Fire the Boss

Yes, your board can dump a shady executive and keep the next one in line.

The errant executive director had used the nonprofits credit card
to purchase several items of furniture for his home.

By Julian H. Spirer

Several years ago, our law firm helped the board of a national, well-established nonprofit deal with an executive director who had been charging personal expenses to the nonprofits credit card. The executive director had routinely extended his stay following out-of-town board meetings and charged the additional expenses to the organization. He had also used the card to purchase several items of furniture for his home.

The executive director weakly offered three defenses. First, he claimed that he had never made a secret of the credit card records, and that the nonprofit had appeared to give him carte blanche to use the card. He pointed out that he had discussed some of the expenses with the organizations treasurer, a personal friend, who had voiced no objections. And finally, he argued, he was paid a salary well below what the heads of comparable for-profits received; with the nonprofits increasing success under his leadership, he was entitled to special financial consideration.

These three arguments did not deter the board from summarily dismissing the executive director. The organization could fire the executive director without a hearing or formal finding of fault because it was located in the District of Columbia, which, like most states, is an "employment at will" jurisdiction. The executive director had no employment contract to counteract this general rule.

However, the executive directors arguments point to three problems faced by non-profits when supervising their employees, especially senior executives. Volunteer board members may not have the time or expertise to closely monitor the nonprofits financial operations. Further, board members, including those who have the resources or interest to review financial records, may owe their place to the personal recommendation of the executive director and so be more inclined to trust his management Additionally, the financial sacrifices which a nonprofit staff may have to make during the organizations formative years could lead to feelings of entitlement when circumstances improve.

The nonprofit in our story took several important steps to address these problems. The board replaced its accounting firm, which had been hired by the executive director to do a financial compilation, essentially a cursory review of financial results collected by an executive director. The new firm examined the financial records to confirm the full extent of the abuses and also agreed to do an annual review, a far more extensive investigation of the organizations financial operations.

In order to enhance the independence of the board from the staff, the organization divided its membership into geographical constituencies with each constituency electing its own board representative. Most, if not all, state corporation statutes will allow the classification of directors along geographical lines, although such provisions should be set out in the nonprofits articles or bylaws. The board also created committees, including an audit committee to work with the accountants and a personnel committee to oversee employment relationships. Again, most if not all state corporation statutes will allow boards, if so authorized by the articles or bylaws, to delegate management authority to committees.

Finally, the board had our firm create employment contracts for the senior staff.  These enable a nonprofit to define more clearly what it expects of its executives and provide a formal vehicle through which executives can express any discontent with their employment arrangements.

Not all of these steps may be possible or appropriate for every nonprofit, but a combination of some of them is essential for nonprofits to maximize executive performance and minimize employment disputes.
 
 

Julian H. Spirer (spirgold@aol.com) is a senior lawyer with the firm of
Spirer & Goldberg, P.C., in Washington, D.C.

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