BI > AUGUST 2000

Do We Vote our Units? Or Is It One Person, One Vote?

A Couple of Timeless Questions

Readers have been "Asking Mr. NAIC" questions since the column's debut in September, 1972 -- more than a quarter century ago. That's a lot of questions, and they have resulted in a wealth of information presented over the years by "Mr. NAIC," who is NAIC's BetterInvesting President and CEO, Kenneth S. Janke, Sr. The subjects he has addressed have ranged from accounting to zero-coupon bonds, with literally every other letter of the alphabet covered as well. Many questions have dealt with the current investing climate, but many others have been general in nature and are just as relevant today as they were decades ago when they were first asked. Here are a couple of those "timeless questions," taken from a book Ken Janke published in 1982 titled (you guessed it... ) Ask Mr. NAIC.

Q. Two of our charter members moved out of state and two more dropped out for business reasons. We have run into the problem, or question, of equal voting power by newer members. Our partnership agreement states that voting be in proportion to the value of capital accounts, but we are experiencing some dissatisfaction with this procedure. We don't want our meetings to become a parliamentary debating session. What have you found is actually being done in practice on this point?

A. In my experience, there are three ways a club will vote. The first, which follows the procedure in the Official Guide, is to have one vote for each unit held by the partner.

The second is to have one vote for each member, regardless of the amount invested. Finally, the last way is a type of compromise with a new member having one vote the first year, two votes thereafter. Personally, I feel the first method is the best because it gives more say in decisions to those who have more money invested. Generally, this means the member has more experience, too. If I were a member of a club for 15 years and had $4,000 invested, I think I should have more of a voice than a member who just joins and pays his first $20. Practically all businesses follow that procedure.

There are circumstances where that procedure creates problems. In that case, I suggest you consider the compromise plan rather than one vote for each member. At least the new member will have two years experience before he has the same voting power as charter members.

Q. Some of our members asked why a payment to a withdrawing partner is based on the month following his request for payment. I thought it was because it gives the members enough time to raise the money, but I'm not sure if that's the full reason. Could you explain?

A. There is more than one reason to determine the partner's capital account a month after his written request for withdrawal. You have already mentioned one.

Members should have a little time to determine which stock should be sold if that becomes a necessity. Instead of an emotional decision, all stocks should be reviewed to see which has the most upside potential or downside risk. Members should also ask the treasurer the status of capital gains for the current year. This could influence which stock should be sold.

Now, remember that you prepare the valuation statement on a date prior to the meeting. For example, the July meeting's statement might be prepared as of June 30 with the meeting held on July 10. A great many things can happen in the stock market during that period of time. Let's assume the popular averages decline dramatically between the valuation date and the day of the actual meeting.

If a member could decide to withdraw on July 10, with his account based on June 30th values, it could be unfair to the remaining members. Actual values could be down by that time. By setting the withdrawal date one month in the future, that problem can be eliminated.

One final thought about a withdrawal. Look upon it as an opportunity to strengthen the club's portfolio. The members shouldn't be upset that the total value of the club will be less. Profitability, not size, is the important factor. There may be one or two stocks in the portfolio that should have been sold but weren't for one reason or another. A withdrawal gives the club an opportunity to weed out the weak stocks and keep those that have the most potential.

Kenneth S. Janke, Sr., is a chairman emeritus of NAIC's Board of Trustees and a member of the magazine's Editorial Advisory and Securities Review Committee.