Further thoughts on the Governance Documents

This post is adapted from an email that I sent to 75 friends and neighbors last night. The bottom line is that it's easier and safer to simply vote in favor of: (a) changing the Club's name (Ballot Item #1); (b) the Flynn proposal (Ballot Item #27); and (c) the Rattacasa proposal (Ballot Item #28) and against everything else. There's no reason to rush through changes to the governing documents. Make the Board come back with a power-grab free ballot to make the housekeeping changes.

There are three major issues facing our club:

 

1. The outstanding ballot on governance issues.
2. The amenities project.
3. The seawall dispute.

 

The Governance Ballot

 

The governance ballot contains quite a few issues that are actually “housekeeping” in nature, but it contains at least six issues that are significant. Please note that the ballot is designed to be a trap for the unwary. You must first vote “do not approve slate” in Ballot Item #2, and then vote individually on Ballot Items # 3-28. As designed, you can vote in favor of what the Board wants with one click. But to oppose any of the Board’s proposals, you must vote individually on Ballot Items 3-28. For some reason, clicking one time to vote against the Board’s recommendations isn’t an option. Plus you only get to vote once—you can’t change your mind after you cast your vote—so vote wisely.

 

The Ballot is 94 pages long, so I doubt that many Owners will slog their way through the entire ballot. Oddly, the most controversial items (at least in my view) are Ballot Items 24, 25, 27, and 28. It’s almost like the Board hopes that people will get bored before they get to the punchline.

 

I view the Ballot has having three tiers of issues:

 

1. Items that should be voted down.
2. Items about which reasonable people can disagree.
3. Items that appear to be harmless.

 

Items that should be voted down:

 

• Ballot Item #24 (Board Code of Conduct)
• This change gives both the current Board and future Boards a blank check to draft a “code of conduct” which may be enforced by the Board against future (but not current) Board members.
• There are no limits on what can be placed in the “code of conduct” and the “code of conduct” can be approved by a simple majority of the Board.
• Although the Board states that removing a Board member for a violation of the yet-to-be-determined “code of conduct” will require a 2/3 supermajority to remove a Board member, that’s not what the proposed By-Law says. When you interpret a By-Law, you need to look at what the By-Law actually says—not at what the Board claims it will do. Boards change and Boards can change their mind.
• The only requirement in the proposed By-Law is that the number of Board members required to remove a Board member is at least that required by state law (i.e., a bare majority).
• It really doesn’t matter what the Board intends to do. The By-Laws permit the Board (or any future Board) to remove a Board member for a violation of the Code of Conduct a bare majority vote.
• The Owners already have the right to vote badly behaved Board members off the Board.
• The proposed By-Law allows the Board to vote Board members off the Board—even (especially?) if those Board members were elected by the Owners to bring a new mindset to the governance of our Club.
• I note that despite the best efforts of the Board and the Nominating Committee to stack the deck, in last year’s Board election 30% of the Owners who voted cast a vote for Al Rattacasa and 43% of the Owners who voted, voted for Marcie Flynn.
• Perhaps this “code of conduct” power grab is intended to rectify any “mistakes” made by the Owners in electing Board members?
• This proposed By-Law is horrible and should be voted down. A link to a Blog post addressing this issue is here
• Ballot Item #25 (Confidential Information)
• SC Law imposes upon each Board member a “duty of care” to become knowledgeable about the affairs of the Club and to act in the best interests of the Owners.
• This proposed By-Law purports to limit access to “confidential personnel information” to only members of the Board Compensation Committee. 
• Who’s on this committee? I don’t know and it’s not listed on the website.
• The bottom line is that this By-Law proposes that as few as two Board members may have access to compensation information about the Club’s employees.
• People do what you pay them to do—given some of the issues facing our Club, maybe all of the Board should be concerned about what we’re paying our employees to do.
• In any event, this By-Law (if approved by the Owners and if it withstands any legal challenge) would convert the right of a Board member to rely on the Compensation Committee into an obligation to do so (because only the Compensation Committee would have access to corporate documents) and would eliminate the right of a Board member to not rely on a committee that the Board member didn’t believe had merit.
• This proposed By-Law is arguably not permitted by state law and is definitely a bad idea and should be voted down. Here’s a link to a more detailed discussion.
• Ballot Item #13 (Club Finances (2))
• This proposal permits the Board to increase the Capital Contribution (i.e., the $40,000 currently charged new Owners) twice a year without any limits.
• The By-Laws currently limit increases to $5,000 per year.
• Based upon my understanding of economics, although the Capital Contribution is paid by the buyer, the economic consequences of the Capital Contribution are borne by the seller.
• That is, the “purchase price” of a home is the cost of the home plus the required Capital Contribution.
• A higher Capital Contribution will lead to lower sales prices.
• Don’t believe me? Imagine that you’re selling your house for $1.5 million with a $40,000 Capital Contribution. The buyer is paying $1.54 million. Now increase the capital contribution to $200,000. Did the house just become with $1.7 million? Or is it still worth $1.54 million? If it’s still worth $1.54 million and the buyer is paying a $200,000 Capital Contribution, the seller will receive $1.34 million rather than $1.5 million.
• The economically challenged people will claim that because the buyer is paying the capital contribution, it won’t affect the sales price. Wrong.
• The economically challenged will also say “but we’re not going to increase the Capital Contribution to $200,000.” Doesn’t matter—the principle is the same whether the increase is $160,000 or $10,000. The increased Capital Contribution will be ultimately be paid by the seller.
• I have no view on whether a higher Capital Contribution is good or bad. I just want to be clear that its effect falls primarily on the seller—not the buyer.
• We’ll all be sellers at one time or another. There should be a limit on what the Board can do. The current limit is increasing the Capital Contribution by $5,000 per year. Removing this limit entirely is a bad idea.
• Ballot Item #6 (Voting Clarifications)
• One of the key provisions in our Club is how fast the Board may raise our annual assessments and how much “Lifestyle Members” must be charged relative to Full Members. The Ballot, as drafted, leaves blank the 2022 assessment amount. While this is likely a drafting miscue, it makes one wonder what other drafting errors are included in the ballot.
• The omission makes the By-Law open to interpretation and requires a “no” vote—for carelessness if nothing else.
• In addition, if we’re concerned with too many golf members, we should be removing the requirement that lifestyle membership assessments must exceed 50 percent of the full membership assessment. The lower the lifestyle dues, the fewer Owners will want to be golf members. This is a valuable lever in dealing with the membership issue (see below) and the floor on lifestyle dues should be eliminated.

 

Items about which reasonable people can disagree:

 

There are several issues which don’t have a “correct” answer. Each Owner should become familiar with the proposals and vote the way they think best.

 

• Ballot Item 27 (Flynn Proposal)
• Jim and Marcie Flynn have proposed making Board meetings open to the Owners (except for executive sessions and privileged sessions), as required in California and Florida and voluntarily adopted by several other Hilton Head area clubs.
• The Board argues that open meetings are not a “best practice.”
• Reasonable people can disagree. I favor open meetings because I have little patience for people who are not willing to speak their minds in public. We’re not a publicly traded corporation—we’re a small town and the actions of the Board affect us directly.
• Ballot Item 16 (Membership Limits)
• The Board likes to frame this change as “guaranteeing” that we can all sell our houses with a golf membership.
• I view this change as paving the way to 700 golfers and congested golf courses like they have at Belfair and Long Cove.
• Here’s the Catch-22 that I see:
• If the “levers” available to the Board are strong, we’ll never reach the 610 limit
• If the “levers” aren’t strong enough, there’s nothing to stop us from going to 710 golfers once the 610 limit is lifted.
• What are the “levers”?
• Stop selling Invitational Participations. The Board has stopped selling them, but nothing stops them from starting again unless the By-Laws are changed to prohibit it.
• No such change is proposed.
• Cut the price of lifestyle memberships relative to full memberships
• The cheaper the lifestyles, the more people will want them and the less likely you are to approach the 610 golfer limit.
• Take lots out of the market
• Many lots are already committed to EDC
• We may need to re-trade that deal. COVID has changed the world and the assumptions that went into the EDC deal have been proved wrong (in particular, COVID has (ironically) breathed life back into the gated golf community market—a market that had been given up for dead as recently as 2019).
• The Club owns additional lots and there are a number of delinquent lots that could be acquired and retired.
• This is an important issue. But we only have about 565 golfers now and we have time to consider a comprehensive approach to this issue rather than to treat a symptom in a manner that will have unintended consequences.
• At some point, eliminating the 610 limit may make sense. But it’s premature to do so now. Here’s a link to a more detailed discussion of this complicated issue.

 

Items that appear to be harmless

 

• The remainder of the Ballot appears to be harmless. Many of the changes (such as changing the legal name of the Club) can’t hurt anything. Same with changing cross-references and fixing typos.
• The problem is that there are a lot of these changes and it’s hard to tell whether the changes are simply “housekeeping”
• Particularly when power grabs are spread throughout the Ballot.
• Just to be safe, I’ll vote to change the name of the Club and against everything else except the Flynn and Rattacasa proposals.
• If the entire ballot is voted down, the obvious solution for the Board would be to present to the Owners a clean ballot that contained only housekeeping changes for an up-and-down vote.

 

The Amenities Project

 

A special Board meeting was held earlier today to “collect and review amenities pricing” (whatever that means). Here’s what we know:

 

• The amenities are at least one year behind schedule, even though less than one year has passed since the vote.
• To the best of my knowledge, ground has not been broken, no permits have been obtained, and no contracts have been entered into for the amenities project.
• The Board now promises that the "maximum price" for the amenities project will be $21 million
• Which represents a 42% increase from the original proposal of $14.8 million
• The $16.5 million price already included a contingency of $1.7 million--so the overrun is actually $6.2 million--not $4.5 million.
• You have to read the fine print around here. 
• I'm still taking the "over" on $21 million.
• The Board proposes drawing the Capital Fund down to finance the overrun, rather than assessing the Owners
• Which also would enable the Board to have an approval threshold of 51% instead of 67%
• I need to analyze the financials and what's changed since last February.
• I'll publish an analysis by the end of the week.

 

The Seawall Dispute

 

The Board has been secretive about the seawall dispute for the past three years. The lawsuit filed by the J-Lot owners has brought the dispute out into the open. And the Club’s answer to the lawsuit will put the Club’s position on the record, as well. All of us can then decide who should pay the millions of dollars in maintenance, repair, and damages sought by the seawall owners. 

 

Each of us should become informed about the issues in this complicated matter and let our Board know what you think. I suspect that there are quite a few people who have bulkheads on the marsh who are wondering why they may have to pay for the river bulkhead, as well (not to mention Owners of lots in the interior of the Club). 

 

Regardless of whether you agree with me, I hope you’ll make the time to fully consider each proposed change to the governance documents before you vote. And that you then exercise your right to vote. If you see any factual errors, please let me know and I’ll fix them. Otherwise, I thank you for making the time to read this far and I hope that you’ll feel like you have a different perspective on these important issues. In any event, please vote!