When Covidiocy Strikes Corporate Governance

For several weeks now we’ve been spot-lighting good practices in corporate governance and compliance during the Covid-19 crisis. Today we’re flipping the script to call out some stupendously inept corporate behavior in these difficult times.

Everyone, say hello to the Boston Sports Club.

BSC is one of those upscale urban personal fitness chains; you probably have them in your city too. Its corporate owner is Town Sports International, based in New York, but for our purposes here we’ll focus on the Boston chain. 

Disclosure: I have never gone to a BSC gym — and now that I’ve seen how the company has conducted itself in the last few weeks, I never will. Nor am I alone in that decision, if public sentiment on social media is any indicator.

What happened? On March 15, Massachusetts Gov. Charlie Baker ordered all non-essential businesses to close the following day. So on March 16, BSC closed all 31 locations it operates around Boston and laid off all employees.

Then came the question of membership fees. BSC charges its members $30 to $100 per month, depending on exactly what services they buy. When the gym chain closed its doors, members started asking about how to freeze or cancel those memberships. 

Or at least, they tried to ask about membership fees. But BSC had gone silent.

As recounted in an article on Boston.com, first BSC had a policy on its website that members could suspend or cancel their membership fees “in person” — except all locations were closed, all employees sacked. BSC didn’t even tell members about the closures until March 20, four days later. 

Members complained on social media, and to state attorney general Maura Healey. Healey said members were entitled to cancellations and refunds of unused fees according to state consumer protection laws. She also said BSC executives had been giving her staff the run-around, which is never a good sign. 

Much like many Boston Sports Club members, my team has been trying to get a straight answer from @BSC_Gym about how people can cancel their accounts. So far, they have refused to provide one. Maybe it’s because they fired all their employees. This is completely unacceptable.

— Maura Healey (@MassAGO) April 2, 2020

BSC members tried calling the gym; they were routed to voicemail hell, with no answer. They tried emailing, only to receive an auto-response that someone would follow up eventually. Finally, on March 26 Town Sports CEO Patrick Walsh sent a general email saying the company would “handle all of your concerns, including credits to your memberships, and personal training sessions,” once the clubs reopen. Whenever that is.

On Wednesday April 1, members saw their bank accounts charged again for April fees. By then Gov. Baker had already said non-essential businesses will remain closed at least until May 4. 

Policy Management Failures

This mess is not just a tale of ham-fisted corporate leadership, although that’s certainly present here. When you dissect how BSC treated its employees, you can see a lot of mistakes that should send compliance enthusiasts through the roof.

First were the policy management failures. Even today, BSC’s website still lists a policy that is not accessible to customers. They must visit locations in person, when all locations are closed; or send a certified letter to the membership department when BSC gives no mailing address. This is the actual policy, taken right from BSC’s website:

When CEO Walsh finally did provide an email address for members to freeze their fees ([email protected], if you need it), people still told Boston.com their inquiries went unanswered. So BSC’s corporate parent was either unwilling, or unable, to handle the volume of customer complaints. 

Blunders like that are exactly what FINRA warned about in updated pandemic guidance it issued on March 10. Insufficient capacity to handle higher call volumes from customers; outdated contact information that leaves customers unable to reach the firm — those were common shortcomings FINRA flagged during a review of business continuity plans last year, and that it mentioned again in its latest guidance. 

To be clear, FINRA governs broker-dealer firms, and Boston Sports Club is just a regular retail business not bound by those FINRA rules. Still, BSC’s mistakes paint a vivid picture of what poor governance and policy management can look like during our Covid-19 crisis. They also demonstrate how good guidance is always worth considering, even when it comes from a regulator outside your industry.

And even while BSC has no concerns with FINRA rules, like any other retailer, it does need to comply with state consumer protection laws. So one wonders about the parent company’s regulatory compliance capability, when even the state attorney general was complaining on Twitter about BSC’s behavior. 

A Greater Governance Crisis?

Let’s look more closely at BSC’s parent company, Town Sports International ($CLUB, naturally). The business operates 186 gyms along the East Coast, and in 2019 had $466 million in revenue. It’s also facing a class-action lawsuit in the state of New York accusing the company of leaving members unable to cancel their memberships during the Covid-19 crisis. 

Even better: Town Sports fired its CFO on March 23, and its audit committee chairman quit on March 19. According to SEC filings, both events were “not due to any disagreement with the company on any matter relating to the company’s operations, policies or practices.” Um, still not reassuring. 

Meanwhile, if you look at the company’s balance sheet, Town Sports has $32.8 million in current assets and (gulp) $328 million in current liabilities, including $178 million in debt due this year. With only $19 million in cash on hand. And all locations closed until further notice. That’s enough to leave you sweating and gasping for breath right there. 

The bottom line is this: Town Sports International was financially over-extended in the best of times, and Covid-19 has shoved it into the worst of times. So the company has engaged in this corporate policy chicanery to keep customers’ cash in its coffers, and those customers have returned fire by roasting BSC’s reputation on social media. 

Covid-19 challenges corporate compliance, governance, and leadership in just about every way one can imagine. Alas, as Boston Sports Club shows, at least some firms will also fail on those fronts in just about every way one can imagine, too.