Governance Power Grab of the Day #2: Limit Access to Club Records

 We, as Owners of the Club, elect Board members to represent us in governing the Club. In order to represent us, each Board member must comply with a "duty of care," which requires them to become informed about Club issues. Each Board member must decide what information he/she needs to become well enough informed to make good decisions.

 The Board has proposed amending the By-Laws to forbid any other Board member not on the Board Compensation Committee to inspect "sensitive personnel information, including but not limited to staff compensation information." I can only speak for myself, but I want all of the Board members to have the right to examine any corporate document--including "sensitive personnel information"--as they discharge their duty of care. JUST SAY NO TO THIS POWER GRAB. 

The current By-Laws provide the "[e]very director shall have the absolute right at any reasonable time to inspect all Club books, records, and documents and the physical properties owned or controlled by the Club." By-Laws Section 9.4(c).

The Board is proposing that this By-Law be amended to read: "Every director shall have the right at any reasonable time to inspect all Club books, records, and documents and the physical properties owned or controlled by the Club. Notwithstanding the foregoing, sensitive personnel information, including but not limited to staff compensation information, shall be made available only to the Board Compensation Committee (or its equivalent) for inspection." (Emphasis added.)

Here are two obvious issues:

• "Sensitive personnel information" in not defined. "Including but not limited to" is lawyer code for "we're going to interpret this provision broadly to do as much as we can get away with." Just by way of example, an allegation of discrimination against a club employee could fall within the scope of "sensitive personnel information" and be withheld from Board members not on the Compensation Committee.
• The  identity of the members of the Board Compensation Committee have not been published. The Compensation Committee charter provides that the Board President and at least one other Board member shall constitute the Compensation Committee. I can find no reference on the Club's website, in the minutes, or in any other communication to the Owners of the members of this committee. I note that last year's Compensation Committee membership was never posted on the Club's website along with the other committees.

What does South Carolina law say about committees? The Nonprofit Corporation Act (which governs the Club) states that: "In discharging his or her duties, a director is entitled to reply on information, reports, or statements . . . if prepared and presented by: . . . a committee of the Board of which the director is not a member . . . if the director reasonably believes that the committee merits confidence." This provision permits--but does not require--a Board member to reply upon the work of a committee.

Under the current By-Laws, a Board member has the "absolute right" to see any Club document--including "sensitive personnel information." But under the Board's proposed language, the Board member would ostensibly be deprived of this right. In this circumstance, the right of a Board member to rely upon the Compensation Committee would be laundered into an obligation to rely upon the Compensation Committee. No thanks.

Even if a Board member were to be deprived of his right to see all corporate documents through an amendment to the By-Laws, each Owner of the Club may have an independent right to inspect "sensitive personnel information." The South Carolina Attorney General has issued two opinions relating to the right of an Owner of a Nonprofit Corporation to review corporate records. See the SC AG Opinions dated January 26, 2016 and April 3, 2018.

I note that an AG Opinion is not binding, but it states how the AG "believes a court would interpret the law." Within its two opinions, the AG stated "that Legislative intent was for any and all underlying documents or materials used to prepare a non-profit corporation's financial statements to be inspected by a member as long as the member provides written notice, the member's demand is made in good faith and for a proper purpose, the member specifically describes the purpose and the records he wants to inspect, and the records are directly connected with the purpose." The AG also quoted the Official Comment to the statute which stated that "a request to examine records to determine whether improper transactions have occurred or a charitable trust breached states a proper purpose." The AG believes that the bar to clear to state a proper purpose is quite low. Most relevantly, the AG stated that "service contracts, business receipts, vendor agreements, employee contracts, all documents supporting the IRS 990 filing, reimbursements to employees and members" "would likely be considered 'accounting records of the corporation'" and would be available to Owners for inspection.

Aside from curiosity about salary levels, why would a Board member (or any Owner) "need" to see "sensitive personnel information" about a Club employee? Here are two obvious reasons:

• The employment agreement should include incentives and each Board member has a duty to determine whether the employee's incentives align with the Club's strategy and the Board member's belief of what management should be doing. People do what you pay them to do--and the only way to understand what people are being paid to do is to look at their compensation agreement.
• Employment agreements frequently include severance provisions. Delegating to the Compensation Committee the right to negotiate "golden parachutes" impairs the ability of the Board to make necessary personnel changes. Which of us hasn't been a fan of a college or professional team that has been impoverished by the requirement to continue to pay coaches who have been terminated for poor performance? 

Frankly, I'm puzzled about why this is even an issue. As I explained in an earlier post, salary information is readily available for officers and directors of public companies and charities required to file an IRS Form 990, as well as public officials at the federal, state, and local levels. Each of us owns about 0.2% of the Club and our interest in how our employees are paid is certainly more substantial and direct that the interest any of us holds in a public corporation, or at any level of government. What's so special about our management that the Owners should not be permitted to understand their compensation?