Non-Profit Accountability – The Executive Director

This article speaks to the challenges faced by the board of supervisors of a non-profit, charitable, organization in the choice and direction of its executive manager.

It is difficult to believe it was 18 years ago (1991) that the United Way of America scandal began to unfold and its own executive director, Bill Aramony, has been convicted in 1995 of a number of wrongdoings such as embezzlement and spending funds unwisely. United Way was possibly the most recognizable public charity in the country and it remains so today.

The government of the United Way has been set, appropriately, in the hands of its board of directors. Regrettably, its executive director was allowed to run the events of the organization with very little accountability. Hence, it was only a matter of time before problems were bound to emerge. It appears simple to overlook the simple fact that non-profits are business entities, rather some of them are extremely big organizations, and many have substantial incomes.

Curiously, it has become common over recent years to replace the title of ‘executive director’ with ‘president.’ This is technically wrong; an executive director is the chief employee of the charitable organization and reports to its board; the ‘president’ is, by statute, the mind (and frequently called the chair) of the board of supervisors, allegedly elected from the membership of this company or its board, depending upon the procedure outlined in the Bylaws. While also technically incorrect, with the title of ‘president’ in lieu of ‘executive director’ may even add to confusion among oblivious board members, making them rely heavily on the ‘president/executive director’ than is prudent. (However, this is no explanation for the board member not understanding the responsibilities of his/her board)

It may be useful to contrast the topics of liability for executive directors in very large non-profits to people in small non-profits. Albeit just anecdotal, it appears that large non-profits operate quite similarly to large for-profits. CEO accountability and board oversight can be low while CEO control is demonstratively excessive. Even the Aramony scandal of 1995 has similarities to the Kenneth Lay (Enron) scandal of 2001 in that too much power and authority was vested in the very best officers of the company and too little accountability was required by its board of supervisors.

Beyond the scope of this article – but a problem worthy of its conversation in the future – is the cronyism too often seen in the boardroom. CEOs often encourage friends and colleagues to function on the board – because do board selection committees – and the practice is normal in both for-profit and non-profit organizations equally.

Systems failures, like the United Way and Enron cases, obviously paved the way for the Sarbanes-Oxley (SOX) legislation that’s intended to provide stronger supervision of for-profit associations. The subject of previous articles, and also the focus of this Center for Ethics, Governance, and Accountability (CEGA), admits that Congress has moved swiftly to empower the IRS to measure its supervision of non-profit entities.

In a previous CEGA article, “Non-Profit Accountability: A Board Gone Awry,” the rude and reckless behaviour of present board members towards a former board member (with much more experience) was exemplified. There was also a promise that a future article would talk to the issues involving the executive director.

This is that article.

In this instance – that could well become a full-blown case study – a tenured executive director retired after nearly 40 decades of service. He was well known in his field of expertise and widely regarded as a man of great integrity and concern for all those around him. His self was virtually non-existent, so he relied upon his staff to perform their jobs, and was supportive of creativity. He was highly focused on the mission of the organization. Replacement of such an individual is hard for even the most ardent boards. In cases like this, a specialized search company was engaged, candidates were identified, and finalists were interviewed by the board. (This isn’t a good sign when joining a new organization.)

Then the problems began.

Unfortunately, the chosen individual didn’t possess the requisite expertise for the position of executive director. This was discussed with the board in the last interview and has been emphasized by the search firm. While the candidate pledged to gain those skills on the job, once hired, he promptly reneged on his promise. Immediately upon arrival into the non-profit company, the new executive director began to terminate employees, eliminate positions, dismantle programs and adjust the focus of the business in a dramatic fashion.

It was immediately obvious that the new executive manager had ignored the leadership provided by the board. There was obviously a private agenda by the executive director and, worse, it was intentionally made people. When confronted with the chair and vice chair of the board, the executive manager turned the board against itself and worked his 5-4 choice vote to full benefit. But such gross insubordination isn’t sustainable. In just 10 months, the whole organization was destroyed, the best board members had resigned shame, the executive director left town under a cloud of suspicion and was subsequently sued by the company for abuse of funds.

Today, this charitable organization has been directed by a new board with no experience, little perspective, and much less institutional understanding. Adding to the challenge was the choice of a new executive manager employing a process further clarified below: tapping the number two person in the business, who has even less experience than the now-departed predecessor. The near future doesn’t seem bright; but, pressure to make it look bright can easily lead to worsening conditions.

What can be learned from this case?

First and foremost, it’s extremely difficult to become a board member. It is not a job which should be dismissed. Governance, integrity, and accountability are crucial and boards must expect and uphold the greatest standards for the non-profit company. Additionally, boards must move swiftly and firmly to deal with rogue executive directors which intentionally discount board policy and assignment. The most important lesson from this example is that the seriousness and immediateness of these negative consequences to a non-profit organization – even one with a strong plank, a known mission, and dedication to succeed.

One of the important nonprofit jobs of the executive director is to execute the policies and vision of the board of managers. And, the executive manager is most often the ‘public face’ of the business, so issues of authenticity and ethical behavior are paramount to the understanding of their business locally and constituency it serves.