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On The Dotted Line

By Thomas McLaughlin - January 31, 2014

The newly hired executive director seemed promising at first. He was the first full-time person in that position and had a year, more or less, of similar experience. It seemed like a good fit.

There was a small fire in one of the residential programs. No one was hurt. It was clearly a resident’s fault (smoking), but it scared everyone – and left a sprinkler system-created mess. After a few months it became clear that the founding board members — the board president and two of her closest friends and neighbors — couldn’t let go. And then one of the program managers began to distance herself from the new executive and the rest of the staff. Rumor had it that she was disappointed at not being considered for the executive director’s job. In a small organization, the dysfunction was potent.

The founding board members began to talk among themselves, and then the founder began to make stronger and more persistent inquiries of the executive director about “how things are going.” The inquiries became hints, and the hints culminated in a “we have to talk” conversation. Within months, the executive director left to take a different job in a different town.

Variations on this scenario happen all the time. Some readers might even recognize it from personal experience. The board members would eventually have begun to say that they made a hiring mistake. The former executive director would have attributed it to inexperience and a convergence of odd events and unfortunate misunderstandings.

An impartial observer might say: “These things happen all the time. Who cares?” And the answer would be correct, these things do happen all the time. A more thoughtful observer might note that executive directors and the small nonprofits that hire them might need to make mistakes like these because it’s all part of the parties’ learning and development.

But what if the organization had been in a situation in which it needed stability in the executive’s chair and the newly hired executive director had suddenly bolted for greener pastures? What if the organization had been accused unfairly of some kind of malfeasance and needed the skills and experience of its executive director to clear its name yet the person took the moment to go to a larger competitor?

These are all problems of executive absence from the other side. People will identify more with an individual CEO’s need for stability, yet nonprofits need stability in the executive chair for their own purposes. Stability in the CEO chair is valuable.

Management Contracts. One answer to this two-party problem is a simple yet surprisingly underutilized one — management contracts. At its simplest, a management contract is a binding document signed by the organization and the executive laying out the relationship between the two. Management contracts often have highly unique provisions and varying purposes. For the moment concentrate on their use solely from the perspective of how best to ensure that executives remain in place for a specified period of time. Nonprofit World is a trusting sector, but there are still situations in which board members might want a legally acceptable contract to ensure the services of the CEO (and other executives) for a period of time. Here’s a spotlight on a few of them.

Founder Transitions. Particularly appropriate in view of the number of nonprofit founder/CEOs who are at or near retirement age, management contracts can be a good way to ensure the continuity of a successful nonprofit. This should happen in the context of an organization-wide planning effort to move through the CEO transition as smoothly as possible. Ideally the contract will incorporate a succession plan. These can be particularly smooth when the CEO takes the initiative to map out the timeline and the steps that would be needed for a glitch-free handover.

Holding Onto Gold. Boards that are particularly satisfied with their CEOs might want to consider a management contract because of the value inherent in an effective leader. There is a tacitly competitive CEO “marketplace” in metropolitan areas with large collections of similar organizations. The competitiveness often causes an individual CEO to rule out ever working for the competition, but this doesn’t happen all the time. When a defection occurs it can be damaging organizationally and culturally.

Mergers. Nonprofit mergers are prime situations for management contracts. It is often very difficult to get two organizations with sitting CEOs to consider a merger because each fears loss of the job. This is a myth because there are ways of having two CEOs (or comparable positions) in the same organization. Verbal reassurance isn’t as powerful as a contractual obligation.

Here’s another combination scenario in which to consider management contracts for each CEO. Suppose a CEO plans to work for a small number of additional years and wants to use that time for a smooth transition. The partner is headed by a CEO acceptable to the other entity, once the CEO retires. Each CEO gets a management contract with their current organization, but the succeeding CEO’s is at least a year or two longer than the retiring CEO’s deal. As long as the two CEOs can create a working relationship this scenario would work well. And, as in the above note, neither individual necessarily needs to lose the CEO title as long as the structure is put together correctly.

Succession From Within. If the plan is to eventually replace a retiring CEO with an internal candidate, board members might want to have parallel and complementary contracts with each executive.

Litigious Environment. Although it doesn’t happen often, some nonprofits operate in a litigious environment. Social welfare organizations — 501(c)(4)s — are more likely to be in this situation, but it can also happen to public charities under unusual circumstances. CEOs in this kind of situation might be well advised to have a management contract spelling out in detail any provisions for legal assistance provided by the organization.

The 3 Ps. What goes into a management contract? The easy answer – whatever the organization and the CEO want to include. There are some norms. Think of them as the 3 P’s — Pay, Power, and Perks. Management contracts are valid legal instruments that are best structured by lawyers, but the 3 P’s will always touch on the majority of the concerns.

Some typical provisions include payment for the length of the contract except if terminated for cause. Power provisions are harder to build in for obvious reasons. The essence is that the executive won’t lose the power in their positions except as a result of the most egregious of behaviors. The terms and conditions should be very clear and ideally probably the product of a mutual discussion. And, build in contract renegotiation in the event of unusual circumstances.

Are you worried about rogue board members, intrusive regulators or donors, or an inexplicable burst of bad public relations? In this ethical and self-aware sector these things don’t happen very often. Remember the executive director described above. No nonprofit executive is immune. Maybe it’s time to break out the legal pen.  NPT

Thomas A. McLaughlin is the founder of the nonprofit-oriented consulting firm McLaughlin & Associates and a faculty member at the Heller School for Social Policy and Management at Brandeis University. He is the author of ‘Nonprofit Mergers & Alliances’ (2nd edition), published by Wiley & Sons. His email address is [email protected]

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