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Contracts for Nonprofit Executives

The balance of board and executive power in nonprofit organizations is a critical and essential ingredient of organizational viability. Organizational stability requires that boards and executives negotiate, sustain, and honor the balance of power – and define the contours of mutual accountability. Easier said than done!

 (For context, please reference Herb’s Third Law of Nonprofit Physics in my February 18th post.)

The reality is that achieving and honoring the balance of power in nonprofit organizations is complicated, if not impeded, by the prevailing nonprofit business model that accords unchecked authority to boards of directors. (Here’s where we really get irreverent!)

In corporate America, boards are ultimately and directly accountable to their shareholders. A range of regulatory mechanisms and metrics enables shareholder and public monitoring of performance. The market and whistleblowers provide additional incentives for good behavior. Notwithstanding the periodic excesses and abuses that make the news, corporations manage the balance of power with their own institutional set of checks and balances.

There are no parallel incentives for board discipline and accountability in the nonprofit sector, not even the superficial compliance requirements of funding sources. (And maybe there should be.)

 The question must be asked:

 To whom is the board of directors (ultimately) accountable?

I like John Carver’s answer: the notion that boards are trustees for the true owners of the organization. But the question remains, pray tell, how do these true owners command accountability for the board’s stewardship of the public trust? What tools have they to determine outcomes, impact, and relevance? What authority can they exercise? What recourse?

In the absence of an ultimate practical and functional authority to whom organizational governers are accountable, the potential exists for dysfunction, mischief, nonperformance, carelessness, inattention to finances and other critical details of organizational performance, and rogue behavior.

Yes, there are great boards. But, there is nothing inherent in the nonprofit organizational architecture that precludes boards going from great to good to not so good. As well developed as they may be at a point in time, succession plans and board development strategies can pass with the tide of board turnover.

So, let’s return to the matter of balance of power and how this governance dilemma pertains.

As much as proponents of effective governance (and I believe Carver to be at the top of the heap) talk of strong board/strong executive models with clearly defined roles and mutual accountabilities, the balance of power between board and executive can never be equal and realize its potential as long as the board can act with impunity, has no ultimate authority to which it is accountable, and can, without consequences, ignore the policies it, or its predecessors) so diligently formulated.

Place the executive in this scenario, and see how vulnerable (s)he is to whim, to moving goalposts of performance expectations, and to personalities.

We all know of great executives who have been the casualties of wayward boards and of the subsequent disruption to the work of the organization. We all know how reticent boards are to conduct regular performance evaluations, let alone establish clearly defined measures on which to evaluate executive performance.

We need a better framework for accountability within which nonprofit organizations operate that is standard among all nonprofits – and in which a reasonable balance of power is maintained, good executives are protected, boards are called to a higher duty of care, and the discipline of board/executive mutual accountability is strengthened.

If, short of establishing an external regulatory structure for nonprofits, we can’t answer the question to whom the board is ultimately accountable, then let me suggest that we promote an alternate means to accomplish the above objectives.

Specifically, let us advocate that boards become accountable to the terms of a legal contract with their executive director. Let us advocate that every CEO should have a contract that specifically outlines the terms of his/her employment and identifies the reasonable objectives against which performance and remuneration will be evaluated.

And, let’s go a step further, perhaps. To be a true contract, let the quid pro quo be an articulation of the Board’s corresponding accountability.

As attractive as at will provisions are to board employers, at will provisions put good executives at risk and open the door to caprice and subjectivity.

Boards may be loath to have contracts, but that’s tough; executives, for their own sanity and integrity, ought to insist on them.

What do you think? What’s your alternative?

Join the conversation. Forward this post to your colleagues, and invite them to join in.

Thanks.

12 Comments to Contracts for Nonprofit Executives

  1. by A Singleton

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  2. by Sierra at Harvard U

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  3. by Medical Development Corporation

    On April 27, 2010 at 11:23 pm

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  5. by Sidney Bezdicek

    On May 21, 2010 at 2:49 pm

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  6. by Jon

    On July 8, 2010 at 2:58 pm

    Great post. I’m actually researching some issues with a nonprofit organization, at the moment. The Executive Director is essentially running it as he sees fit, with his power unchecked. For years, the members had the ultimate authority to overturn ANY board decision by a 2/3 vote at the Annual Convention. Now we’re being told ultimate authority in the membership is illegal. Any thoughts on the membership being unable to wield ultimate authority, or that situation running afoul of the law?

  7. by Herb

    On July 9, 2010 at 9:08 am

    Thanks. The first thing I recommend is a review of the organization’s current bylaws to ascertain its corporate status, specifically the extent to which it is defined as a membership organization and what powers have actually been assigned to the membership. Who, by the way, is telling you that the authority of membership is illegal? I need to know more, but certainly, in the cases I’ve seen regarding membership strife, one needs to refer to the bylaws, mediate the concerns of the contesting parties, and likely secure legal counsel. Hope this helps. Feel free to let me know if you have any further questions.

  8. by Jon

    On July 9, 2010 at 2:11 pm

    The Executive Director of the Corp. is saying that allowing the membership to have ultimate authority in a 501(c)(3) organization is illegal. Essentially, his authority that he cites for this argument is found in the Model Nonprofit Corporation Act, which has been adopted as the state law in the Missouri (the state in which we are incorporated). The Exec. Dir. is using this argument and law to prevent us from passing a resolution at the Convention that would put ultimate authority back in the hands of the members. Any direction or advice you could give would be greatly appreciated! Thank you. jonathan.zadina@gmail.com

  9. by Herb

    On July 9, 2010 at 5:05 pm

    Jonathan, first, I need to reiterate that I’m not an attorney and can only share with you my opinions based on the information as I understand it. It may be that you will need to retain legal counsel to be absoluely certain about the interpretation of the law and its applicability to the situation you’re describing.

    I’ve briefly reviewed the Missouri Revised Statutes, the Nonprofit Corporation Law, as of August 2009.

    First, it would be important to ascertain if there was any language in the adoption of the law that indicated that it preempts and now supercedes the exeisting bylaws of established organizations. Section 355.116 indicates, “The incorporators or board of directors of a corporation shall adopt bylaws for the corporation. The bylaws may contain any provision for regulating and managing the affairs of the corporation that is not inconsistent with law or the articles of incorporation.” Thus, check your bylaws to ascertain what its provisions for membership are and how that comports with the law.

    In any case, Section 355.181, which deals with Members, says, 1.) “The articles or bylaws may establish criteria or procedures for admission of members. No person shall be admitted as a member without his or her consent; 2.) A corporation is not required to have members; 3.) Except as provided in its articles or bylaws, a corporation may admit members for no consideration or for such consideration as is determined by the board.”

    Section 355.186 says, “All members shall have the same rights and obligations with respect to voting, dissolution, redemption and transfer, unless the articles or bylaws establish classes of membership with different rights and obligations with respect to any other matters, except as set forth in or authorized by the articles or bylaws.”

    The ultimate question then is what powers and responsibilities are accorded to the membership as enumerated in the bylaws, and how are those distinct from the roles and responsibilities of the board.

    Also, what role is the board playing in this whole affair?

    Hope this helps.

    Herb

    (L. 1994 H.B. 1095)

  10. by Jon

    On July 12, 2010 at 8:44 am

    Wow, that is definitely a new way to look at it. I appreciate the help. We do have the ability to Amend the bylaws, and essentially, I understand how you are making the argument that the Statue is subject to the bylaws. Hence, if we amend the bylaws, the statute would have to allow for it (or at least that is the argument I will make). Thank you so much.

  11. by Herb

    On July 12, 2010 at 11:29 am

    Just to be clear, Jonathan, the Statute supercedes the bylaws. So, you want to be sure that the bylaws are in compliance with law. At the same time, it doesn’t appear that there’s anything in the statute that limits you from having a membership organization. OK, just wanted to be sure we’re on the same page.

    Otherwise, it sounds like you have a plan. That’s great.

    I’m delighted that I could be of help. I hope things work out for you all. Please keep me posted (paineconsulting@cox.net) and let me know if I can be of further assistance.

    By the way, I did not post our exchange on my blog because of sensitivity to your situation. However, because it’s such a good case, would you object to my posting it if I edit out your name? Thanks.

    Herb

  12. by EC

    On July 26, 2010 at 1:50 pm

    This is undeniably one of the most interesting blogs I have seen. It’s so easy to tune out, but there’s honestly some incomparable information online, and I think your blog is one of the few!

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