Accountability and Fiscal Responsibility. These are two terms we often hear in discussions of politics. Regardless of one’s political persuasion, a balanced budget and reduced debt are always front and center in our national political discourse. Member-owned private clubs often have the same issue. Legitimately, members, just like voters, often question the finances of their private clubs, and in particular the decision to invest in capital improvements.
Earlier this week, I received a call from a member at a very upscale and well-known club about that club’s plans for major investment and improvements, with a significant amount of debt funding proposed. Among the things he shared were that the club had recently modified the bylaws to allow the board to unilaterally incur significant debt for such improvements without an approving vote of the membership.
At many clubs, board and leadership positions are filled by a slate nominated by a committee often comprised of former club leaders. Membership votes either don’t happen or are nothing more than a formality. Rarely are there candidates not nominated by the committee, and the “slate” often comes from the “same old crowd”. Frequently, this is the result of most members simply not wanting to be involved as they joined the club to be free of the day to day responsibilities they encounter at home or in the office and seek to use the club exclusively for relaxation and recreation. Consequently, decisions are made and funds invested with little input from the broader membership outside a club’s “inner circle”.
As many clubs have thrived during the COVID era, some have embarked on (often aggressive) improvement plans that may be promoted by an outside consultant, might include pet projects of board members or could have amenities that might be used by only a small portion of the club membership. Since I was once a member of a club that declined any improvements and (probably as a result) now no longer exists, I am generally a proponent of sensible capital improvement plans for clubs. However, as in the case of the club referenced above (and others), many seem overly aggressive, especially those requiring substantial debt financing, incurred with no need for approval from the general membership. As we all know, that debt is considerably more costly today than it was 2 years ago thanks to higher interest rates.
As I wrote in 2015, again in 2022 and then as recently as April, 2023, debt can (and has) become a major problem for some clubs, and has precipitated the financial failure of many. There are various methods to calculate how much debt is “right” for any given club. Some use a debt/equity ratio, others a debt/gross revenue ratio and still others a debt coverage ratio. There are differences from club to club in what line items are included in the calculation. Some clubs include entrance fees in their revenue calculations, even when that is generally not considered operating revenue. Whichever method is chosen, it’s essential that a margin for error be built in. Most experts predict that the post-COVID surge in club membership will eventually (if not sooner) subside and that those clubs that planned projects during the low-interest rate COVID era and then incurred much higher cost of debt could find themselves “in a bunker”. Companies that acquire member-owned clubs are banking on that.
The question I’m addressing today is one of responsibility. In those cases where club boards can unilaterally invest and incur debt on behalf of the club, what is the accountability and what is leadership’s responsibility to the members? The member mentioned above, a former board member at his club, suggested that if the debt became unmanageable the board would simply “throw up their hands”, apologize and assess the membership. Then what happens?
In most cases, at the very least, the membership would be displeased. In a worst case scenario, members would leave the club and the club’s economics would deteriorate further. In those cases, the clubs become targets for acquisition and are often sold. While most certainly there are some clubs more capable than others of shouldering this financial burden, I maintain that no club is “bulletproof”. A more capable club may not be killed by the bullet but it could be injured, through the necessity for higher dues, the need for more members (placing stress on the facilities), or simply the displeasure of the membership which could sour the club’s atmosphere and alter the club’s culture.
Having worked with so many clubs through the years, I’ve observed a wide variety of leadership styles. Those that are successful in leading their clubs both financially and culturally are those who not only demonstrate accountability and fiscal responsibility through transparency, but also avoid the sin of micro-management and take a genuine interest in the thoughts and opinions of the membership with the goal of happy members. They also exhibit confidence in the professional club management they’ve hired to make the day to day operating decisions for the club.
Club leadership is a thankless and time-consuming job. All of us who are club members should appreciate the time and energy commitment these people provide to the club. Like politicians, club leaders should be term-limited, and should represent a broad cross-section of the membership. Like management and staff, club leadership is successful if members are happy. Both leaders and management need to maintain the ability to make the tough decisions required of their positions, while also being accountable and responsible for those decisions. While it can be argued that member votes would stonewall some projects, the board would be free of that total responsibility if things went wrong. Not a bad thing.