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Main Board Questions

What Boards Should Do When Nonprofit Executive Director Misconduct is Discovered

Introduction

A nonprofit board’s worst nightmare is the discovery of financial malfeasance or gross violation of personnel laws by the chief executive officer. While many staff complaints about an executive director (ED) are unfounded, cases of significant nonprofit management shortcomings are sadly on the rise. The underlying societal factors contributing to an increase are a combination of human resource litigation generally and economic pressures from today’s financial environment. Employee retaliation claims are increasing and nonprofit leadership is increasingly distracted by operational pressure.

In addition, many nonprofits never put in place all the mechanisms one would want to mount an affirmative defense to employee lawsuits. With respect to financial challenges, nonprofit management has always required attention to cash flow but current funding cuts/revenue delays mean that organizations without strict, effective cash management practices may be pushed to the financial edge sooner, without as much time to prepare. More specific causative factors that allow situations to develop into disasters include:

• Boards hiring executives without verifying sound financial and human resource management expertise
• Board’s delegation of duties to executive directors without proper monitoring
• Overall board member disengagement
• Boards inexperienced in complex nonprofit financial operations and updated human resource standards
• Economy denial: organizations counting on historical revenue to fund current operations
• Lack of proper anti-nepotism policies, allowing ED and relatives to ignore problems and/or collude

Areas of immediate attention

When a board is notified of an employee’s intent to sue for executive director conduct or when a vendor hires an attorney to collect an outstanding payable, there are certain precautions needed to avoid insolvency and damaging public relations. One message to convey repeatedly is that the board has commissioned an investigation which will be thorough and unbiased. You can also reassure internal and external parties that if the allegations are without merit the alleged “offender” will be reinstated without prejudice. The following list is not meant to convey specific management or legal advice but is offered as a list of ideas from which a board might choose to consider. It is imperative that a nonprofit facing  aserious employee misconduct charge, consult their legal and financial representatives for professional guidance and to follow all organization policies that might apply. Among the points to consider:

The “Offending” Executive Director

• Consider an immediate, temporary, paid executive director (ED) suspension and set up a board representative to be the only conduit of information from board to ED and from ED to board;
• Indicate that the ED is not to contact anyone in current employ or discuss agency affairs in a leadership capacity, with any party until contacted explicitly to do so;
• Audit the ED’s office contents and make note of personal possessions on agency property. These need to be safeguarded and returned in the event of termination;
• If the matter involves staff and requires substantive internal communications, set clear boundaries with staff (see below) about contacting the ED while the matter is under investigation;

If the misconduct is financial

• Verify the safety and integrity of organization assets and income by reviewing the balance sheet, profit and loss statements, accounts payable aging and accounts receivable aging reports, if available. If these reports are not available, consider hiring a forensic accountant for temporary assignment
• If you have an internal or external bookkeeper/accountant, you must first determine if this individual is loyal to the organization or to the “offender,” whether he or she is competent and then take appropriate action
• Contact all contractors, funders and vendors/creditors with a form letter conveying confidence in board’s ability to rapidly sort through the issues and comply with all standing obligations
• Meet immediately with all major lien-holders such as banks, lenders, and landlords to let them know a personnel matter or financial matter has been discovered, the board is conducting an investigation and set up an ongoing communication contact in these groups. This group along with significant creditors should be contacted weekly until the crisis is stabilized
• Your bank may have a “workout” department who can review your account activity in detail and help you identify gross errors, immediately
• Locate all your financial files and secure them regardless of their condition.

If the issue is Human Resources oriented

• If the ED is suspected of inappropriate or unlawful conduct, determine how the staff divides along loyalty lines. This is easily done by a brief, private interview with key staff then determine if others should be suspended, temporarily
• Consider a large group meeting to indicate generally what has happened (no negative personnel details other than an accusation of some kind has been made), why details are not released (confidentiality) and how the board is responding.
• Instruct employees not to gossip about any specifics, remind them of confidentiality policies
• Consider offering a confidential survey to employees to allow them a safe way to speak up about concerns that might help your forensic analysis or to ask questions they might hesitate to bring up in the group
• Secure an up-to-date copy of your personnel policies in-force and follow them consistently. If you have none, contact an experienced HR contractor immediately for advice and guidance
• Locate all the official and unofficial personnel files and secure them regardless of their condition.

Contracts and Reporting

• Create a list of all funders and contractors in the community and contact them with a form letter of whom to contact and promising further information shortly
• Verify that payroll taxes have been regularly submitted and other withholdings have been transmitted to pension sponsors, health insurers, and others
• Verify that 990′s and state corporation reporting has been submitted
• Verify that licenses are current and copies on file
• Locate all contract files and secure them regardless of their condition.

Board Governance

• Verify that Directors and Officers liability coverage is in force along with other key commercial insurances. If you don’t have D&O coverage, most bylaws have a basic indemnification clause that hold board members harmless as long as no criminal activity is carried out, but insurance may help with a defence, if covered
• Assign one or two board members to cover agency operations in the absence of an ED on suspension – someone needs to physically be present for some part of the first week immediately after the current issue is discovered, particularly if you don’t know staff allegiances
• Remind board members of their fiduciary responsibilities and caution board members about quitting when a significant organizational failing is uncovered. Most state’s attorneys general have the power to reinstate board members so they can clean up what they should have done initially. I have seen this done in Maine. Board members quitting also draws public attention. It can make an innocent, inattentive board look ignorant, avoidant or guilty
• Meet weekly as a full board and vote as a group on all decisions in advance where possible or vote to affirm emergency decisions made by board representatives in the moment. Keep documentation of all meetings and decisions
• Verify that your organization is properly incorporated and locate copies of current incorporation documents – IRS determination letter; state sales tax exemption letters; board bylaws in force; and board meeting minutes
• Secure these files regardless of their condition

Again, these items are meant to remind the board of matters they must consider. If you are a board member facing such an allegation of executive director misconduct, engage an experienced nonprofit management consultant or attorney and follow their advice. They will be more objective than you can be and will be able to warn you of what to expect. In my experience, after meeting with a board who is upset, shocked or fearful, the overwhelming feeling after our first meeting is relief that someone with experience is there to support a scared but well-intentioned board. Good luck!

About the Author

Suzanne V. Benoit, LCSW, SPHR is a management operations consultant, speaker & author promoting mission stewardship for publically funded groups and efficient excellence in commercial businesses.  Ms. Benoit specializes in helping businesses strategize to avoid crises and when necessary, manage and recover from them.  For more information about the author please visit www.benoitconsulting.com. 

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