United States

Measuring the cost of the dysfunctional private club board

INSIGHT ARTICLE

As a firm with a lot of accountant types in our ranks, we are often called bean counters. While we bring much more to the table than a focus on historical information, we have to admit to spending much time anguishing over something we can never quite put a cost on for our club clients: boardroom dysfunction.

To us, boardroom dysfunction is measured best by a term from the economics field: opportunity cost.

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

Measuring opportunity cost due to such a nightmare, but all too often common, scenario, we reflect on who are the people or groups that are affected by the situation? Who are the stakeholders? For purposes of this discussion we will focus on those closest to the dysfunction: the members and staff.

What is the member share of this opportunity cost? Simply put, members have many choices for the disposable income dollar. They need to know that their club is being well run by those charged with governance. They need to know that they are being listened to, not just heard. The club that cannot understand what members wants, be it improved amenities or different services, because its board cannot make a decision—or makes the wrong one—will undoubtedly lose members and fail 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 cost, and we have the amount with which any given member supports the overall cost of the club operations—whether they use them or not. Losing members is anti-dilutive for club operating costs…fewer members have to spend more on a per capita basis, and the cost per member goes up and affordability goes down.

And what about prospective members? As we spend most of our time in club boardrooms, we are always fascinating when the board of club A asks about the scuttlebutt at club B. This fascination grows as we realize that the issues at club B may only have blown up at a board meeting the previous day. But, in keeping with our 24-hour news cycle, the story has rapidly spread across town and the private club marketplace. With so much focus today on speed of communications and the increased speed of mobile devices, we maintain that Apple has yet to invent a device that moves information faster than the gossip 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 in the market place.

Will prospective members be interested in joining a club or buying into a community that is famous for its boardroom slugfests? We doubt it, so good bye to any joining fee dollars from those prospects and hello to deferred maintenance projects and declining facility conditions—which in turn leads to the proverbial death spiral. For those clubs connected with residential real estate this impact is magnified as lack of interest in club memberships takes its toll on property values. Those board members intent on getting their own way will eventually see members flee to depart the madness.

For those readers who still find the link between boardroom angst and membership economics tenuous, consider this essay: Boardroom Brawls: An Empirical Analysis of Disputes Involving Directors. We can quickly draw the analogy between public companies and their share price and private clubs and the perceived value of their memberships when we read the following passage:

“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.”

So what of our other stakeholder group affected most directly by boardroom strife: employees? When we conduct operational reviews for clubs across the country, one constant theme emerges all too often—club employees are negatively affected by lack of direction, consistency and understanding in their boardroom. Even with the economic challenges of the Great Recession, 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 huge. 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, be they general managers, finance professionals, or golf and restaurant department heads are tight knit, and their constituents are typically 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 and training 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 costs of losing a normal employee are high enough, another study found that the cost of losing an executive is astronomical—up to 213 percent of the employee'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 effect that a high turnover rate has on the effectiveness of the club and the morale of the people in it—people who are charged with delivering lifestyle experiences to club members. The result is another death spiral.

Discord in the boardroom does no one any good. Yes, healthy debate should be encouraged and practiced but the horror stories that emanate from some club boardrooms would put Stephen King to shame. 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 every club and when the board thinks it too costly to make these investments we ask them how they can measure the opportunity cost of boardroom dysfunction when the alternative is priceless—at least according to us bean counters.

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Contact Our Team

Philip Newman
National Private Clubs Practice Leader

800.966.0428
Philip.Newman@rsmus.com