer if I were you.
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