2020 Club Benchmarking, All Rights Reserved.

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Dear Fellow Club Leaders,

The camaraderie and traditions of the private club world are near and dear to our hearts and we

feel privileged to be involved in work with the management and volunteer leadership of clubs

aimed at ensuring health and longevity for such a great industry. While our professional careers

were rewarding, little has been more satisfying than the opportunity to engage with and support

you in your efforts to advance and improve your own clubs.

Information sharing was the foundation for our first collaboration in 2007, and with the help of

dozens of general managers, club officers and club industry professionals, the first Club

Governance Survey was launched in 2017. Their input and support has been invaluable in our

efforts to develop, refine and distribute the survey over the last several years.

Earlier this year, we joined the team at Club Benchmarking and we look forward to working with

them to continue the evolution of this important research. Please don’t hesitate to reach out if you

have questions about the contents of this whitepaper or about implementing a board

self-evaluation for your club.

Best Regards,

Joe Abely

Dave Duval

Executive Consultant – Club Benchmarking

Executive Consultant – Club Benchmarking

jabely@clubbenchmarking.com

dduval@clubbenchmarking.com

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2020 Governance Survey Report:

Best Practices in Club Governance

Merriam-Webster defines a best practice as “a procedure that has been shown by research and experience to produce optimal results and that is established or proposed as a standard suitable for widespread adoption.”

The board of a private club is a fiduciary body charged with the same duties and responsibility to adhere to best practices as any other. Unfortunately, efforts to identify, document, and disseminate best practices specific to the needs of club boards have been slow to permeate the industry, most likely due to its decentralized nature and the frequency of board and management turnover. The focus of this whitepaper is on research designed to evaluate the understanding of and alignment around identified best practices in club governance.

Background

Co-authors Joe Abely and Dave Duval met in 2007 when both were in line to assume the Treasurer role after serving several years on the boards of their respective country clubs. Their careers had also followed a common path of CPA, CFO, COO, CEO, Partner and Board Member of multiple corporate and tax-exempt entities. Duval and Abely eventually become club presidents and each served on their club boards for a total of 12 years. Their professional experiences have served them well in their volunteer leadership roles and provided a unique perspective on significant and problematic differences in the way clubs were governed.

Most notably, they observed that clubs were operating in isolation relative to other industries. Because information about club-specific best practices was not widely available and the practice of sharing ideas and financial information was not well-established, many boards were inclined to fill the void with home-grown practices. Duval and Abely knew there was room for improvement in their own clubs and sought insight from other club leaders to begin identifying what “better” might be.

Believing it was possible that they were not alone in their frustration, Duval and Abely took a chance and invited the Treasurers, General Managers and Controllers of a dozen of the strongest clubs in the suburbs of Boston to meet and share their practices. Nearly everyone they invited to that first

gathering attended and while the faces have changed, interest remains keen and the group continues to meet to this day.

Club Governance Survey

The authors worked with the group and other professional advisors to refine the concepts shared in those meetings into a defined set of Best Practices for club governance. The information gathered serves as the foundation for an annual industry survey designed to evaluate the understanding of and alignment around identified best practices in club governance. The Club Governance Survey has two distinct goals:

• The survey is used to gather information and compile survey findings in an annual report which advances the industry’s awareness and understanding of best practices for club governance.

• The survey also functions as an effective self-evaluation tool for individual club boards. It is designed to provoke thought, fuel productive discussion and promote widespread adoption of governance best practices.

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What is Governance?

Governance is a system of interrelated activities that consistently drive an organization toward a desired result – its mission – in an ethical manner. While an exact practical definition for all settings is elusive, we can define key characteristics. Dison Okumu, an expert in strategic planning and CEO for the Institute of Corporate Governance in Uganda, describes the four cornerstones of governance as People, Purpose, Process and Performance: “People come first as they are involved in every aspect of the system. People determine a purpose, develop a consistent process, and evaluate their

performance outcomes and impacts.”

While the club industry is considered by many to be unique, much can be learned by studying governance in other industries. An article posted on BoardEffect.com in 2018 provided this succinct definition: “Governance is the practice of the board of directors coming together to make decisions about the direction of the company. Duties such as oversight, strategic planning, decision-making and financial planning fall under governance activities.”

Governance consultant Barry Bader offers seven guiding questions that can be used to determine whether an issue falls under the heading of governance and is thus the board’s responsibility:

1. Is it big?

2. Is it about the future? 3. Is it core to the mission?

4. Is a high-level policy decision needed to resolve a situation? 5. Is a red flag flying?

6. Is a watchdog watching?

7. Does the CEO want and need the board’s support?

Every variation of board governance – corporate, charitable non-profit, clubs, associations, etc. – is framed by a common set of principles. First and foremost, board members must understand the entity they are serving and the industry in which it operates. They should avoid involvement in day-to-day operations and invest time with the CEO, the board’s only employee, to establish trust and understand what that individual is trying to accomplish. Their obligation is to represent the entity as a whole while balancing the needs of various stakeholders.

Volunteer leaders must understand that their commitment to serve on the board of a private club carries the same legal responsibility as would board service to any other entity. The board member has a fiduciary duty to act in the best interest of the club and its stakeholders, which includes the duty of care (i.e. commitment of time, regular attendance and being informed and prepared) and the duty of loyalty (i.e. acting in good faith, avoiding conflicts of interest and seeking independent advice.)

Lessons Learned

While numerous associations exist to provide board-specific guidance and education in other industries, such resources have been slow to break through barriers in the club industry.

Understandably, because the club industry is not a board member’s primary world, they would likely be unaware of relevant resources unless management brought them to their attention. As a result, club boards are often “self-taught” and disinclined to question longstanding practices unique to their club but well outside the definition of best practices. Leadership turnover presents another obstacle in an industry where short board terms and manager tenures are common. Ironically, the latter is often related to difficulties in implementing long-term plans amidst inadequate or ineffective succession planning and board training.

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The authors were not immune to the challenges noted above. Their path from student to teacher has been paved with “lessons learned” through experience, research and guidance provided by subject matter experts along the way. Those lessons, outlined here, helped to define best practices for club governance. The concepts are probed in various ways in the Club Governance Survey in order to provoke thought and fuel discussion in the boardroom.

Lessons in Operating Finance:

• Dues are the club’s highest margin operating revenue source.

• F&B is an amenity not a profit center.

• The capital ledger is strategic. The operating ledger is tactical.

Lessons in Capital Finance:

• A club can never have too much capital. The minimum target for Net Available Capital (capital available for repair and replacement of existing assets, debt service and funding reserves for future capital projects) is the equivalent of 18% of total operating revenue according to Club Benchmarking analysis of industry data.

• Debt is unforgiving. If not used judiciously in the context of a long-term funded plan, it is the #1 cause of club failures.

• Clubs that reduce initiation and capital fees, critical sources of capital, have a difficult time increasing them again. These sources of capital must be replaced.

Lessons in Membership:

1. You can’t cut your way to success. Under-funding member-facing services and amenities diminishes the member experience.

2. Clubs average 5-7% attrition each year. Who will your members be in 10 years? 3. Communicate with members often, in writing and in person.

4. The formula for member satisfaction is a combination of state-of-the-art amenities and great quality and service.

Lessons in Strategic Governance:

• The president should develop an annual agenda for board and committees.

• Succession planning for boards, officers, committees and management is critical.

• Respect the line between board and management.

• Time is precious, use it wisely.

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In the absence of industry-specific training, club boards often overlook critical warning signs of impending financial difficulty. Club leaders would be well-served to consider the following red-flags carefully and seek professional guidance and education if there is uncertainty about whether a particular point of concern is relevant for their club.

Eight Warning Signs

1. Declining Full Member Equivalents.

2. Dues revenue less than 50% of total operating revenue.

3. Capital base decreasing over time (depreciation exceeding capital expenditures). 4. Net worth decreasing over time.

5. Capital levies less than annual depreciation and debt service. 6. Total debt greater than annual dues revenue

7. Debt amortization periods of more than 10 years. 8. Multiple occurrences of debt refinancing.

Club Governance Survey: The 2020 Report

Analysis of this year’s survey is based on a total of 827 responses from 452 club managers and 375 board members. The survey questions were worded such that a “yes” response generally indicated successful adoption of a recognized best practice and a “no” response generally highlighted an opportunity for improvement. A response of "not sure" indicated some ambiguity, either individually or across the organization, while "in process" indicated an issue or area currently under development. Responses from managers and board members were tracked separately so differences in perspective between the two groups could be studied.

It is also important to note that several questions are drawn from supplemental questions on IRS Form 990 and, as such, a “no” answer would signal potential issues for those that file 990s.

Specific definitions for certain terms such as “long-term financial plan” (as in the question “Does the club have a long-term financial plan?”) were intentionally not provided. Follow-on questions were used to add context and to help respondents identify potential weaknesses at his/her club. Results of annual industry surveys and those conducted with individual club boards since 2017 reveal some obvious definitional issues in the club industry. When boards are presented with samples of specific documents such as a strategic plan or when additional contextual information is provided, affirmative responses often change to “no” or “not sure.” Such ambiguity points to the need for ongoing club leader education to introduce common industry terminology.

The survey’s value as a self-evaluation tool for individual club boards is evident in comments offered by this year’s participants.

• “This is so fabulous to answer and see really what is complete and what is outstanding.” • “Great survey! I am actually am going to provide this survey to the incoming President as a

checklist of items to address.”

• “Thank you for the great, thought provoking initiative!”

• “Thank you very much for putting this together. VERY interested in the outcomes.”

• “Even just answering these questions leads to better governance, especially when you come across a question and can say “Aha - great question, better think about instituting this.” • “Well done, using as Board education to raise awareness of Board member responsibilities.”

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Critical Questions

The survey posed approximately 100 questions, all relevant to a club and to board-governed entities in general. While all the questions are important, the focus of this analysis is on a subset of 14 that relate most directly to a club’s financial performance and the sustainability of its business model.

1. Do you have a written strategic plan?

2. Does the strategic plan include a long-term financial plan?

3. Does the club have an effective nominating process for Board Members and Officers? 4. Is there appropriate succession planning for Board Members and Officers?

5. Does your nominating process actively seek to avoid contested elections? 6. Does your club have an annual orientation program for Board members?

7. What percentage of time is spent on strategy/balance sheet as compared to operations? 8. Does the club maintain a long-term financial plan for all funds?

9. Is your club debt-free?

10. If not debt-free, is your total debt balance less than your total annual dues revenue? 11. Was the original loan amortization period on any debt not more than 10 years? 12. Does the long-term plan reflect expected capital spending for the next 5-10 years? 13. Is the plan funded?

14. Is the club current on capital replacement spending (avoiding deferred spending)?

For the questions listed above, answers on either end of the spectrum (Yes or No/Not Sure) are of particular interest and have the greatest potential to impact the financial position of a club.

To test our theory that adherence to recognized best practices in governance produces contributes to financial health, we correlated answers to the 14 questions from either end of the spectrum (yes and no/not sure) with available financial data. Many clubs with predominantly affirmative answers were generally generating sufficient capital levies to fund both depreciation and debt service and were experiencing steady to increasing Net Property, Plant and Equipment and increasing Net Worth Over Time, two critical Club Benchmarking metrics indicative of financial health and sustainability. Clubs with primarily “no” answers often had weaker financial results. Participants responding in the negative to one or more of the 14 key questions would benefit from a thorough benchmark analysis of the club’s balance sheet.

Analysis of the 2020 Club Governance Survey revealed many instances of clubs with multiple board members responding and providing different answers for key questions, as well as numerous responses that did not reflect the club’s reality as evidenced by available financial data. In the same light, board members answering “not sure” to key questions suggests the need for increased

education in keeping with their fiduciary Duty of Care. Governance reviews and annual orientations are necessary to avoid knowledge gaps created by frequent board turnover.

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Instances where managers and board members disagreed on key responses are equally concerning and call for further investigation. In order to do his or her job effectively, the manager must have full knowledge of the club, including finances, so a “not sure” answer from a manager may be a red flag. In addition, it should be noted that the manager bears responsibility for ensuring that the board receives continuous education on all relevant matters, including collaboration with subject-matter experts from outside the club when necessary.

Survey Findings & Observations

1. Do you have a written strategic plan?

More than half of all survey respondents (55%) responded “yes.” Another 19% reported that the club’s strategic plan was “in process” and 26% reported “no” or “not sure.” Of those responding “yes,” less than 50% indicated that the membership was supportive of the plan. Communication with membership increases transparency and is instrumental in garnering support for long-range plans.

2. Does your strategic plan include a Long-Term Financial Plan?

Slightly more than half of all respondents (51%) reported “yes,” with another 23% reporting that the long-term financial plan was “in process” and 26% reporting “no” or “not sure.” The authors believe clubs should have funded strategic plans covering multiple years, preferably in rolling 10-year periods. A long-term financial plan provides focus and clarity of goals for boards, management and

membership. It also helps boards focus on executing a plan instead of focusing on projects. Fund plans, not projects.

3. Does the club have an effective nominating process for Board Members and Officers?

A significant majority (80%) of respondents felt that there was an effective nominating process for Board Members and Officers. Approximately 15% responded “no” or “not sure.”

4. Is there appropriate succession planning for Board Members and Officers?

While 55% of all respondents reported “yes,” another 10% responded “in process” and 35% reported “no” or “not sure.” Of the 295 respondents that answered “no” or “not sure” about appropriate

succession planning for board members and officers, 56% also reported that their club is not current on capital maintenance spending in response to question 14.

The nominating process of a club should encompass needs going out several years. While you may be acting on a current year’s slate, planning ahead for the next four to five years gives a club an opportunity to be proactive about getting the right people with the necessary skillsets into the queue.

Observation: Based on survey results, board members appear to less satisfied than club managers with the succession planning for board openings and officer roles.

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CHART 1 (Succession Planning for Board Members)

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5. Does your nominating process actively seek to avoid contested elections?

While 60% of respondents said their club’s nominating process is designed to avoid contested elections, 33% said either their process is not designed to avoid contested elections or that they are “in process” with a change. Another 7% were not sure.

Contested elections can be problematic and present challenges in a number of key areas, namely succession planning, board harmony, integration of needed skill sets and consistent implementation of long-term plans. With only 60% of respondents reporting their clubs actively avoid contested elections, this is an area for widespread improvement.

6. Does your club have an annual orientation program for Board members?

Among all respondents, 59% reported that their clubs have an annual board orientation program. Another 9% said their club is “in process” and 32% reported “no” or “not sure.”

The board orientation process should be thorough, covering considerably more than just basic legal responsibilities and a tour of the facilities. It is difficult to be an effective board member without a good understanding of the club industry, your club’s finances and any plans currently in place.

CHART 3

7. What percentage of its time is spent on strategy/balance sheet versus operations?

More than 65% of respondents reported that the board spends less than half their time on strategic issues, specifically the balance sheet and capital spending, while 42% spend less than 30%.

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(Question 7 cont.)

Rehashing recent operational results wastes valuable time yet many clubs do it “because that’s the way it has always been done.” We believe that 80%+ of the board’s time should be spent on strategic issues. Assuming a robust budget process, timely reporting of results, and operations performing at or above the full year plan, the Board should be focused on strategic issues and rely on management to oversee the operation.

Only 30% of respondents indicated that their board sets annual goals and objectives for themselves. Doing so would help a board become more strategic.

Debt and Capital Funding

8. Does the club maintain a long-term financial plan for all funds?

Just more than half of all respondents (54%) responded “yes.” Another 12% reported “in process” and 34% reported “no” or “not sure.” Given the capital-intensive nature of clubs coupled by the increasing use of debt in the industry, it is imperative that clubs have a long-term financial plan. Such as plan should reflect all future anticipated capital expenditures (replacements and enhancements) and a strategy for funding those over time. Ideally, these investments are funded through a projected combination of operating surplus, initiation fee income, capital assessments and prudent use of debt. In addition to disparate responses between board members and club managers, the number of “not sure” responses by board members (14.1%) is noteworthy. A long-term financial plan is fundamental to a club’s growth and vitality and it is a key responsibility of the board.

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9. Is your club debt-free?

Only 23% of respondents reported their club was free of debt. For many clubs, the judicious use of debt is an important element of the funded long-term financial plan. Unfortunately, this is not the case for all clubs. Debt used liberally can become unforgiving and thwart future efforts.

10. If not debt-free, is your total debt balance less than your total annual dues revenue? Of those respondents reporting debt, 59% stated that the club’s debt balance is less than annual dues revenue (a “yes” response), 35% reported that the debt balance was greater than annual dues (a “no” response) and 6% were not sure.

The “not sure” responses were 9.49% for board members and 1.80% for managers. Debt in an

amount greater than annual dues is not automatically a negative, but red flags go up if a club’s capital levies are not sufficient to cover debt service and depreciation and the percentage of “not sure” responses on this question is cause for concern.

11. Was the original loan amortization period on any debt not more than 10 years?

Of those respondents reporting they had debt, 50% stated that the amortization period is less than 10-years dues, 41% reported the amortization period was greater than 10 10-years and 8% were not sure. Digging further into those uncertain “not sure” responses, we see a clear imbalance with 12.42% of board members “not sure” versus 4.06% for managers.

Clubs typically undertake major capital projects or implement strategic improvement every 10 years or so. While longer loan amortization periods result in lower annual payments, protracted amortization or loans with so-called “bullet” payments can hamper a club’s ability to accumulate adequate funding for future undertakings and tie the hands of future administrations. Both boards and managers must have a working knowledge of the club’s finances which includes understanding the particulars of the club’s debt including the term and the amount.

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12. Does the long-term plan reflect expected capital spending for the next 5-10 years? More than half (59%) responded “yes.” Another 15% said “in process” and 26% responded “no” or were “not sure.” At the median, a club’s depreciation expense is equivalent to 11% of its operating revenues. Over time, a club should anticipate and plan to fund inflation-adjusted depreciation (to avoid deferred maintenance) in addition to funding aspirational capital expenditures.

As shown in the Chart 5 below, board members (3.7%) are generally less certain than club managers (0.45%) that all capital spending is accurately reflected in the long-term plan. This is another area where alignment is necessary and board education is key.

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13. Is the long-term capital plan funded?

In response to this critical question, 40% of all respondents said “yes” their long-term capital plan is funded and another 17% said they were “in process” while 39.73% responded “no” and 3.34% were “not sure.” Without a funded long-term financial plan, a club risks not having enough available capital to fund depreciation, service debt and add or enhance the amenities critical for member retention and recruitment of new members. This can lead to a dangerous downward spiral.

Observation: There is little room for ambiguity on the issue of funding the club’s long-term capital plan. The variation between board member and club manager responses points to a weakness in the industry. The number of clubs that do not currently have funded plans is also a concern. Consistent implementation of plans is much more difficult without a clear strategy that ensures readily available funding for all programmed needs.

CHART 6

14. Is the club current on capital replacement spending (avoiding deferred spending)? This question reflects another unfortunate divide. While 47% responded “yes” and another 9% said their club was “in process,” more than a third (35.9%) said “no” and 6.8% were “not sure.” The “not sure” responses were 11.5% for board members and 2.9% for managers.

As a strategic fiduciary body, the board’s primary duty is to protect, preserve and grow the club’s assets. Deferred capital spending is a visible outcome of inconsistent, non-strategic governance and getting behind on timely repair and replacement of existing assets has a direct impact on financial outcomes and the club’s ability to attract and retain members.

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(Question 14 cont.)

More than 50% of all respondents could not answer affirmatively that their club is current on capital spending. Getting behind on capital spending is an easy hole to dig and a difficult one to fill. You may recall it as one of the eight financial warning flags mentioned earlier.

CHART 7 (All Respondents)

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In Summary

As noted earlier in this paper, the survey questions were intentionally worded so that “yes” responses would reflect adherence to recognized best practices in club governance and the overall findings of the 2020 Club Governance Survey suggest that there is significant room for improvement and a clear need for increased board education across the industry.

There are several more observations to be made in regard to the 14 key questions:

• In 12 of the 14 key questions most closely related to strong financial results, “yes” answers represented less than 60% of the responses.

• Some of the lowest number of “yes” responses were recorded in the critical areas of succession planning, debt management and funding of long-term capital expenditures.

• As illustrated in the charts above, there were often wide discrepancies in perspective and understanding between board members and general managers.

• Based on findings this survey and those dating back to 2017, it is not uncommon to find multiple perspectives and understandings among board members from the same club.

• In a sampling of clubs where financial data was available, answers to objective questions were sometimes not supported by the financial data which indicates some lack of understanding of fundamental financial information.

• Board members frequently answered “not sure” to questions that addressed critical responsibilities of the board. It is difficult to reconcile these uncertainties with the board’s obligation to fulfill their fiduciary duties to the club.

Each of these observations is worth considering at the individual club level. It is hard to imagine optimal performance where members of the leadership team – Board Members and General Managers – operate with different understandings of where the club stands and/or where practices could be improved. A primary conclusion is there are a significant number of clubs that would benefit from consistent, industry specific training in strategic governance and adherence to best practices.

Where Do We Go from Here?

The survey and related research is a continuous work in progress. It is possible that an industry-wide survey will take a different form than the detailed one used in annual club governance reviews and board orientations. The industry survey may best align with aggregate data while the detailed audit will better relate to the specifics of a given club. Participant input will play a major role in shaping the evolution. The goals will remain the same as noted above:

• To gather information and compile survey findings in a report which advances the industry’s awareness and understanding of best practices for club governance.

• To serve as a self-evaluation tool that will provoke thought, fuel productive discussions and contribute to widespread adoption of governance best practices in the club industry.

We expect the process and findings to assist in development of industry education, board orientations, annual action plans and the fulfillment of fiduciary duties.

We invite you and your club’s leadership team to participate in the

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About the Authors

Dave Duval is a member of Charles River Country Club, The Quechee Club, Turtle Creek Club and Portmarnock Golf Club. He served on the board of Charles River Country Club for eight years, including six as Treasurer, before joining the board of The Quechee Club. He served on The Quechee Club board for four years including two as President & CEO. During the course of his club board experiences, Dave architected the long-term funding plans and finances for more than $20 million of capital improvements. He also oversaw multiple membership surveys and governance improvements while

communicating frequently about board activities and membership satisfaction. Dave’s professional experience includes public accounting, C-suite

management and 20 years as a partner in venture capital partnerships. He is a CPA (retired) and holds a BS in Accounting from Bentley University and an MBA from Babson College. Dave has served on numerous corporate, association and charitable organization boards.

Joe Abely is a member of Brae Burn Country Club and The Wianno Club. During his twelve years of board service at Brae Burn he served as Treasurer for six years and President for three. He continues to chair the nominating committee there. Joe also architected the long-term funding plans and finances for more than $20 million of capital improvements during his tenure and prioritized membership satisfaction and communications. In addition to serving on many corporate and tax-exempt organization boards, Joe’s career accomplishments include partnership in a Big 4 CPA firm, CFO/COO/CEO of a publicly traded company and serving as Executive Director of a large

charitable organization. He is a graduate of Boston College and holds an MBA from The Wharton School of the University of Pennsylvania. Joe is a retired CPA.

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References

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