||| from MICHAEL RIORDAN |||
The word “fiduciary” has been bandied about recently on Orcas Island, especially with regard to two recall efforts at Eastsound Water Users Association. One group states that the majority of the EWUA Board of Directors is not fulfilling its fiduciary responsibility to the members to represent their rights and interests in the organization. Another group claims that three board members violated their fiduciary responsibility by submitting affidavits in a lawsuit brought against EWUA for recent voting irregularities. What do they mean by this word? And is it being used correctly?
According to my dog-eared copy of Webster’s Dictionary, the word fiduciary is derived from the Latin verb fidere, meaning “to trust.” Commonly employed in a financial context, it means “of, relating to, or involving a confidence or trust.” When a financial advisor makes investment decisions on behalf of a client, for example, she should put aside her personal biases and act solely on behalf of that client’s own best interests.
But the word has much broader usage and application in governmental and organizational contexts. An elected official bears a fiduciary responsibility to represent the rights and interests of his electorate (which may be a difficult task when you consider the diversity of those interests). Still, there are some universal behavioral standards. When New Jersey Senator Robert Menendez accepted gold bars from Egyptian lobbyists to influence his votes, he was violating his fiduciary responsibility to that state’s voters. And he was also breaking federal laws, for which he will almost certainly spend time in jail.
On a local level, the Treasurer of a non-profit organization has a “duty of care” to make sure that its money is spent judiciously. If she has reason to believe that an employee has misappropriated organization funds, for example, she has a fiduciary responsibility to report that to the Board of Directors, which then should take the possibility seriously and launch an investigation. If that investigation bears out the likelihood of this theft, the board has the fiduciary responsibility to report it to legal authorities and try to recover the funds, which ultimately belong to the organization members. According to the expected fiduciary “duty of obedience,” a board must ensure that the organization complies with the law.
But such a response did not happen at EWUA in early 2023 when the board was presented with credible evidence of misappropriated funds. After that possibility had been largely confirmed by the analysis of an independent forensic accountant, the board did not act upon it as required according to its fiduciary responsibility to the EWUA membership. Instead, it acceded to the demands of the general manager, ignored the incident, and removed the one remaining board member who took it seriously.
During the elections that November, EWUA members were denied their right to vote for three new board members, as required in the bylaws, and instead could only vote for two of the four candidates on the ballot. At its December 5 meeting, the newly established board attempted to correct this oversight — whether accidental or intentional — by quickly appointing the third-place vote-getter to the third open board seat. But it did so in executive session, not an open meeting, and did not permit that new board member to participate in the subsequent appointment of another new board member in early January, which again occurred in a closed meeting. These are undisputed facts.
The minority board members therefore contend that the majority board members have violated their fiduciary responsibility to represent the rights and interests of EWUA members in these two instances, as well as others. This is largely the basis for their recall of the board majority, to occur on September 28.
The majority board members, in turn, are pursuing the recall of the minority because they are said to have “breached their fiduciary duties as Board members” by filing affidavits with the San Juan County Court regarding a lawsuit being brought against the Association. This can only be interpreted under the “duty of loyalty” wherein a director should act in the best interests of the organization involved. But that “best interest” is vague and open to interpretation. In this instance, the minority members can validly argue that they were acting in the Association’s best interest because their affidavits attempted to establish the voting irregularities cited above, which were material to the lawsuit. Such an argument is consistent with the minority’s position that they were attempting to promote the rights and interests of the EWUA members by making actual facts of the case available to the Court.
To this observer, the majority board members are abusing the word “fiduciary.” Under the duty of loyalty, the minority owes its primary allegiance mainly to the EWUA members — NOT to the other directors. If certain members of a board feel that the majority is acting irresponsibly (or illegally), they have every right to say so. In fact, it is their fiduciary responsibility to do that. Under the duty of care, board members are expected to exercise their independent judgment and due diligence in making decisions.
By those criteria, the majority’s argument that minority board members violated their fiduciary responsibilities rests on a flimsy foundation. It seems a trumped-up charge meant to distract unwitting EWUA members from the truly important matter before them — whether to recall majority board members for neglecting their fiduciary responsibilities. That neglect occurred in extremely important matters: they overlooked misappropriation of EWUA funds, and they manipulated the election and appointment of new board members.
EWUA members should not be fooled by this smoke screen. They will hopefully see through all the smoke and vote to remove the majority board members for their failure to abide by their fiduciary responsibilities.