Separation of Powers in the Context of Private Clubs and Trade AssociationsNovember 10, 2022
Security Surveillance Policies for Private Associations and Clubs1March 1, 2023
Best Practices for Trade Association and Private Club Governance
Much gratuitous advice has been bandied about in recent times concerning “best practices” in different industries. Most of it is subjective opinion, albeit some of it useful in an appropriate context.
The dictionary informs us “best practices” consist of 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. However, “best practices” are unlike voluntary standards. The latter are usually formed by a consensus of unrelated persons vocationally involved with the subject being considered as a standard and sanctioned by a certifying standards organization. “Best practices” don’t necessarily achieve the level of a consensus standard unless there is a compelling safety, cultural, or utilitarian reason to run the gauntlet of standards certification and the discipline required to be certified as a standard.
One observer notes “Standards are something necessary and need to be defined, monitored and controlled while Best Practices can be taught but may vary by individual [entity] . . . Because there are many different ways of doing things, we can teach “Best Practices” and encourage them to be used, but in the end we require ‘Standards’.”
In September 2021, ISO (International Standards Organization) published ISO 37000. Its abstract proclaims:
This document gives guidance on the governance of organizations. It provides principles and key aspects of practices to guide governing bodies and governing groups on how to meet their responsibilities so that the organizations they govern can fulfill their purpose. It is also intended for stakeholders involved in or impacted by, the organization and its governance. It is applicable to all organizations regardless of type, size, location, structure, or purpose. 
In attempting to use ISO 37000 in a practical way, it is necessary to translate its principles into useful and practical methods to abide by the principles.
The Organization for Economic Cooperation and Development, (OECD), issued OECD Principles of Corporate Governance in 1999 and later revised them. Originally the Principles were designed with the purpose of assisting governments in their efforts to evaluate and improve their frameworks for corporate governance, and providing guidance for regulators and, more broadly, participants in financial markets. They now purport to also provide guidance to private organizations. “Principles” as used by the OECD we interpret to equate with “standards”.
Corporate governance standards relating to the board of directors have been established by the NYSE, Nasdaq, and the SEC, where applicable. However, these standards are of limited relevance for use by nonprofit, nonpublic private organizations. Notwithstanding, some elements of them have migrated into the nonprofit realm, e.g., conflict of interest, and executive compensation review and scrutiny.
Following this lead, the IRS has stuck its nose under the tent of private nonprofit, tax-exempt entity governance with its form 990 Return of Organization Exempt From Income Tax.  Under 990 Part VI Governance, Management, and Disclosure, Section B. Policies (This Section B requests information about policies not required by the Internal Revenue Code) [Italics supplied for emphasis], the entity is required to respond to questions about Governing Members, Officers, and Key Employees.
One might ask if the information requested under Section B is not required by the IRC why should the organization furnish it? Presumably, the answer is by not furnishing the information, the organization brings undesirable scrutiny upon itself. More significantly, however, for purposes of this discussion, the information requested demonstrates what IRS believes are necessary governance “best practices” for tax-exempt entities. We conclude the prudent tax-exempt entity, e.g., 501(c)(7) private clubs, or a 501(c)(6) trade association should adopt the policies asked about in Section B. That is, they become “best practices” to avoid later unwanted scrutiny by the IRS.
Form 990 asks the following questions, among others: (1) Has the organization provided a complete copy of this Form 990 to all members of its governing body before filing the form? (2) Did the organization have a written conflict of interest policy? (3) Did the organization have a written whistleblower policy? (4) Did the organization have a written document retention and destruction policy? (5) Did the process for determining compensation of the [CEO, Executive Director, or top management official and other officers or key employees of the organization] include a review and approval by independent persons, comparability data, and contemporaneous substantiation of the deliberation and decision?
The foregoing 990 questions undoubtedly grew out of the OECD recommendations, notably as relates to conflicts of interest, whistle-blower protection, and oversight of internal control and financial reporting systems.
What is available from a basic Google search of numerous consultant websites and relevant industry sources is a variety of what we believe is important to consider. Some of these “best practices” help to promote the economic, social, and cultural stability and viability of the entity and even the industry group to which the entity belongs.
Having served on various governing and advisory boards and in leadership positions of private clubs, other voluntary organizations, including homeowner associations and trade associations, and local and state government commissions or advisory panels, we are persuaded there is no “best practices” formula that works for all private clubs, trade associations, or nonprofit governing bodies. Each entity’s culture, constituency, physical plant, demographics, and financial status is unique. Further, these factors may and do change over time for a specific entity. If these factors differ in any material respect from entity to entity then their governance styles, methods, and organic documentation shall or ought to materially differ.
Indeed, a recent article expressed the observation best boards focus on solutions and structures tailored to their companies, ignoring cookie-cutter “gold standards.”
A generation ago, the norm in corporate governance was to recognize differences among companies — the need to tailor governance to fit needs, to shun cookie-cutter approaches. In recent years, however, the norm has veered to a universal expectation that all boards should follow identical guidelines, usually anointed as “best practices” or “gold standards.”
But are there “standards” or “policies” as opposed to “best practices” we might look to for some guidance as to what characteristics might make for a coherent, useful and successful nonprofit entity governance structure that is universally valid?
Given the premise there is no necessarily common approach to much of what is considered “best practices”, we proceed to undertake a limited catalog of what some of these “best practices” might include if only to provide a buffet sample from which to select the ones desirable for a particular organization.
One principle espoused by ISO 37000 is transparency, i.e., suitably disclosing board activities and making them understandable to the entity’s members. Specifically, the board should be transparent in its decision-making process, key operating indicators, and consistency in terminology and application through the adoption of reporting frameworks.
Transparency has now crept into the window of private organizations. See, e.g., The Corporate Transparency Act which applies to corporations, limited liability companies, limited liability partnerships, and any other entity which is required to file with a secretary of state (for domestic entities) or is required to register to do business in the US (for foreign entities).
Our experience is that boards typically are not suitably transparent about their activities. We recall a member meeting where the members were asked to vote for an assessment but had not been furnished in advance with the club’s annual audited financial statement for the fiscal year only recently ended. Rather, the members were presented with a verbal summary presentation of the prior fiscal year’s financial results before the assessment vote was taken. Query: as a matter of transparency, whether the members should have been first furnished with the audited statement before being asked to vote on the assessment?
Admittedly, “confidentiality” is often required for specific board actions or matters. Thus, member disciplinary hearings, pending but yet undecided matters, and employee decisions or disputes, must be handled in a confidential manner for legal reasons. But we find boards prone to overemphasize confidentiality over the need for transparency when confidentiality is not legally required.
As observed by Cunningham, generalities in corporate governance are suspect. The issue should always be what is best for a particular organization and its members, not what generalists and self-anointed industry advisors or policy entrepreneurs declare is best.
Governing boards need to balance legal needs for confidentiality with the growing awareness and demand for transparency. Certainly, e.g., employee and member disciplinary proceedings must be held in confidence. However, boards might consider posting their minutes (excluding executive session minutes) after they have been approved, Also, the president’s or general manager’s newsletters discussing non-confidential board activity of member interest are useful tools for satisfying transparency. While there is a paucity of law respecting transparency duties, we predict it is the wave of the very near future.
To conclude. Private clubs and trade associations should be wary of simply adopting “best practices” published by self-appointed industry advisors. Rather, they should ask whether each and every one of the proffered “best practices” is suitable and appropriate for their particular organization. Additionally, they should ask and resolve whether other practices may be appropriate that are important to them in their governance and administration.
Fred L. Somers, Jr., P.C.
Atlanta, GA 30338
This blog is designed for general information only. The information presented at this site should not be construed to be formal legal advice or the formation of a lawyer/client relationship. The author of this blog is not certified by any state agencies or boards of legal specialization. This blog may constitute attorney advertising in some jurisdictions.
 Best practice Definition & Meaning – Merriam-Webster https://www.merriam-webster.com/dictionary /best%20practiceh
 Improving corporate governance standards: the work … – OECD https://www.oecd.org › daf › corporategovernanc…
 See About Form 990, Return of Organization Exempt from Income Tax | Internal Revenue Service (irs.gov) also see https://scholar.google.com/scholar_url?url=http://digitalcommons.pace.edu/cgi/viewcontent.cgi%3Farticle%3D1592%26context%3Dlawfaculty&hl=en&sa=X&ei=c3SuYbi_PLGUy9YPieuc-As&scisig=AAGBfm1o3R67kGuYtIWkCD4AQrBaWl3C4w&oi=scholarr
 See “The Illusion of Corporate Governance “Best Practices” by Lawrence A. Cunningham (2022) at https://www.directorsandboards.com/articles/singleillusion-corporate-governance-best-practices
 . The Anti-Money Laundering Act of 2020, which is part of the National Defense Authorization Act for the Fiscal Year 2021 (“NDAA”) and includes the Corporate Transparency Act, became law effective with Congress’ override on January 1, 2021, of former President Trump’s veto of the NDAA. The Corporate Transparency Act consists of §§ 6401-6403 of the NDAA. Section 6402 of the NDAA sets forth Congress’ findings and objectives in passing the Corporate Transparency Act, and § 6403 contains its substantive provisions, primarily adding § 5336 to Title 31 of the United States Code. See https://www.americanbar.org/groups/business_law/publications/blt/2021/05/corporate-transparency-act/#:~:text=The%20Corporate%20Transparency%20Act%20Included%20in%20The%20NDAA Also see 59498 Federal Register / Vol. 87, No. 189 / Friday, September 30, 2022 / Rules and Regulations.
 See f.n.7 supra.