Strata Reforms [NSW] Update 5: Decision Making

A fresh chance to get better decisions made in strata buildings …

We can improve the things that decision-making theories identify as critical in strata meetings by focusing on both the process and substance, plus ensuring better communications before and after meetings.

Introduction about strata decision making

NSW Strata laws include a variety of provisions relating to decision making covering the following things.

• Holding owners meetings [SSMA  ss 14-23, & Sch 1] [SSMR  r  5, 6, 9, 10, & 12]

• Holding committee meetings [SSMA  ss 39, 40, & Sch 2] [SSMR  r 7, & 8]

• Managers making delegated decisions [ SSMA  ss  52, 53, 55, & 56] [SSMR  r 4 ]

• Electronic voting [SSMA  Sch 1, cl 28] ] [SSMR  r 14-17, & 41-42]

• Covid 19 special rules [SSMR r 70, & 71]

The 2020 NSW Statutory Review Paper discusses decision-making issues at questions 48 to 53 and a few more relating to strata managers’ decisions at questions 60 to 64 which I’ve reproduced at the end of the article.

General comments about decision making

Almost nothing happens in strata buildings without a decision being made; whether by strata owners/voters in a meeting, executives in committees, or managers exercising delegated powers.

So, decision making is a critical activity that is happening on a massive scale [millions of times per year in NSW:  think 90,000+ strata buildings making at least a few decisions per week].

But, in my experience, strata decision making suffers from a long-running focus on process and compliance at the expense of participation and quality.

So, let’s start with some general decision-making theory [as summarised by Wikipedia]. 

It’s a bit esoteric but that’s one of my points in this article and my strata law reform suggestions; namely, that we need to think harder about the decisions made in strata buildings to improve them since so many different factors are impacting on them. 

Decision theory is the study of an agent’s [the decision maker] choices and has two key theoretical branches:

a.     normative decision theory, which analyses the outcomes of decisions or determines the optimal decisions given constraints and assumptions, and

b.     descriptive decision theory, which analyses how agents actually make the decisions they do.

Normative decision theory focuses on optimal decisions determined by considering an ideal decision-maker who can calculate with perfect accuracy and is in some sense fully rational.

The practical application of this prescriptive approach (how people ought to make decisions) is called decision analysis aimed at finding tools, methodologies, and software (decision support systems) to help make better decisions

In contrast, descriptive decision theory focuses on observed behaviors often under the assumption that agents behave under consistent rules. These rules may, for instance, have a procedural framework or an axiomatic [self-evident] framework.

Then there are subsets of decision theory including:

• Intertemporal choice; concerned with choices where different actions lead to outcomes that are realised at different stages over time.

• Cost-benefit decision making; which involves choices between rewards that vary according to magnitude and time of arrival.

• Game theory; which takes into account how other people in the situation will respond to the decision that is taken.

• Decision or organisational complexity and/or resource shortages; which create deviations between real and optimal behaviour.

• Heuristics; where decision-making is based on unjustified or routine thinking and is likely to involve fallacies or inaccuracies.

• Group decision-making (also known as collaborative decision-making or collective decision-making); where individuals collectively make a choice from the alternatives before them.

• Consensus decision-making; which tries to avoid "winners" and "losers" by requiring majorities to choose a given course of action, but that the minority also agrees to go along with the decision.

• Range voting; permits group members to score one or more of the available options and the option with the highest average is chosen.

• Delphi method; a process of collective anonymous thought exchange using a channel. It has three characteristics that are clearly different from other expert prediction methods, namely anonymity, multiple feedback, and statistical responses of groups.

• Dotmocracy; which relies on the use of forms called "dotmocracy sheets" to allow large groups to brainstorm collectively and recognise agreement on an unlimited number of ideas they have authored.

• Plus, other concepts like fuzzy logic, possibility theory, quantum cognition, etc.

You can read more about decision-making theory at these links as a starting point:

https://en.wikipedia.org/wiki/Decision_theory

https://en.wikipedia.org/wiki/Decision_theory

Where strata law reform is needed & my suggestions

I have a split view about the strata law reforms required about decision making. 

A.  To improve decision making processes & awareness.

I think that existing mechanisms are most;y effective to frame a traditional decision-making process via meetings for first past the post majority voting or for delegates exercising decision-making power.  But they need :

• changes to better define the processes [which is just housekeeping],

• tweaks to get more representative decision making by opening up access by owners and other voters to get higher quorums and more representative decisions, and

• to introduce more transparency when delegates make decisions for strata buildings.

B.  To improve the quality of the decisions being made.

The quality of strata decisions can improve with more information, help, and assessment of the issues that need deciding so the owners and voters making those decisions [decision support strategies].

Plus, new and different options for canvassing the issues before and around the decision are required [with appropriate flexibility] rather than a one-track and basic majority voting process.

So, I suggest 10 main areas for strata law changes for decision making as follows.

1.  Quorums

Quorums or minimums for meetings [and decisions] have been dropping for some time to make the process easier and can be waived entirely by the minority meeting attendees. 

But, that’s the wrong approach since we shouldn’t have tiny proportions of strata owners/voters making decisions.

Rather, quorums should revert to 50% of strata owners/voters [or even higher] so that decisions are actually representative of strata owners/voters majorities.   

And, if that’s not available at the meeting or when the decision is made, then the decision can stay alive for a period [say 14 days] whilst more strata owners/voters consider the matter and can cast post-meeting votes in support or against the decision to determine it.

After all, if strata owners/voters can vote before a meeting, why not for a limited period after a meeting?

I also suggest [at item 6] that we could restructure decisions into different types that make it easier for strata owners and other voters to understand and decide about them.

So, I suggest that the strata laws require quorums of 50% of the strata owner/voters or committee members.

So, I also suggest that the strata laws include mechanisms that allow ‘provisional’ decisions to be made at no-quorum meetings which can be completed by post-meeting votes up to 14 days after the vote.

2. Proxies

Proxies have [incorrectly in my view] become the strata meeting bogeyman because of occasional abuses by poorly intentioned players.  But, rather than deal with these abuses through legal review actions, the strata laws have imposed blanket restrictions on who can be appointed proxy and how many proxies individuals can hold.

This is a perfect example of the point I’ve made over the last 25 years of strata law reforms about making wholesale changes to address a limited issue that has more widespread negative impacts.

Proxy limits are arbitrary and artificial controls that don’t prevent abuses by smarter strata players but which disenfranchise all strata owners who may want to give proxies.  They also reduce potential quorums for meetings and decisions by reducing the pool of potential appointees and they lead to ‘wasted’ proxies when more proxies are given than are permitted to appointees.

Plus, I believe most strata owners are adults who should be treated as such in relation to their express decisions about their strata votes and who to appoint as their proxy.

The actual problem that needs addressing with strata proxies is that many of them are invalid but still get used at strata meetings.  I’ve been involved in many post-meeting proxy audits that found significant numbers of defective proxies; not signed by all owners, not identifying the lot or lots properly, undated, overlapping other proxies, etc.  Plus, the recording of voters made by proxy is often patchy.

I’d rather see more effort placed on getting valid proxies issued, signed, and recorded at strata meetings.

So, I suggest that the strata laws remove the limits on the number of proxies a person can hold.

So, I also suggest that the strata laws remove restrictions on who can be appointed as a proxy.

So, I suggest that the strata laws include an express requirement for the making and keeping of a record of proxies received, invalidated, and used on decisions made at strata meetings to be provided with the meeting minutes.

3.  Secret ballots

NSW imported secret ballots from other organisations and from interstate strata laws.

It’s clearly designed to protect strata owners/voters from disclosing their preferences of choices when making decisions at strata meetings.

But, I’ve never understood why that’s required. 

Presumably it’s because of fears about harassment or bullying against strata owners/voters by someone in or outside the building who is unhappy about the decision or their vote.   Or, is it to protect the owner from embarrassment?

I’ve been it’s to allow for situations like a strata owner voting against their neighbour’s pet application without spoiling their friendship.  Really?

Again, I believe most strata owners are adults who should be treated as such in relation to their express decisions about their strata votes.

Plus, secret ballots are just another meeting complexity that waster strata resources.

So, I suggest that the strata laws remove secret ballots.

4.  Priority votes

In NSW, strata lot mortgagees and some other secured creditors have a priority vote, where they can take over a strata owner’s vote at general meetings in some circumstances. It’s designed to give them a say in strata building decision making to protect their security position since they can rank behind strata levies in a forced lot sale situation.

But, you might be surprised about the kind of decisions priority votes apply to which include:

• insurance,

• budgeting,

• levies,

• anything involving expenditure of more than $1,000 per lot,

• special resolutions, and

• unanimous resolutions.

Think of a lender who has advanced 90% of the lot value where the building is deteriorated and needs to raise a significant special levy that exceeds the equity left in the strata lot.  That lender is then exposed to a net loss unless the lot value increases by more so may want a say in the levy or spending decision.

It’s rare to see a priority vote exercised.  But, that’s partly because strata meeting notices are not sent to mortgagees even though they should be in most cases.  And, in my experience, almost no strata owners or other strata stakeholders even know that mortgagees have these voting rights.

So, whilst I believe priority votes are a legitimate strata mechanism, I believe it’s worth telling strata owners more about it when a decision could actually trigger priority vote rights.

So, I suggest that the NSW Office of Fair Trading provide information about priority votes as part of bigger strata operations awareness campaign.

So, I also suggest that the strata laws impose stricter obligations on the secretary to send meeting notices to mortgagees when required.

So, I also suggest that the strata laws require an express notification on motions that permit priority voting rights explaining that a lot owner’s mortgagee could vote in the strata owners place.

5.  Electronic meetings & voting

Strata buildings have gone from face to face meetings to electronic meetings and remote voting pretty quickly in the last few years.   And, Covid-19 has focused more attention on that meeting option which is great news,

But, the rules for electronic meetings and voting are inconsistent between decisions and, in my view, don’t make sense as follows:

• strata buildings should be able to hold electronic meetings by simple secretary decision without a meeting,

• all strata decisions should be capable of electronic voting and pre-meeting voting [not excluding committee elections],

• pre-meeting voting should always be available if the strata building wants and the technology permits it, and

• live meeting voting should always be permitted if the strata building wants and the technology permits it.

So, I also suggest that the strata laws should automatically allow electronic and pre-meeting based on the secretary’s express decision to do so [notified to owners].

So, I also suggest that the strata laws should not prevent any decisions to be made by electronic and pre-meeting voting.

So, I also suggest that the strata laws should permit pre-meeting & live voting when electronic voting is used.

6.  Different categorisations for strata decisions

In NSW there are 3 kinds of strata meeting decisions:

• majority votes at general and committee meetings for most matters [ordinary resolutions],

• three quarter majority votes at general meetings [actually counted in the reverse ie: less than one quarter against] for strata changes [by-laws, subdivisions, upgrades, etc], and

• unanimous votes at general meetings [actually counted in the reverse ie: no vote cast against] for a few things like termination and distribution of surplus funds.

What’s included within each category is defined in the strata laws and that’s fine as to authority categorisation and decision thresholds.  Plus, most strata stakeholders understand the current rules when running meetings.  So, I believe that should be left alone.

But, why not have different and additional ways to categorise strata meeting decisions based on other criteria relevant to the nature of the issue or decision which impact the meeting, voting, and decision-making processes? 

They would operate as a further overlay on decision-making to help strata owners/voters and better understand the significance of the decision and facilitate decision making.

For example, decisions could be categorised:

• according to their administrative type; as routine, non-routine or emergency decisions based on the subject matter, and/or

• based on how the expenditure arising from the decision relates to the budget; as a proportion and/or whether it is inside or outside the budget, and/or

• by the strata operational area; risk & insurance, repairs & maintenance; finance; behaviour; disputes; etc.

These additional categories would help strata owners/voters decide how involved they want to be in the decisions, what information they want and need or how to vote.

So, I suggest that the strata laws should permit or require new kinds of decision/motion categorisations that will streamline strata meetings, voting, and decisions.

7. Decision-making resources

Most strata meeting notices contain additional information to assist the strata owners/voters beyond the simple motions to be considered. 

Sometimes it’s no more than the statutorily required information about procedural issues, a proxy, and the last minutes.  At other times, it can include documents, copies of advice, memos from the manager or committee, or more materials.  But that’s not usual and most notice attachments are typically limited to statutorily required documents and copies of quotes and other documents that need approvals.

If strata owners/voters want more information about the decisions to be made at the strata meeting than was provided, they must request that from the strata or building manager at or before the meeting.  It’s an unreliable process, there’s usually limited time to get that information and, if refused, then it can only be obtained by a strata records search.

Given that the quality of a decision usually depends on the amount of information available to the decision-maker, any steps to increase information supplied and available to strata owners/voters must help.

There’s one quirky provision [SSMA Sch 1, r 4] that requires strata owners/voters who request a motion to be included in a meeting agenda must provide a 300-word limited explanation of the motion to accompany it.  It makes sense that the requesting strata owners/voters should say why they want the issue decided.  But, there’s no similar obligation to do so for any other motions at meetings included by the secretary or strata manager exercising delegated powers. 

Why not?

Wouldn’t it help to give strata owner/voters some guidance about the purpose of the motion, why it’s important [or not], background, options for the decision, predictions for different voting outcomes and the committee’s, manager’s or advisor’s recommendations?

How about providing details of previous decisions made by the strata building on the same or similar motions, and even the outcome/s from the decisions.  A kind of strata history lesson.

And, what about providing anonymised information about the decisions taken on the same or similar motions by other strata buildings for comparative purposes.  As a kind of strata decision making benchmarking tool.

So, I suggest that the strata laws should permit or require that all strata meeting agenda items include an explanation of the motion and other information to assist strata owners/voters make their decision.

8.  No decision meetings

Strata building meetings exist for the purpose of making decisions. 

But, there are many good reasons for strata owners to meet [in person or virtually] without making decisions. 

After all, it’s very likely [in my view] that a more open and reasonable discussion on strata building issues will occur without the pressure of an impending decision being made at the same time. 

Generally, the stakes of the meeting decision and outcome are so high for strata owners that they can’t or won’t speak openly about the issues, and can’t consider any alternative viewpoints for fear of conceding ground.

So, why not permit strata buildings to have no-decision meetings? 

A kind of strata forum where information is provided on issues, questions are answered and topics are discussed without any decision being permitted at that time.  A formal strata meeting and vote can occur [ideally electronically] afterward giving the strata owners/voters time to consider things.

Similarly, strata buildings could conduct non-binding and/or anonymous polls and surveys of owners’ views on issues before meetings to provide the strata owner/voters with more information about opinions, preferences, and concerns.

So, I suggest that the strata laws should permit no decision meetings of owners.

So, I also suggest that the strata laws should permit polls, surveys, and other canvassing activities and that they cannot impact any later decisions.

9.  Delegated decision making by agents

Now, let’s consider strata building decisions that occur without a meeting; strata managers’ exercise of delegation functions under their management appointments.

In NSW these powers are regulated, requiring:

• general meeting decisions to delegate a power or function,

• written documents between the manager and strata building identify delegated powers or functions,

• requirements to specify the extent of the manager’s delegated powers or functions,

• limits on the powers or functions that can be delegated, and

• requirements to document and notify when delegated powers or functions are used.

But, the documenting requirements are largely ignored in NSW, and whilst the record of exercise must be made immediately [SSMA s 55(1)] the reporting only needs to occur once per year [SSMA s 55(2)].

There are excellent reasons why a strata building would want its strata manager to make decisions for it on many issues as it’s a useful and valuable service that managers provide by doing so which saves time and money.  And, whilst most manager decisions typically cover a range of day to day and routine activities from things like receiving money, paying invoices, issuing levy notices, etc the decisions often extend to more important things like convening and notifying meetings and engaging contractors and, even, signing contracts for major works.

However, this means that in effect, most strata owners find out their strata building has made a decision after it’s occurred and been implemented.  That’s if they ever actually find out.

So, without limiting a strata manager’s right to exercise delegate functions, why not impose stricter notification requirements when delegated powers or functions are used and an obligation to explain their decision.

So, I suggest that the strata laws include an express requirement that strata managers must also include a reason or reason for exercising a function when making the record under s 55(1).

So, I also suggest that the strata laws require strata managers to provide a copy of the records and reasons made under s 55(1) to strata owners within 7 days of doing making it.

Feb 15, 2021

Francesco ...

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NSW STRATA LAW REFORM DISCUSSION PAPER QUESTIONS ABOUT DECISION MAKING

48. How have the meeting procedures been operating and are any changes needed? If so, what changes?

49. Should the meeting procedures be moved from the Management Act to the Management Regulation so they can be changed more easily? Should any parts remain in the Management Act and, if so, why?

50. Should the law be changed to permanently allow electronic voting in all circumstances without the need to first pass a resolution? If so, are additional protections for lot owners needed?

51. Are there other alternative methods for electronic meetings and voting that should be considered?

52. How well have the different ways (teleconferencing, email etc) of voting been working? Are any changes needed? If so, what changes and why?

53. How well are the limits on proxies working and are any changes needed? If so, what changes?

60. Are the current conflict of interest laws working? If not, how should the laws be changed?

61. Are the provisions of the Management Act relating to gifts and commissions easy to understand?

62. Should there be a general duty of care in the laws to ensure managing agents obtain goods or services at competitive prices? 63. Should the rules be tightened on disclosure of conflicts of interest for owners corporation contracts?

64. The managing agent must follow certain rules when they make a decision for the owners corporation. Are these rules appropriate? If not, how can they be improved?