When Nonprofit Boards Discover Executive Director Misconduct

A nonprofit board’s worst nightmare is the discovery of financial malfeasance or gross violation of personnel laws by the chief executive officer. While staff do make unfounded complaints about an executive director (ED), cases of significant management shortcomings are sadly on the rise. Factors contributing to this increase are human resource litigation; over-lean staffing; lack of professional management training; and the increasing pressure of sustaining today’s nonprofits. Many nonprofits never develop the mechanisms needed to mount an affirmative defense to employee lawsuits. An affirmative defense requires policies and comprehensive records which are well-maintained and secured. Regarding financial challenges, nonprofit management has always required attention to cash flow. Current funding scarcity, budget cuts and revenue delays mean that organizations without strict, effective cash management practices are pushed to the financial edge with little warning. Specific causative factors that allow situations to develop into disasters include:

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

Immediate attention

When the board is notified of an employee’s intent to sue for executive director misconduct or when a vendor hires an attorney to collect an outstanding payable, there are certain precautions needed to avoid insolvency and/or 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 for a board to consider. It’s imperative that a nonprofit facing serious employee misconduct charges, consult their legal and financial representatives for professional guidance and to follow all organization policies that might apply. This is especially important if litigation is anticipated. Among the points for the board to consider and discuss:

The “Offending” Executive Director

• Consider an immediate, short term 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 explicitly authorized to do so.
• Audit the ED’s office for the proper existence and condition of key operational files.
• 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 and accounts receivable aging reports, if available. If these reports are not available, consider hiring an independent accountant or bookkeeper 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 determine it’s ability to meet current obligations.
• Meet immediately with all major lien-holders such as banks, lenders, and landlords to let them know a 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 resolved.
• Your bank may have a loan “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 engaging in or covering up sexual harassment, contact your attorney before taking the steps that follow. They may need modification. The potential of a cover up or collusion among employees makes the Board’s response more complex.
• If the ED is suspected of nonsexual, 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 are involved and should be suspended, temporarily.
• Consider a large group meeting to indicate generally what has happened (no negative personnel details other than a personnel accusation has been made), why details are not released (confidentiality) and how the board is responding in a careful way.
• Instruct employees not to gossip about any specifics, remind them of confidentiality policies. Explain that they may be interviewed and not to discuss what will be said or what has been said in the context of a confidential interview.
• Consider offering a secured and confidential survey to employees to allow them a safe way to speak up about concerns that could aid 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 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 and deductions are withheld and remitted regularly to pension sponsors, health insurers, and revenue services.
• Verify that 990’s and state corporate reporting are completed and filed.
• Verify that business licenses are current with 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 defense.
• Assign one or two board members to cover agency operations in the absence of an ED on suspension – someone needs to 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 avoidant or guilty.
• Meet weekly 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 an upset, worried board the overwhelming feeling is relief that someone with experience is there to offer clear, objective support. Good luck!