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EFFECTIVE GOVERNANCE FOR EXECUTIVE

BODIES OF STRATA COMMUNITIES

We commence this training with a twelve part series on Effective Governance for Executive

Bodies of Strata Communities:

The role of the committee (this note);

The mission, vision and values of a strata community;

The relationship between the body corporate manager and the committee;

Effective committee meetings;

Chairing meetings;

Risk management;

Compliance with legal obligations;

Financial planning and control;

The committee and extraordinary expenditure;

Measuring progress;

Relations with other strata communities; and

Recruitment and succession planning.

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Part 1 of 12: The Job of a Committee

A clear statement of the role and responsibilities of any group can be the biggest step towards

improving effectiveness and satisfaction.

While there are some legal differences between the role of a committee, council or executive of a

strata community (as they are variously called), there are analogies between the practical functions

of a committee and the board of a company. In this analogy, the Body Corporate Manager is the CEO

of the company.

Drawing on the board analogy, the practical functions of the committee of a strata community

are these:

Articulate the strata community’s mission and values;

Provide strategic direction;

Confirm and monitor the strata community’s programs and services;

Select the body corporate manager;

Support the body corporate manager and review their performance;

Ensure that adequate resources are available and that they are managed effectively;

Enhance the strata community’s image within the strata community;

Resolve conflicting priorities;

Resolve conflict between members of the strata community;

Ensure compliance with the law;

Assess the committee’s own performance.

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Part 2 of 12: The Mission, Vision and Values of a Strata Community

A clear sense of direction is especially fundamental for the running of a company and indeed a not-for

-profit organisation, but rarely is it a consideration for strata communities.

We believe strata communities should have a strategic plan, which is a process of setting objectives

and deciding how to accomplish them.

As strata communities struggle to find people to volunteer, we have developed a pro-forma strategic

plan as a starting point for any strata community, no matter how large or small.

The elements of a basic plan are summarised in the following table:

Issue Benefit Example

In terms of converting strategy into action we used a balanced scorecard approach to focus our

attention on four key areas for our strata communities:

People and learning;

Internal procedures;

Owner’s perspective; and

Financial perspective.

Peter Drucker, a world leader in strategy, reminds us “one prays for miracles but works for results”.

He says strategies lead you to work for results. They convert intentions into action and busy-ness into

work.

Issue Benefit Example

Mission Defines the organisation's

reason for being.

Google’s mission is to organise the world’s information

and make it universally accessible and useful.

Vision

Clarifies the way the

organisation wants things to

change as a result of its work.

OXFAM Community Aid Abroad; for a fair world in

which people control their own lives, their basic rights

are achieved and the environment is sustained.

Value Describes the way we expect

to behave as an organisation.

VISCOPY; a copyright collection agency for artists

describes one of its values as being active and

Goals

Articulates where the

organisation wants to be and

what it wants to have

achieved at a point in the

Vision 2020; to ensure eye health and vision care are

recognised as health priorities nationally and are

adequately funded by the year 2020.

Strategies Converts what you want to do

into accomplishment.

To become the best body corporate in Queensland by

maintaining property values.

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Part 3 of 12: The Role of a Body Corporate Manager

Perhaps the single most import decision a Committee can face is the appointment of a body corporate

management company.

A strata management company collects levies, arranges the payments of invoices, compiles insurance

policies, maintains the financial records and convenes, attends and prepares minutes for meetings.

However, what about the individual Body Corporate Manager appointed to manage your Scheme?

Their role is far more “people focused” rather than just focusing on the tasks and processes

established by the body corporate management company. A competent Body Corporate Manager

will be the glue that holds the strata community together.

Some of the qualities needed for this role are:

• Kindness, compassion and an understanding as there exists a number of people with different

perspectives in regards to sharing common property;

• A logical mind with coherent communication skills that can organise and prioritise each task;

• Knowledge of the appropriate legislation and how best to put it into practice;

• An ability to listen and be heard on important issues; and

• Thorough understanding of right and wrong.

One quality above all else that needs to be understood well by both Body Corporate Managers and

their Committees is empathy.

From the Body Corporate Manager’s perspective this means:

• Understanding the constraints of the strata concept and process

• Respecting the voluntary nature of the role of Committee members; and

• Assisting with the induction of new members and ensuring they have a thorough understanding of

their nominated roles

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From the Committees’ perspective this means:

• Understanding that body corporate management can be a difficult role;

• Understanding the various types of relationships that the Body Corporate Manager has to manage;

and

• Having realistic expectations of the Body Corporate Manager.

Mutual feedback is a beneficial tool that can improve the relationship between the Body Corporate

Manager and the Committee. The Body Corporate Manager can offer practical guidance on different

issues faced by the Committee and in return, the Committee can notify and critique the Body

Corporate Manager on the organisational progress being made.

As with any relationship, both the Body Corporate Manager and the Committee will benefit from the

clarity of the parties’ respective roles.

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Part 4 of 12: Effective Meeting

Body Corporates can be notorious for meetings that lack structure and discipline.

This is just one of the many reasons why Committees can struggle to entice members. A competent

Committee should pride themselves on their ability to structure and organise time efficient meetings.

To ensure a meeting’s effectiveness, the following points can prove useful:

1.A well prepared Agenda;

2.Ensuring the Agenda is dispatched in the appropriate timeframe;

3. Preparation by the Committee of the Agenda items and documentation prior to the meeting;

4.An understanding of the issues requiring resolutions by the Committee; and

6.The ability to discuss, actively debate and not dominate (more about this and how the Chairperson

can promote active debate next week). A well prepared Agenda will pace the meeting by suggesting

time frames and grouping similar items together.

An Agenda may be formatted in the following way:

• First ten minutes –confirm accuracy of previous minutes and identify any outstanding matters from

the previous meeting;

• Second twenty minutes – an update from the Body Corporate Manager and/or Caretaker on tasks

completed and the progress of tasks outstanding;

• One-hour discussion – the main Agenda Items and any additional items that may arise; and

• Last half hour - reviewing the financial accounts, budgets and any outstanding monies owed from

Levies, Secondary Debtors and debt recovery.

The most important thing that a Body Corporate Manager or Chairperson can do to ensure a

purposeful meeting apart from preparing a well structured agenda, is to ensure that the meeting

starts on time, the agenda is adhered to and discussion is controlled. By utilising the time effectively,

the Body Corporate Manager can ensure each Agenda Item is addressed and Committees can achieve

the desired results for Lot Owners.

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Part 5 of 12: The Role of a Chairperson

The Chairperson of a Body Corporate is an interesting role. Generally, the Chairperson is in a position

of authority and is deemed the leader of the organisation. This can lead to the misrepresentation as

being the face of either the organisation’s success or failure.

It could be deemed that the role is quite an authoritative position. However, in a Body Corporate, the

Chairperson’s only power is to chair the meetings. Beyond that, the decisions rely on Committee

Members and the Lot Owners as a whole.

In a practical sense, the Chair of a strata community, despite legal constraints, has the opportunity to

be a figurehead and leader. The Chair of a Body Corporate can be a facilitator of effective meetings

and a steward of the organisation’s standards of governance. All of this is reliant on the personality

of the Chair and the relationship with the Body Corporate Manager.

At a Committee level, one of the most important things a Chairperson can do is to encourage active

debate. Some of the techniques for doing this include:

• Asking a member who has made a long speech to summarise their main points;

• Inviting a quiet member to contribute if they have tried unsuccessfully to join the discussion;

• Asking a member who is continually disagreeing what suggestions and actions they would like to

see implemented to resolve particular issues;

• Having the ability to control discussion should the meeting extend beyond the allotted time frame;

and

• Request other Committee Members to express their views, should they indicate any level of

differing opinions.

A good Chairperson will:

• Prepare for a meeting in advance and ensure all paperwork is accurate;

• Arrive early for meetings and be there to greet members;

• Listen to other Committee Members’ concerns;

• Be willing to question and challenge yet support the contributions of others; and

• Ensure they are available between Meetings to finalise any routine issues.

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At the Annual General Meeting, the Chairperson is very much in control of the room. Here are 10

points that will contribute to a successful and well organised Annual General Meeting:

1. Start on time out of respect for those in attendance;

2. Manage the meeting so it finishes on time;

3. Be prepared and follow the Agenda;

4. The ability to present the Motions being voted on;

5. Prepare people in attendance if a motion has to be ruled invalid;

6. Be sensitive to peoples’ feelings in particular, those ineligible to vote;

7. Avoid delays in counting votes by making sure the returning officer or those responsible for

counting votes prepare as much as they can before the meeting;

8. Never raise your voice or lose your temper – the meeting will take its tone from the Chair;

9. Thank people for their attendance and contributions; and

10. Encourage some form of fellowship following the closure of the meeting to encourage community

spirit.

Overall, the Chairperson is to co-ordinate each Meeting in an organised and efficient manner

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Part 6 of 12: Risk Management

Risk management is the process of managing an organisations potential exposure to liabilities or loss.

Risk management reduces and manages risk, compliance (our next topic), seeks to eliminate or

prevent risk.

In the context of a strata community, some risks are obvious. This list starts with the less obvious but

equally as important.

1. Public Liability Risk: This indemnifies the strata community for claims brought from negligence

resulting in bodily injury and/or damage to property of third parties. This category of risk is often the

most focused upon and is straight forward in quantifying exposure and purchasing suitable levels of

cover.

2. Property Damage and Destruction: This form of risk is well understood and resultant insurance

claims are common place. However, the question is whether the insurance held is adequate.

Replacement valuations should be obtained every three years for large and small buildings.

Queensland legislation requires that a replacement valuation is undertaken at least every five years.

In the case of total or partial destruction, the risk of personal loss is the same no matter if you live in

a high rise or a duplex. Each year between valuations the insured sum should be indexed in

accordance with construction costs. Don’t fall into the trap of doing this based on the prevailing

consumer price index movements. The consumer price index measures the increase in the cost of

goods not building materials. In some parts of Australia last year the price of building materials rose

17% yet hardly any strata communities would have used this as the basis for the increase in their

insured sum.

3. Reputational Risk: Most prudent purchasers will conduct a search of the records of a Body

Corporate before making a purchase. This is the way to find out the state of the Body Corporate with

respect to the levels of harmony among owners and the satisfaction with the operation of the

scheme. This is as important as a pest inspection. It is important to remember that everything

written is available for inspection by the purchasing public. Be careful what is written and manage

trouble-makers well so they do not inflame minor disputes and dominate your strata community.

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4. Breach of statutory duty to repair and maintain common property: This is the most under rated

risk. Strata communities are under strict statutory duties to repair and maintain common property.

The legislation does not say that common property should be fixed when it suits or when the strata

community can afford it – the law is absolute, if it’s broken, then it has to be fixed. Fines and

imprisonment can flow to individuals who fail to observe this duty of care. Office Bearers Liability

insurance is available to mitigate this risk.

5. Investment Risks: Where is the strata communities savings invested? This is the most topical of

risks facing strata communities today. Not all banks are equal anymore and a strata community must

select its investment accounts wisely, not just based on the best interest rate available.

6. Fraud: In most states and territories there is no requirement for a Body Corporate Manager to be

licensed. In some cases, Body Corporate Managers handle millions of dollars in administrative and

sinking fund levies. Without licensing, the risk of fraud or embezzlement is high. Strata communities

should take care to entrust their funds to a reputable Body Corporate Manager and one that is

insured not only for professional negligence, but also fraud.

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Part 7 of 12: Legal Compliance

The Australian Standard on Compliance (AS3806:2006) defines compliance to mean; adhering to the

requirements of laws, industry and organisational standards and codes, principles of good governance

and accepted community and ethical standards.

In the context of a strata community, this means more than meeting the statutory requirements of

the legislation governing your strata community – although that is part of strata compliance. The

broad spectrum of legal obligations with which a strata community must comply includes:

•The general common law and statutory obligations of honesty, good faith and duties of care and

diligence;

•Special laws and rules about your strata community – the governing legislation including regulations

and rules or by laws of your strata community, codes of conduct; and

•The wider body of statutory laws applicable to all bodies in Australia whether for profit or not for

profit such as a strata community.

It is the last category above that is often forgotten or not understood in strata communities.

These laws include:

•Tax compliance;

•Occupational/workplace health and safety – all common property is a workplace because employees

or contractors of the strata community must inevitably enter upon the common property to do work;

•Anti-discrimination laws; and

•Privacy laws.

There is a misconception among committee members of strata communities that they are absolutely

immune from personal liability for bad decisions, which harm the interest of the strata community.

This is wrong on two fronts.

Firstly, they are liable for bad decisions which harm the organisation because they didnʼt exercise care

and diligence in reaching a decision.

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Secondly, even if immune personally as a committee member because they did take care and

diligence but still got it wrong, the strata community itself has unlimited liability and as a member of

that body, they will be exposed to their share of the damages (spread among owners according to

entitlements set out in the subdivision plan).

In the face of these realities, strata communities need to adopt a compliance culture that goes

beyond the specific strata laws applicable to them. This involves starting a conversation about

compliance at a broader level. Some good habits in this regard include leaving compliance as a

standing item on agendas. Make a simple checklist of the main obligations. Make someone on the

committee the owner or leader on compliance issues. Make an annual calendar of compliance

obligations.

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Part 8 of 12: Financial Planning and Control

Traditionally, committees have focused well on budgets and financial planning. Sometimes this is to

the detriment of other aspects of the management of strata communities. Other times the focus is on

reducing fees and levies rather than budgeting for appropriate expenditure. Seldom, if at all, do

committees focus on financial control.

The budgeting process typically happens in the first quarter of the next financial year prior to the

AGM. Last year's accounts are taken as the base and some elementary calculations are applied to

increase the values thought to have increased over the year.

Budgeting for administrative expenses is not hard. It is budgeting for capital items that presents

more challenging items and tests the strength of the committee. Most agree that it is fair and

reasonable that owners of the day should save annually for the repair and replacement of capital

items. However, not all committees back this up with adequate savings.

A budget for capital items should be reviewed annually using a quantity surveyor's report about the

cost and useful life of all capital items. Queensland legislation requires at all times that a Sinking

Fund Forecast is to project capital expenditure for a future period of 10 years. Simplistically, if a fence

costs $10,000 to replace and has a life of 10 years, then $1,000 should be put away each year to

replace the fence. This should be reviewed annually to take account of inflation so that if suddenly the

cost of timber rises and the total replacement cost will be more then $10,000 a catch up payment will

be made and future contributions will be increased accordingly.

Strata communities that work on this premise will have adequate funds to pay for repairs and

replacements as required, will avoid the trauma of one-off special levies and will find their apartments

attractive to purchasers because of a healthy reserve account.

In terms of monitoring the expenditure of funds, again, strata communities usually perform this

function quite well. Usually accounts are monitored monthly or quarterly to ensure that spending is in

line with the budget.

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An area that requires more attention is precautionary financial control procedures. Most strata

communities entrust their administrative and sinking funds to body corporate managers with little or

no investigation into how the body corporate manager handles financial control internally. Three

principles underpin good financial control within a body corporate management company:

• Segregation of duties - dividing duties between individuals increases the degree of protection

against fraud, error or oversights. For example, if one person records incoming cash and another

checks bank statements, it becomes easier to detect dishonesty. Segregation of duties is one of the

fundamental tenets of robust control. Smaller organisations are disadvantaged in this regard;

• Qualification of staff and advisors – the committee should ensure that all staff of the body corporate

management entity are competent and properly trained; and

• External audit – some committees are forced by legislation to have audits prepared annually, others

have discretion. More often than not those with discretion choose not to have external audits

performed. This practice is to be discouraged.

ERNST Body Corporate Management adpots and practices all of the above principles.

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Part 9 of 12: Funding Major Works

In body corporate management there are three options for a committee faced with the responsibility

of funding major capital works.

1.Save progressively by making contributions to a separately levied sinking fund each levy period;

2.Strike a special levy when required; or

3.Borrow funds in the name of the strata community.

The most common method is the first. Under Queensland Legislation every Body Corporate must have

a sinking fund forecast for the next 10 years, to ensure adequate funding for capital works and some

states require this to be funded progressively.

This is the fairest way for apportioning costs between new and old owners. If sinking fund levies are

not funded annually, then new owners are disadvantaged. They are forced to pay for the neglect of

the former owners. In America there is a lot of litigation against past members of committees for not

exercising due care and diligence by saving progressively. It can only be a

matter of time before a similar action is taken in Australia.

Special levies are always inconvenient for most owners. As an aging society with many older people

who are asset rich but cash poor, special levies are traumatic for strata communities and their

members. Usually, work can’t start until all of the money is received and it may take some time to

recover money from unhappy or impecunious owners.

Borrowing involves finding a lender who will lend to a strata community without security. Almost all

legislation prohibits a strata community from giving security over common property.

Some lenders will lend to a strata community on an unsecured basis because there is a statutory

liability on the strata community to levy fees that are necessary to meet the obligations of the strata

communities. In the event of a default the lender could have an administrator appointed to levy and

recover the funds necessary to repay the loan. Funding will come at a premium to normal borrowings

because of the unusual nature of the security. The borrowing costs may be tax deductible for letting

owners.

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Although borrowing is a relatively new option very few strata communities use this option. Most find

the best method is to pay progressively and update forecasts annually to take account of inflation.

This avoids the need for special levies when the work needs to be done.

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Part 10 of 12: Sharing Facilities and Services with Other Communities

As the built form of our strata buildings becomes more complicated, sharing facilities between strata

communities is becoming more common.

These arrangements are normally established by the developer before buildings are completed and

handed over to members of the strata communities.

The main purpose of providing for the sharing of facilities and services among strata communities is

to access bigger and better amenities than the strata communities could hope to access on their own.

Examples of shared facilities and services include:

Entrances, roadways and parks to major gated residential communities;

Shared gym and recreational facilities such as pools in major high rise towers built as a

precinct; and

On-site building management services working across different but adjoining strata

communities.

The legal mechanisms used for the sharing of services and facilities include:

Layered strata communities where an overarching strata community is formed to control and

manage these shared facilities and services, and contain a number of subsidiaries that control

and manage discrete classes of common property used only by the members of the subsidiary

scheme; and

Legal agreements between different strata communities which are more likely to occur in New

South Wales and Queensland than in Victoria and Western Australia.

However, as the sharing of facilities comes about, the most important thing for the strata

communities involved is to have a clear understanding of how the costs of repair, maintenance and

replacement are shared. This should be documented in writing and form part of the records of all of

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the strata communities involved. It is important that purchasers are made aware of these

arrangements and their liability to contribute to the shared costs before they become members of the

strata communities involved.

Strangely, it is not common for adjoining strata communities to access services and goods together.

This form of bulk purchasing could have substantial benefits for strata communities in a range of

products and services where there is some economy of scale for the provider. Energy and water fall

in to this category.

As strata communities look for ways to become green and more self sufficient, sharing expensive

plant and equipment necessary to deliver these benefits might well become an economic option.

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Part 11 of 12: Measuring Progress

One of the difficult things about the management of strata communities is the “uneconomic“ nature of

the activities of the committee of management.

If the committee was a commercial service provider and the owners were the client, then the owners

would go elsewhere if the best outcomes of the strata community were not being met.

Due to the voluntary community service nature of the role of a committee of a strata community, the

owners might feel they can’t speak up about poor performance or if they do, the criticism is often

taken very personally.

In these circumstances a committee then has a responsibility to make an additional effort to listen to

comments about improving services and should implement some system of reviewing their

performance. This should be provided to the owners for review. A logical time to do this is at the

annual general meeting of owners.

Some states compel this and the others should.

Some of the benefits of monitoring performance include:

Educating owners about the importance of the work done by the committee;

Recognising achievement to reward those responsible and to encourage others to serve; and

Averting major problems by identifying them at an early stage.

What then should the committee of a strata community monitor?

Levies are an obvious one but successful organisations are concerned with more than just money.

There are issues relating to the sharing of knowledge, compliance with laws and building internal

processes to better serve the owners that are equally as important as financial management. We are

building our processes and systems around these areas and suggest a simple form of monitoring

performance as follows:

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1. Can the committee identify one piece of communication to owners beyond the statutory

requirements that improves the knowledge of owners about their rights and responsibilities as owners

within a strata community (e.g. a leaflet, a booklet about living in the community, a website – work

your way up to this year by year)?

2. Can the committee demonstrate that it has complied with all of its statutory requirements (e.g.

Use a simple compliance checklist and attend to any items of non compliance)?

3. Can the committee identify the implementation of a process or standard procedure to help owners

access services from the strata community or manager in a more satisfactory or timely way (e.g. a

web accessed form for changing owners details or a standard way of applying for permission to make

an improvement to a lot? And

4. Can the committee demonstrate that it has ensured the strata community has saved the required

amount to meet its maintenance or sinking fund plan for the year. (e.g. measure compliance with a

10 year sinking fund or maintenance plan)?

A great truism of business is that “if it can’t be measured, then it can’t be managed". If this were

applied to body corporate management, then not only would committees need to monitor

performance in some way, but also evaluate their own performance in delivering these outcomes.

This means taking corrective action if any targets are not met. This might mean outsourcing the task,

forming a subcommittee with some new co-opted owners to serve on that committee, who are not

members of the management committee, or changing the way the committee functions.

The enemy of this process is complacency – particularly when there is a strong chairperson who takes

care of it all and is resistant to new ideas and methods. This person makes an enormous contribution

but if not careful can also place the community in a position of distress when they can no longer do

the work.

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Part 12 of 12: Recruitment and Succession

The committee of a strata community holds the corporate memory for the organisation. It is essential

that this be entrusted to the right group and that the entire group does not leave at the same time.

Thinking ahead to the unofficial term of a committee member’s tenure will help with three problems

common to strata communities. Firstly, the turnover of members will avoid small cliques. Secondly,

unofficial terms provide a way of farewelling underperforming members without unpleasant

confrontation. Thirdly, if the expectation of the period of service is reasonable, then new members

may be attracted.

Strata communities are elected each year but a process of recruitment by the existing members can

help maintain and enhance the committee and the community’s corporate memory.

In profiling future members the committee should have regard to the core areas of responsibility -

knowledge management, legal compliance, property maintenance and financial control.

Knowledge management might be led by a person with a communication background, librarians are

good at this role as are people in human resources.

For compliance, look for someone with a legal, accounting or risk management background.

Property maintenance does not necessarily require facilities management experience. Anyone in

general management, operations, logistics or with a trade background will perform this role well.

The skills for the finance role are obvious. This work appeals to auditors, accountants and

bookkeepers. A thoughtful profiling and recruitment process prior to the annual general meeting is

much better for a strata community than pressuring people to put up their hand to fill vacancies at

the meeting.

From the candidates’ perspective a form of induction should be expected which might perhaps include

a meeting with the body corporate manager to clarify roles and expectations.

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Succession planning is something done poorly by most boards and a committee of a strata

community is no exception. Poor succession planning can result in the chairperson or key members

becoming “trapped” in the role or “clinging” to the role when others may believe their time has

passed. Either event is unhealthy. Legislation governing strata communities does not address this

important issue.

Enlightened committees will take it upon themselves to plan for the future by reaching agreement as

to how long they will serve and how they will, over a number of years, progressively retire and be

replaced by others with suitable skills so that the corporate memory stays alive and well for the

benefit of the strata community.