Recently, I attended a local chapter meeting of the National Capital Club Managers Association and heard a presentation by Ray Cronin of Club Benchmarking on fact-based governance. One of his premises is that opinions do not belong in the boardroom. The directors have a responsibility to understand and argue the facts. To state that food costs are too high or that we spend too little on the golf course brings very little to the discussion. How much is too much or too little? Any statement that starts with “in my opinion” is suspect. As I travel around the country and visit with boards and managers, I see this all the time. Opinions run rampant and, as a result, the board deals with the minutia as opposed to the important issues for the club.
This often repeated issue relates to the decision-making process in a club. In spite of attempts by management to provide sufficient facts and structure to the decision-making process, many clubs make decisions based on anecdotal evidence of what is happening in the club or, even worse, at the club down the street. Although club managers have made tremendous strides in running a club like a business, making decisions based on fact rather than opinion or emotion is not always the norm. Anyone who has been a member of a club board certainly has an understanding of and appreciation for the dynamics in the boardroom. As is so often the case in the larger world, the most persuasive person or loudest argument is not necessarily the right one.
Operating the Boardroom like a Business Over the last twenty years, clubs have taken great strides toward operating as a business. In well-operated clubs, professional managers run the club and the board of directors provides the strategic direction. However, we know that this is not the case with all clubs. Particularly due to the recession’s impact, many boards started taking a more hands-on role in the club operations, which generally, is not the best course of action. The members are the lifeblood of any club. They elect a board of directors to oversee the operations and direction of the club. While many board members are very successful in their own careers, the operation of a club is a different animal all together. It is critical that all board members understand their role.
In endeavors that matter most—those associated with life and death, such as flying a commercial airplane—decisions are made in a standardized, fact-based manner, not based on opinion. Pilots for United or American don’t get to convince each other in the cockpit which items will be checked pre-flight and in which order. The confident, charismatic pilot does not get to convince the introverted co-pilot to change the pre-flight checklist. From the moment the pilots enter the cockpit, they are locked into a standardized, data driven routine governed by the airline’s chief pilot that is aimed at assuring no mistakes are made. Every pilot and co-pilot go through the same process whether they agree with it or not, independent of their own view and feelings.
In the larger world, as individuals, we are all free to make decisions in a manner consistent with our own personality. We are not bound to make decisions in any particular manner when acting in our own self-interest. Yet what manner is required when we step into a fiduciary role? A club’s board is the central decision- making body of the club. Members elect the board and expect the board to represent and act in the club’s best interest as a whole, not a particular segment. Club board members are also fiduciaries. Life and death may not be at stake (but you cannot always tell that from the passion brought to some issues), however, there is still an expectation that decisions will be made in an objective manner with the necessary diligence. As a fiduciary in any walk of life, there is an obligation on the part of the fiduciary (board member) and an expectation on the trusting party (membership at large) that decisions will be made in an educated manner based on thought and diligence and that the right decision will be made based on all the facts available.
The Board’s Fiduciary Duties A board member also has a potential liability if he or she fails to uphold these duties. According to the Midwest Center for Nonprofit Leadership, from a legal perspective, a nonprofit board and its members individually have three fundamental fiduciary duties: duty of care, duty of loyalty and duty of obedience.
Duty of Care
The duty of care principle means that the board member actively participates, attends board meetings, is educated on the industry, provides strategic direction and oversees management. Some clubs take this to an extreme and the board attempts to micromanage management. This is not the responsibility of the board. Its responsibility is to provide the strategic oversight to ensure the club’s future success. Accordingly, board members are required to educate themselves and make decisions based on facts and not just opinion and emotion.
Duty of Loyalty
The duty of loyalty requires the board member to operate in the best interest of the club and not his or her personal agenda. Clubs should have and enforce a conflict of interest policy to ensure that board members (or their friends and families) do not financially benefit from their position on the board. Failure to follow these provisions can make the board member, and the board as a whole, personally liable for such decisions.
Duty of Obedience
The duty of obedience requires the board to know the applicable state and federal laws. In addition, for a tax-exempt entity, this also entails the regulations and guidance issued by the Internal Revenue Service. It requires knowledge of the operating documents (by-laws, rules, board manuals) and an understanding of the difference between the terms “may” and “must” contained in those documents. Finally, the board cannot act outside the scope of the organization’s legal documents.
Sharing the Same Goal At the board level in a club, decisions are made by a group of people. The individuals in the group come to the table with a diverse set of personalities and experiences. Some are charismatic, some are introverted. Some are penny-wise and pound-wise, others are penny-foolish and pound-foolish. But all are charged with a common duty. Each board member is charged with acting with diligence on behalf of the membership of the club. Those meeting the standards of a fiduciary cannot make decisions based solely on their own emotions or opinions. Decisions are expected to be made based on data and fact. Once a decision is made, it must be supported by the whole board, regardless of the disagreements leading up to it. Nothing is more damaging to a club than to have a board member undercut a decision made by the board as a whole. Basing controversial decisions on facts makes it easier to support a decision a board member once opposed.
I may have scared off half the readers from serving on the board of a club. In fact, because of the time commitment and issues raised above, many clubs are finding it more difficult to get members to serve. However, that is one of the most important responsibilities of the board: to groom those individuals coming after them. The good news is that clubs that have solid governance policies and an educated and committed board generally are the most successful. Given the importance of club governance, the National Club Association (NCA), in conjunction with the NCA Foundation, provides many resources to assist club boards. Among these are: The Board Toolkit: Club Leadership Essentials and Club Governance Guidelines: A Path to Organizational Excellence. Both should be required tools for any board.
Kevin F. Reilly is a Partner at PBMares, LLP. His areas of practice include hospitality consulting including clubs, hotels and restaurants, real estate consulting, individual and business tax planning and preparation, and business advisory services. Reilly is a director of NCA and serves on the Finance/Audit Committee and the Government Relations Committee. He also serves as the secretary/treasurer of the NCA Foundation. He can be reached at [email protected].