Part 1: Cut the Board Down to Proper Size
Proposition 3, composed of 7 bylaws amendments to reduce the number and terms of directors, has been proposed by members of Alliance for a Better Community to be voted on at the June 20 annual meeting. Here’s how the changes will benefit property owners.
Last June property owners elected eight directors because they ran in favor of some combination of reduced dues, cuts in unnecessary spending, greater accountability and/or transparency. None of those things have happened. Attendees at POA meetings have witnessed vote after disappointing vote against membership interests. Even worse is the attitude ranging from total indifference to attempted intimidation by some directors when owners ask questions or comment during open forum at meetings.
How to fix that? How to increase the likelihood that directors will actually account for their decisions, accept responsibility, disclose activities in a transparent manner, and remain faithful to campaign promises? How to end the top-down, command-and-control posturing of those who mistakenly think they know best? Some of us, appalled by their behavior, began looking for answers.
We found them in the private corporate sector – unsurprisingly, since that’s where the practice of creating boards of directors with almost unlimited authority began. It’s the corporate model adopted by our existing POA bylaws – large board, long and staggered terms, with control based overwhelmingly in the board. A century of use by business and nonprofit corporations has given practitioners and researchers a great deal of insight into the model.
What have they learned? First, the size of a board definitely matters. Over time, study after study has confirmed that large boards have a negative effect on corporate performance and value. Consequently, average board size of complex publicly traded companies shrank from 18 directors to 11 between 1988 and 1999.
They are shrinking even more now. Since Enron led off the parade of corporate scandals in the early 2000’s, research on board size, composition, and term length has gone viral. Numerous studies on group performance in decision-making have found that 5 to 8 is the optimum number of people for effective, efficient decisions. Bain & Company management consultants named their study results The Rule of 7: for each person added above 7, a group’s decision-making effectiveness is reduced by 10%. That would rank our board’s performance at just 60%.
The reason is “free riding,” the tendency of individuals to do less than their fair share because others in the group will take up the slack. The larger the group, the more free riding occurs as some see their contributions as unnecessary, unworthy, or unlikely to have much impact. Resentment builds, apathy increases, the board fails to assume responsibility, board discussion and debate decline in quality, and a tendency to cliquishness sets in.
It’s visible to anyone who attends Diamondhead POA meetings where discussion and debate are virtually non-existent, meetings are brief since decisions were already made behind closed doors, private conversations between directors occur while others have the floor, a few are often absent, and in one recent instance there was no agenda because there was no business at all to be conducted. As the Forbes Group notes, having lots of elected directors doesn’t represent the membership’s democratic will if the directors are unable to provide what the membership wants.
Although it still has 11 directors, the board has now halved its previous responsibilities by creating the city and hiring a management company. Living costs are high here when dues plus all other taxes and fees are added in, property values are low, golf courses and country clubs are rapidly shifting from asset to liability here and across the U.S., and a sense of community is eroding.
But too many on the board have spent their time blocking dues reduction as well as accountability and transparency measures that were overwhelmingly demanded by owners in last June’s election, spending more on amenities that attract few members or potential buyers, and hoping that happy talk will improve the situation. We need a lean, flexible board able to adapt swiftly to today’s changing world, but what we’ve got is an inflated, unresponsive one unable to focus on membership needs and wants or to develop a plan to deliver it.
Cutting the board down to proper workable size is the first step in placing reasonable limits on its power to continue ignoring the challenges Diamondhead faces today.
Part 2: Elect all POA Directors Often
Granting corporate directors guaranteed long terms of office, staggered so just part of the board was elected at a time, was a corporate practice that began in 1920. It was at some point adopted into our POA bylaws. Changing it to meet today’s needs is another key step toward improving Diamondhead.
The practice rests on arguments that a slow rate of board turnover, called continuity, means you always have experienced directors on hand for long-range planning and organizational stability that should attract long-term investors. Its strongest support, however, has always come from incumbent board directors and managers who prefer having the balance of power heavily in their favor rather than allowing shareholders or members a voice.
It intensified during the Eighties, heyday of hostile takeovers, when it was useful as “shark repellant” against corporate raiders who targeted companies where they could replace the entire board immediately rather than waiting two or more years of elections to do so. But Enron and its successors finally forced business and law to re-examine the corporate governance system that had failed so spectacularly.
Researchers found that without the credible, frequent threat of losing office, directors are more prone to making bad decisions and serving their own interests and management’s rather than shareholders’. Staggered long terms of office shield them from accountability and devalue their companies. They also make them more dependent on company management, less likely to perform adequate oversight, and more likely to pay higher salaries. In short, their own continuity, rather than corporate success, becomes their guiding principle.
Because of the research, according to Skadden Arps, today nearly 90% of Standard & Poor’s 500 companies hold annual elections for all directors, and studies are getting similar results regarding corporations of various sizes, types, and nationalities – staggered, long terms of office produce “entrenched” boards and lower corporate value.
We need better board performance to deal with Diamondhead’s challenges. Continuity and stability will be assured by the membership who, as always, will re-elect incumbent directors with whom they are satisfied. But rather than endure four long years of stagnation, depressed property values, or worse for Diamondhead under unsuitable directors, they can quickly be replaced via frequent elections which serve as a referendum on each director’s performance.
The Forbes Group advises, as do numerous POA management companies, that boards identify the needs and wants of members and develop a plan with broad input and support to provide them. Our board is supposed to be working for our mutual benefit and in accord with what we want, but none of that is happening.
It’s your property, your investment, your dues money. Shouldn’t you have more voice in how it’s managed? Shouldn’t continuity of board directors and policy be up to you? Having so much control in directors’ hands is no longer working well for Diamondhead. It’s time to give a voice to the membership.
To paraphrase Churchill, in the POA just as in politics, democracy may not be the ideal form of government, but it is certainly preferable to the alternatives.