United States

Measuring the cost of the dysfunctional private club board


As a firm comprised largely, albeit not exclusively, of accountants, the professionals at McGladrey are not strangers to being called bean counters. While accountants offer much more than a look at historical information, one topic admittedly leads to much anguish and frustration as it continues to elude a true calculation of cost. That topic: boardroom dysfunction.

For the McGladrey professionals who devote their time serving private clubs, boardroom dysfunction is best measured through the application of a term from economics: opportunity cost.

The New Oxford American Dictionary defines opportunity cost as "the loss of potential gain from other alternatives when one alternative is chosen." With that understanding, one must question the opportunity cost of a board choosing—and it is a choice—a governance model that promotes micro-management over leadership; allows personal agendas to supersede the best interests of the club or community; confuses boardroom conflict with balanced debate; and ignores strategic planning in favor of flavor of the month decision making.

Measuring opportunity cost due to such a nightmarish scenario requires reflection on those whom are impacted (i.e., the stakeholders). The article titled Go beyond equity: Reflecting on the stakeholder perspective of private clubs, which appeared in the February 2013 issue of this newsletter, offered some perspective on assuming a stakeholder view in the private club setting. For purposes of this discussion, the focus will be on those closest to such dysfunction as described above—the members and staff of a club.

What is the member share of this opportunity cost?

Members have many choices in how they spend their disposable income. They deserve to know that their club is run well by those charged with governance. They need to know that they are being listened to, not just heard. A club that fails to understand members wants, whether they be improved amenities or different services, due to its board's being unable to make a decision—or its making the wrong decision—will undoubtedly lose members and find it increasingly challenging to recruit replacements.

Quantifying the immediate economic impact of losing a member is a relatively straightforward exercise. Consider the revenue received from a member, remove any direct costs, such as food and beverage costs, and the amount left is what any given member contributes to support the overall cost of the club operations—whether they use them or not. Losing members is anti-dilutive for club operating costs as fewer members have to spend more on a per capita basis (i.e., the cost per member increases while affordability decreases).

What about the opportunity cost for prospective members?

Amazement often develops when standing in boardrooms as board members of club A begin inquiring and discussing scuttlebutt taking place at club B. This amazement often grows when it becomes clear that the issues at club B have often only blown up at a board meeting the previous day. Nonetheless, in keeping with the spirit of 24-hour a day news cycles, the story has rapidly spread across town and through the private club marketplace.

With so much attention today on the speed of communications and incessant access through mobile devices, neither smart phone, nor tablet of any label can yet move information faster than the gossip that flows from the boardroom table to the grill room bar. Board members need to be reminded at every meeting that loose talk can put their club at a competitive disadvantage.

After all prospective members are less likely to be interested in joining a club or buying into a community that is famous, or perhaps infamous, for its boardroom slugfests. That means saying goodbye to joining fee dollars from prospects and hello to deferred maintenance projects and declining facility conditions—the proverbial death spiral. For those clubs connected with residential real estate, the impact is magnified as lack of interest in club memberships takes its toll on property values. Those board members' intent on having it their way can be happy that, eventually, they will—as members flee to depart the madness.

For those who still find the link between boardroom angst and membership economics tenuous, consider this academic research outlined in Boardroom Brawls: An Empirical Analysis of Disputes Involving Directors. It is not much of stretch to make a comparison between public companies and their share price and private clubs and the perceived value of their memberships. Consider the following excerpt:

We examine the nature, determinants and consequences of boardroom disputes…About two-thirds of the conflicts pertain to board functioning or agency problems, while most of the remaining cases involve disagreements over corporate strategy or financial policy…Stock prices experience large and significant declines upon the revelation of boardroom disputes. Finally, dispute firms exhibit poor operating and stock price performance in the years surrounding a dispute episode, and they experience a greater incidence of post-dispute shareholder class-action lawsuits, proxy contests, asset divestitures and stock market de-listings compared to control firms.

Which group of stakeholders is most impacted by boardroom strife?

Through the provision of operational reviews for private clubs across the country, one consistent theme emerges all too often. Employees are negatively impacted by lack of direction, consistency and understanding in their boardroom.

Even with the economic challenges of recent years, employees will choose to leave, just like members, when they feel that the value is just not there. When employees leave, the costs to any organization are enormous. The club loses its investment in staff training; it loses the employees institutional knowledge of how to satisfy members; and it loses the public relations war.

Employees who leave in the face of boardroom abuse will often talk negatively about their former employer. Management communities in the private club world, whether they are general managers, finance professionals or golf and restaurant department heads, are tight knit and their constituents typically being very loyal to each other. These communities, like most, will look out for their own and warn against taking jobs at certain clubs because of the irregular board dynamics. This will only increase the cost to clubs of hiring replacements. Certainly for senior management positions, clubs will find it even more difficult to retain or attract top leaders.

The U.S. Department of Labor has estimated the cost associated with the loss of a trained employee as upward of 30 percent of the employee's salary and benefits combined. While the cost of losing a typical employee is high enough, another study found that the cost of losing an executive is astronomical—up to 213 percent of the executive's salary. Clearly this can produce a seriously adverse impact to a club's bottom line. Even worse than the financial impact is the negative affect that a high turnover rate has on the effectiveness of the club and the morale of the people in it—the people who are charged with delivering lifestyle experiences to club members. And so begins another death spiral perhaps.

In the final issue of this newsletter in 2012, twelve wishes for private clubs in 2013 were shared. The final, but arguably most important wish was that peace and goodwill be felt by all board members.

Discord in the boardroom does not do anyone any good. Yes, healthy debate should be encouraged and practiced but the horror stories that emanate from some boardrooms would put Stephen King to shame. Club management should help board members help themselves by routinely investing in governance training, orientation sessions, strategic planning and governance audits. But remember, just like operations audits, a club cannot audit anything unless established standards exist. It is time to reflect on whether these standards for board governance exist within the club. And, when the board thinks it too costly to make these investments, they should be asked how they can measure the opportunity cost of boardroom dysfunction when the alternative is priceless—at least according to the bean counters.