If you’ve heard me speak before, you know I stress that club boards should read their bylaws annually to be sure they know and understand what the bylaws say, identify provisions that the club is not following or wants to modify, ensure the bylaws do not include items that more appropriately belong in their rules, take note of the “shalls” and “mays,” and incorporate/appropriate best practices.
Annually reviewing the club’s bylaws is good board discipline—and is more important today than ever. I review and update bylaws for clubs around the country, and what I find never ceases to amaze me.
1. Bylaws must not conflict with state statues.
Nonprofit corporations (including private clubs) formed under the local state’s laws are subject to that state’s nonprofit statutes. The statutes will always trump the bylaws. Examples of statutory provisions relating to club governance and internal affairs might include: board of directors’ rights, duties and standards of conduct; members’ meeting and voting rights; sale of club assets; bylaw amendment requirements; member discipline standards; and member inspection rights. The club’s bylaws must be consistent with the statutes, but may also include additional provisions that are not required by the statute, so long as they do not contravene the statute. For example, some states statutes say, “unless the bylaws provide otherwise, _____.” In that case, the club still has latitude to provide its own standard. If the bylaws do not provide an alternative standard, the standard in the statute will apply.
Also, clubs should be careful to avoid making costly mistakes. For example, a board-proposed bylaw amendment was passed by the membership, but was in direct contravention of that state’s statutes. This created potential liability for the club board, which acted without legal counsel and created unnecessary expenses to undo the damage.
2. Boards must adhere to the club’s governing documents.
When the club is a nonprofit corporation, the board of directors has a legal obligation to follow and enforce its governing documents. Simply put, the board needs to follow its documents or change those documents, but the board cannot violate the club’s documents. Some boards are surprised to learn that D&O policies generally exclude coverage for a board’s acts in violation of the entity’s governing documents. So, the club and the board each have a vested interest in being sure that the bylaws in place are bylaws the club can and will enforce.
3. Boards face increased scrutiny about adherence to governing documents.
During the recent economic challenges, some clubs have found members more interested in “double-checking” to be sure the club is following all corporate formalities and following the club’s governing documents. In prior years, you might not have received any requests for copies of board minutes, evidence of proper repayment procedures for the resigned list, etc.
Under the circumstances, many clubs have created a committee focused on core governance issues. This committee can initiate drafting, reviewing and updating documents, such as governance guidelines, bylaws, conflict of interest statements and ethics codes to ensure the provisions in these documents comply with laws, regulations and best practices. A club should carefully select this committee’s membership, especially if the club does not have many of these governance documents already in place.
4. Bylaws should reflect best practices.
Another reason to update your bylaws now is to adopt best practices that make sense for your club. The number of clubs that have not adopted the best practices that are specifically addressed on the Form 990 surprises me. See the new NCA survey findings on page 14 for more on this and other best practices that can help keep the club out of trouble.
Operational improvements may be available as well. I recently updated bylaws for a club that has many international members. Their bylaws required notice to members to be mailed by certified mail, and it said the club would mail the club’s annual financial statements to the members! Think about the postage expense, staff time and returned mail. That state’s statute allowed notice by e-mail, but the bylaws had a higher standard. That club could transition to notice by e-mail and efficiently adopt security protocols for the member-only website so that sensitive content such as club financial information could be posted there.
5. Clubs should adapt to changing member needs.
As times change, so do member needs. Stringent, outdated provisions in club bylaws can make it more difficult for clubs to adapt. For example, some clubs are able to modify their refund rights and some clubs are not. In these economic times, some clubs find that possibility, among others, worth considering. As part of the club’s analysis, it should consider exactly what documents govern these rights. Is it only the bylaws, or is there a membership agreement that also must be enforced? Does the club follow the majority rule that the bylaws can be amended to change any provision so long as the amendments are properly adopted, or does the state have a statutory provision that specifically addresses changes to refund or transfer rights requiring consent from the affected existing member? Be sure to understand your obligations and options before making changes.
Before You Update Your Bylaws…
Some clubs find it challenging to drum up member interest sufficient for any vote to pass and particularly to amend the bylaws. In that case, the club might need to make a one-time push to obtain the required votes to lower the quorum and voting hurdles (but not lower than statutory requirements). Some clubs think the members will resist, or that very strong member support should be required before any significant decision can be made. Let me explain why that argument should not carry the day in many cases. When a member vote of a certain percentage is required and some members don’t vote, their lack of a vote is essentially counted as a vote “no.” For example, if a 2/3-majority vote of all 300 members is required, 199 members could attend the meeting, read the materials, ask their questions and unanimously vote “yes.” The other 101 non-participating members could receive the materials, throw them in the trash, not attend the meeting and not vote. The 101 non-participating members’ vote (lack of a vote is a vote “no”) cancels out the informed unanimous vote of the participating 199 members.
If you lower a voting hurdle, you are not saying that a vocal minority can overrule the will of the majority. You are saying that the majority of those who care enough to participate should not be thwarted by the lack of participation of those who do not care enough to participate.
Quorum requirements as low as 10 percent of voting members apply in some states. Clubs generally should have higher requirements for quorums and voting, but not so high that important decisions are delayed or the participating members can never act.
Because the board has a duty to enforce the club’s bylaws, clubs should conduct an annual board orientation— at least for the new members, but preferably for all board members. Before board orientation, the board should read the club’s bylaws. I recommend that general mangers also read the bylaws with two colored highlighters, using one color to highlight all the provisions that require mandatory action. These are recognized by words such as shall, will, must, are, and is. Then, use the other color to highlight what is optional or in the board’s discretion. Those provisions include words such as may, might, and board discretion. This exercise identifies areas of obligation and discretion, helps make the board aware of these distinctions and the bylaw’s requirements, and can highlight bylaw provisions that should be updated.
Experienced club counsel should review the bylaws, make certain they are current, and advise the club on any changes in the law that may require the
club to act or update its documents or policies.
Robyn Nordin Stowell is a partner in the law firm Stinson Morrison Hecker LLP in Phoenix, Arizona. Robyn can be reached at (602) 212-8682 or by e-mail at [email protected]. This article is for informational purposes and is not legal advice.