The Board of Directors
Society for Creative Anachronism
Corporate Secretary
c/o SCA Corporate Offices
P.O. Box 360742
Milpitas, CA 95036-0743
Dear Sirs:
This is the second letter I have written you since the January Board meeting. In the first, I mentioned my unhappiness with the actions taken there but spent most of the letter discussing my views of how the Society ought to have dealt with the problems of growth, in order to avoid the difficulties that were in part responsible for your actions, and how it now ought to deal with them.
Since writing that letter, I have been actively involved in discussions of the Board's actions; I believe I have now spoken with a majority of the Board members as well as many others. In this letter, I do three things: ask you for answers to some specific questions, offer you the analysis on the basis of which I believe that some of the statements Board members have offered in defense of their actions are false, and offer you my views on what you ought to do.
Some of the analysis some of you have already seen; it was included in my correspondence with two Board members. In addition, I am attaching a public letter that I have written to my fellow members of the Society, giving my views on many of the issues; it has by now been seen by a considerable number of people. I have already sent it to two Board members; I do not know if they have sent copies to others. I believe it, rather than my previous letter to the Board, is the "recent letter by David Friedman" which Ms Karen Kasper refers to in her letter to you, of which she kindly sent me a copy.
Questions:
I. To what degree was the reason for imposing required membership budgetary, to what degree legal? I have seen inconsistent statements on this subject, in some cases attributed to the same Board member (A. J. Riviezzo).
2. To the extent that it was budgetary, what were the assumptions on which you based your estimate of the budgetary effect of requiring membership? In calculating the budgetary gains from required membership, what did you assume about how many members there would be with the price rise and without required membership, and what did you assume about how much of the Corporation's cost were variable ones that would increase with the number of members, absorbing some of the additional revenue?
I ask these questions because my calculations, as you will see, suggest that the budgetary gains implied by the assumptions in your letter to the membership were small--far too small to provide any justification for imposing, without discussion, a policy you had good reason to believe that many members strongly opposed. If you have numbers showing I am mistaken, I would like to see them.
3. To the extent that the reasons were legal, precisely what were they? What did your counsel tell you the consequences of requiring or not requiring membership would be, and on what evidence did he base his conclusions? I should perhaps add that I am currently a visiting professor at Cornell Law School and spent most of the previous seven years as an Olin Fellow in Law and Economics at the University of Chicago Law School, so although not an attorney I am reasonably familiar with legal reasoning and have access to lots of experts. You may feel free to reply, or ask your counsel to reply, in as much detail as you wish.
4. Statements by Board members have claimed or implied that the alternative to the combination of higher prices and required membership that the Board actually imposed was doubling the cost of membership. If this was more than simply a scare tactic, it is a claim that the two alternatives had roughly similar effects on our net financial situation--the size of our budget surplus or deficit. My calculations, as you will see, suggest that that is implausible.
I would therefore like to know what assumptions you made about the effect that doubling the price of membership (instead of increasing it, as you did, by about 40%) would have had on the number of members. I would also like to know, as in question 2 above, what assumptions you were making about the division of the Corporation's costs between fixed and variable--or in other words, how much you assumed that costs change with the number of members. And, finally, I would like to see the calculations, based on those assumptions, by which you concluded that if we did not require membership we would have to double its price--supposing that such calculations exist.
5. The financial attachments to the Board's letter describe the change in the cost of Board Officers & Meetings in terms that suggest a growth roughly equal to membership growth plus inflation--say 15%. Comparing the number given in the 1994 budget with corresponding items in the 1993 budget--not provided in the letter--the real increase seems to be over 130%. That suggests that the author of the attachments was either incompetent or attempting to deliberately mislead those who read the letter.
According to Their Majesties of the Middle, a Board member offered them a different explanation:
"Previous BOD Expense Budget numbers were not in line with reality. At this most recent Executive Session, the Board re-categorized expenses more appropriately. The new expenses reflect all of the costs of the Board where before the costs of board telephone, mailing, and a host of other items were in other categories." (from Their Majesties letter, posted to the Rialto)
There is a problem with this explanation. Shifting sizable amounts of money from other parts of the 1993 budget to "Board and Officer expenses"--which is what you have to do to to justify the attachment's statement about growth in that category--is likely to have a sizable effect on the categories the money is shifted away from. That may--according to my best guess of where the money is coming from, it does--make other things asserted in the attachment false.
I would therefore like to know whether the explanation attributed to the Board member by Their Majesties is correct and, if so, which items (other than travel expenses, which I was already including in my calculations) ought to be added to the 1993 figures for Board and Officer's Expenses in order to make them comparable to the 1994 figures. Where in the 1993 budget do those items presently reside, and how big are they? In other words, I would like the information necessary to check the comparisons that the attachment claims to make between last year's expenditures and this year's, in order to see if they are as inaccurate as they appear at first glance.
I may seem to be asking for quite a lot of information. I believe, however, that it is all information you (or Mr. Provine) must already have if you actually have a basis for the public statements that some of you have made. In order to compare alternative ways of solving the budget problem, you must have had estimates of the effect of each on revenue and expenditure. In order to make the statements you make in the attachment to your letter ("General & Administrative costs reflect ... . Increases for 1994 are expected to be approximately 25% over 1993"), you must have already decided what items in the 1993 budget correspond to the items in the 1994 budget. If you have all of those numbers, I do not think it an unreasonable imposition to ask to see them. If you do not, then your published statements were an attempt to snow the membership with invented facts and figures, and the members, as well as any Board members not involved in the project, are entitled to know that.
Analysis:
The Board letter mentions three alternative ways of balancing the budget. One is the set of price rises that were actually voted, combined with required membership. For that alternative, the letter and its attachment give numbers representing the board's projection of revenue, membership, etc. Most of my calculations are based on those numbers.
The letter suggests (and the posted draft of the letter, and apparently the statements made at the Board meeting, assert clearly) that the price rises enacted would not have been enough to balance the budget, and that the alternative to 40% with required membership would have been a 100% increase in membership rates without required membership. If that claim means anything, it means that 100% without required membership gives us about the same projected surplus as the policy actually adopted.
In order to calculate the budget implications of the alternatives, one must make some assumptions about what membership will be in each case. I will start with some assumptions that seem like good first order guesses, and then discuss the effect of changing them. If anything in the calculations is unclear, I hope you will feel free to call or write for clarification.
I assume that either price increase, with no required membership, will stop but not reverse our usual growth, so that membership at the end of 1994 will be the same as at the beginning. On this assumption, the 10% increase in the figures attached to the letter is due to required membership. I think this assumption is reasonable for the 40% price hike--it represents a larger effect on membership than the last price hike had, according to a conversation I had with Hilary--but a little optimistic for the 100%. It is, however, a convenient starting point.
The calculations comparing 40% with and without required membership, roughly corresponding to those in the attached letter, are:
With required membership: (attachments to the Board letter)
A1: Membership= 25,121 (sum of membership figures in 1994 budget)
A2: Membership revenue: $712,850
A3: Cost of newsletters and TI: $283,023
A4: A2-A3=429,827
Without required membership:
B1: Membership =23,000 (board letter figure for beginning of 1994)
B2: Membership revenue=(23,000/25,121)x$712,850 = $652,663
B3: Cost of newsletters and TI: (23,000/25,121)x$283,023 = $259,127
B4: B2-B3=$393,536
Line A4 shows revenue net of publication costs with required membership, line B4 shows it without. The difference is $36,291. This is the improvement in our net budget position due to required membership, if you assume that the only cost imposed by new members is the cost of providing publications to them.
This assumption substantially overestimate the improvement. In addition to requiring publications, members bring other expenses, such as the cost of processing memberships, employees' time dealing with members, etc. I think a conservative estimate is that half of the $36,291 gain would be consumed in such costs, giving a net budgetary gain (increase in revenue minus increase in expenses) from required membership of about $18,000. That is roughly 2% of the 1994 budget--a result which casts some doubt on the claim that required membership was imposed for financial reasons.
So far, I have assumed that the new members brought in by required membership buy the same mix of memberships as existing members. Since they are people who would not join without required membership, I would expect them to be less willing to pay money than the average of the current membership. If so, a larger fraction of them will be family members, which produce less net gain for the Corporation than the other classes, reducing the figure even farther. I have not taken account of this in my calculations; if I did, the Board's claim would look even worse.
What about the budgetary gain from the alternative policy--increasing membership fees by 100% instead of the amount in the budget? I am lazy and most of our members are sustaining members, so I did the calculation by comparing a 40% increase in rates to a 100% increase, without trying to break it down by membership class. The calculation is fairly simple:
Membership revenue with no price hike= $652,663/1.4 = $466,188
Membership revenue with 100% price hike= 2x$466,188 = $932,376
Improvement in net budget position (I am assuming at this point that the number of members is the same whichever price increase we adopt):
$932,376-$652,663= $279,713
So we have two ways of balancing the budget which the Board, according to its letter, considered as alternatives. One appears to improve the net situation by about $18,000, one by about $280,000.
If these numbers are anywhere close to correct, then the claim in the Board letter (and various other statements from the Board) that we had to impose required membership because the alternative was increasing membership rates by 100% is a lie, an invented fact designed to scare people (whether Board members at the meeting or Society members reading the letter) into accepting a change that many of them disapproved of. The real alternatives, on these figures, were 40% with required membership or about 44% without required membership. Either the author of that letter did not bother to calculate the real consequences of the alternatives but simply made them up, or he calculated them and deliberately misrepresented them.
Can we generate numbers more consistent with the Board's statement by assuming, perhaps more realistically, that the 100% option decreases membership--as was suggested in the Board's letter? The difficulty in doing this is that decreasing membership reduces expenses as well as income; the result is that you need a very large decrease in membership to make the numbers come out right. How large?
Again, let us start by assuming that the only expense members impose is the cost of providing them with publications. Each member that we assume drops out due to the price increase takes with him:
Average membership revenue at 100% increase
= $932,376/23,000 members = $40.53 of membership revenue
Average publication cost = $11.27 of membership cost
Net loss per member: $29.26
Number of members you have to assume lost to get our initial figure of a $280,000 gain from doubling membership rates down to $18,000
=($280,000-$18,000)/$29.26= 8,954 = 39% of the membership
So even if you assume that members impose no costs other than the cost of providing them with publications, you have to assume that the price increase would cost us almost forty percent of our members in order to make the numbers justify what the Board letter asserted. If, to be a little more realistic, you assume that a third of the Corporation's other expenses are variable instead of fixed, increasing or decreasing in proportion with the number of members, you have to assume a loss of about 50% of the membership.
To summarize: My calculations suggest that, on any believable assumptions about the alternatives, a 100% price increase would leave us with a much larger budget surplus than 40% + requiring membership. I conclude that the Board letter deliberately misled the membership and that it is quite likely that someone deliberately misled the other Board members at the Board meeting.
Suggestions:
Perhaps you still believe that you have done nothing wrong, aside from presenting your arguments less well than you might. If that is the case, I cannot reasonably ask you to offer the membership either a change in your actions or an apology. If you believe that, and intend to act accordingly, I think it likely that the SCA Inc. is finished, and will be replaced over the next few years by one or more successor organizations.
In the rest of these comments I will assume, perhaps optimistically, that that is not the case. I will assume that a majority of you now realize that, however good your intentions, you have in fact behaved very badly. My reasons for believing that are detailed in the attached open letter.
If you have acted badly, the first step is to undo that action. The increase in the price of membership, whether a correct decision or not, was at least defensible as an action made necessary by a budgetary emergency. The imposition of required membership was not. The Board ought immediately to reverse that decision and, if it can get the necessary unanimous vote, reverse the associated change in the bylaws.
If you still believe that required membership is a good idea, you should publish your reasons and call for discussion. After making a serious effort to learn the views of the membership and consider their arguments, you should decide whether you still favor required membership and, if you do, whether that position is now supported by the bulk of the membership. If it is, you should do it; if it is not, you should not.
What you should do about the price increase depends on how bad the arguments by which you were persuaded that it was essential were. On the evidence I have seen, they could be completely bogus--an attempt to stampede the Board into voting increased prices in order to fund a bigger Corporation, when the present level of expenditure was adequate to the Corporation's needs. Or they could be essentially correct. That is something you will have to decide--hopefully, this time, with the help of the membership.
If the increase is necessary to fund the Corporation's immediate obligations, you should announce that it will be maintained for a year but that, failing further Board action, the price will go back down to its previous level thereafter. During that year you, or your successors, should make a serious effort to determine whether the increase is necessary in the long run, or whether it can be avoided by alternatives such as decentralization or contracting out.
So far as the decision to cancel the present minutes is concerned, no serious justification for that has so far been offered. Assuming that none is forthcoming, you should restore them immediately, under a different name, as well as producing the "official minutes" that your attorney advises you are needed. The issue covering the January meeting should be a best seller.
I do not believe the policies I have described are an adequate response to the situation you have created; in my view they ought to be accompanied by the resignation of the Board members most responsible. Whether you are willing to do that I do not know. I think the policies described are the minimum that has any hope of persuading the rest of us that you realize you have done something wrong and are prepared to try to correct it. Whether that is your desire I do not know; I fear that it is not.
In Service to the Society, I am
David Friedman
(Cariadoc of the Bow)
309 Mitchell St.
Ithaca, N.Y. 14850
encl: Open Letter
cc: All Board Members