Does the Board's Letter of February 25 make sense? (edited 2/26 to add Jim Flynn)

The Board has issued another missive this afternoon in an effort to set the Owners straight on the governance ballot. Apparently this Blog and Jim and Marcie Flynn's meetings with Owners to discuss governance issues have made too many of the natives restless. I feel like David against Goliath as the Flynns and I pretty much singlehandedly attempt to debate the Board, the Governance Committee, and the Club's attorneys. I also feel like I'm playing whack-a-mole in clarifying the misleading impressions left by the Board in its communications.

But first, it's important to remember that under our governing documents (at least the currently effective ones), the Owners--not the Board--make the major decisions around here. And the governing documents--like our country's constitution--are in place to restrain the Board:

Now let's go through today's missive point-by-point to put it into perspective (here's a link to the Board's missive, in case you want to verify my analysis):

The Proposed Governance Changes Overall

As is the fashion in corporate America in 2022, the Board lists all of the process steps it took in coming up with this 94-page ballot. Personally, I hate process--just show me your results. The Board claims that the "process has not been rushed, and the changes proposed reflect what the Committee and the Board feel are needed to update our covenants and by-laws, removing outdated language, and bringing our policies up to meet best practices."

Let me ask you something. If the process wasn't rushed, why does proposed Section 12.1 of the covenants not include the 2022 assessments? Rather there are brackets as placeholders that nobody took the trouble to fill in. This doesn't really give me much comfort that the process worked. What can be more important than the amount of our assessments?

I'm also curious as to who determines what "best practices" are. Is it a best practice to limit the access of most Board members to corporate documents? Is it a best practice to empower the Board to adopt and enforce an unspecified "code of conduct"? Who determines that it's a best practice to conduct Board meetings in secret when open Board meetings are required in California and Florida and have been voluntarily adopted by several clubs in the Hilton Head area? It seems to me that "best practices" is code for "the Board will let you know what we've decided."

Capital Contribution

Economics 101 says that an increase in the Capital Contribution is primarily borne by the selling Owner. Do a thought experiment. Your house is worth $1.5 million and the "capital contribution" is $40,000. You have a deal to sell your house for $1.5 million, so the total purchase price is $1.54 million. The Club increases the capital contribution to $60,000. You call up your buyers and give them the good news. What do you think will happen? Cool, I'll gladly cut a check for another $20,000? Or, sorry, I agreed to pay $1.54 million and that's still my offer--you'll have to take $1.48 million for the sale. Simply put, I believe that the capital contribution is borne by the seller--which is why the current Covenants limit the increase in the capital contribution to $5,000 per year. The "best practices" enable the Board to increase the capital contribution by as much as they want twice a year. Money doesn't grow on trees and the notion that you can increase the capital contribution without impacting the selling Owner is simply wrong. Think about this. I'll be voting "no" on this proposed change.

610 Golf Membership Player Capacity

This is a complicated issue and deserves more analysis than it's received. The Board urges the Owners to lift the 610 limit and trust them to manage capacity to "preserv[e] the quality of golf and the overall Member experience." Kind of reminds me of Nancy Pelosi's advice that the Congress needed to pass Obamacare to learn what's in it. No thanks.

Here's the problem: either the "levers" available to the Board are sufficient to keep the number of golfers below 610 or they're not. If the levers are sufficient, you'll never hit the 610 limit and it doesn't need to be changed. If the levers aren't enough to manage the number of golfers, the next stop is 710 golfers. I can't speak for everyone, but most of the guys who hang around the men's grill each afternoon believe that we're already reaching congestion with 565 golfers.

I'm not belittling this concern. But I am stating that there is no problem in our immediate future and if we're worried about the possibility of hitting the 610 limit, maybe we should be changing the governing documents to strengthen the levers. Just by way of example, require that any future Invitational Program licenses be callable by the Club (the Club gives the IP his/her money back and terminates the license). The Board seems to confuse their voluntarily taking an action with being required to do so. They've voluntarily suspended sales of IPs, but can change their mind tomorrow unless the governing documents limit them. Similarly, the governing documents require that lifestyle memberships be priced at greater than 50 percent of full (i.e., golf") memberships. Why? If we're getting congested and want fewer golfers, simply decrease lifestyle dues and increase full dues until enough people prefer to be lifestyle. Those two changes treat the underlying problem, rather than the symptom of reaching 610 golfers.

This issue requires that differing priorities be balanced. Some people view lifting the cap as guaranteeing them the right to sell their home with a golf membership. I view it as a slippery slope to 700 golfers. If I'd wanted a crowded golf course, I would have moved to Long Cove or Belfair. These two competing priorities must be balanced and that takes analysis and explanation.

Board Code of Conduct

This section of the Board's missive is gaslighting at its finest. The Board does have a "code of conduct." I signed two of them. But there was no enforcement mechanism and it wasn't worth fighting over. The Board links to its "Code of Conduct" and implies that it's no big deal. But codifying the existing "Code of Conduct" isn't what the Board has proposed. Make no mistake, I would vote against this provision even if the existing Code of Conduct were to be written into the By-Laws verbatim. What the Board actually has proposed is that a bare majority of the Board has the right to revise the Code of Conduct whenever and however they want. I question whether such an open ended delegation is authorized by the law and I'm positive that such an open-ended delegation is a horrible idea. Owners already have the absolute right to remove directors at any time for any reason. And Owners have delegated to the Board the power to remove Board members for: (a) three consecutive unexcused absences; (b) being delinquent on their Club bills; and (c) being suspended. If the Board wants more power to remove Board members, they should tell the Owners what authority they want. An open ended power to write new "Codes of Conduct" is simply unacceptable to me--and I believe to many other Owners, as well.

Board Member Removal

Not only does the Board want carte blanche to write a "Code of Conduct," it wants the right to remove directors who don't comply with the Code of Conduct. Once again, we have the famous "best practices" as a justification. But the Board then goes into hyper-drive on its gaslighting. They claim that  75 percent of the remaining Board members must vote to remove a Board member for a violation of the "Code of Conduct." Rubbish. Sorry to go all lawyer on you, but it never hurts to read what the proposed By-Law actually says: "the level of Board approval to necessary for any such removal shall be . . . at least equal to the level of approval necessary for director removal under S.C. Code 33-31-808(i)."In turn, Section 808(i) provides that the "director may be removed only if a majority of the directors then in office vote for the removal." So a bare majority of the Board has the right to remove the Board member under the proposed By-Law--as drafted by the Board. The Board could provide for a supermajority to remove a Board member--but they didn't--they can go down to five Board members if they feel like it. Doesn't anyone on the Board read these ballots before they go out?

And here's my favorite part. Section 808(i) provides that "the director may be removed for the reasons set forth in the articles or bylaws," but only if such action is permitted "at the beginning of a director's term." So none of the current Board members would be subject to removal under this provision. It's almost like this provision was written in case a petition candidate is elected to the Board and the Board wants to throw them off on some trumped up pretext. It certainly doesn't affect any Board member now serving.

Restricted Access to Confidential Personnel Information

This provision is another non-starter for many Owners. A little background. In 2018, Board member Sam Mollet requested compensation information and his informal request was denied by the then-president and the general manager. Sam chose not to further pursue the issue, despite his clear right to such information. In 2020, Board member Peggy Mulligan requested an employment agreement relating to a Club employee and the then-president and general manager denied her informal request, Peggy chose not to pursue the issue further. In 2021, Board member Larry Cruise requested employment information and was denied. He made a formal request for the information, which was also denied. Then he resigned as a matter of principle. After this refusal was explained to the Owners, the Board promised that all Board members would have access to any compensation information they requested. But now the Board has decided to change the By-Laws to deny this right to any Board member not on the Compensation Committee. In short, Board members will be required to defer to the Compensation Committee on all matters involving compensation and accordingly, their ability to discharge their duty of care will be impaired.

The Board appears to be confused. The South Carolina Attorney General has issued an opinion that states that Owners (not Board members) have a right to review employment agreements. The Board's lawyer disagrees with this opinion and correctly observes that AG opinions are not binding authority. The Board's lawyer has his opinion--the Attorney General has his. The courts are there to resolve this difference of opinion, if it becomes necessary. Here's a little secret--a legal opinion doesn't mean the lawyer giving the opinion is right. It simply means that it you rely on the opinion and are damaged, you can sue the lawyer. Legal opinions--whether of the Club's lawyer or the Attorney General--are non-binding opinions about what a court would do. You need to get an appellate judge to make the final ruling on the matter.

But the issue here isn't whether the Owners have a right to inspect compensation information--it's whether a Board member has that right. Many of you have served as Board members--how many of you have been denied the right to inspect a corporate document? If the AG believes that Owners have a right to inspect employment agreements, it's a safe bet that the AG will opine that Board members have an absolute right to review such documents. Perhaps the Club should inform its D&O carrier of this proposed By-Law and see what they think?

Open Meetings

Reasonable people can disagree about whether Board meetings should be open to the Owners. In California and Florida--it's required. Several of our neighboring clubs require open Board meetings. But once again the famous best practices raises its head. The Flynn proposal permits both executive sessions and privileged sessions and enables the Board to establish procedures to permit or limit the Owners' participation in the Board meeting.

The Board still doesn't understand the point. Owners want to watch and listen. If the Board wants to hear from the Owners in attendance, the Board can provide a mechanism for them to participate--or not. Doesn't seem that complicated to me.

We were planning on voting against the "code of conduct" and "restricted access to confidential personnel information" provisions and in favor of open meetings. But the more I read the documents and read the Board's gaslighting about what they mean, the more I'm inclined to simply say no to everything. Let the Board bring back a "housekeeping" amendment that limits itself to "removing outdated language" and fixing cross-references and typos. Then after the Board gets the amenities project and seawall dispute under control, we can move on to a debate about what substantive changes are required to our governance documents.

Please remember that in order to vote against the individual proposals, you need to vote "do not approve slate" in Ballot Item #2. And don't even get me going on the ways that the Board has tried to hide the ball and stack the deck to get approval for measures that would not pass if they were put under a spotlight.