The typical non-profit organization has an executive director that reports to a board of directors as indicated in its IRS application for charitable status. Too many executive directors now carry the title of President/CEO which is totally erroneous (at best) and very misleading (at worst).
I was in a meeting recently with the executive director of a local non-profit organization – actually, several executive directors of several local non-profit organizations were in the meeting – and I saw a television ad that evening where one of those executive directors was titled President/CEO. This is not the correct way to refer to the executive director; the purpose of this article is to explain why.
In addition to abiding by the rules and regulations governing the charitable status designated by the IRS to an non-profit organization, the non-profit organization must abide by the rules and regulations of the state in which it was incorporated. For example, in my state, two officers are required for incorporation: a president and a secretary. The corporation for the non-profit is a standard, non-stock, c-corp entity. Perhaps unknowingly, non-profit organizations are using titles that are misleading to the public. When an executive director assumes the title of President and/or CEO, that person has, in effect, legally become the head of the corporation. I am sure this is not the intent of the board of directors, and it is not in keeping with the requirements of the IRS, but the fact of the matter is that confusion has been introduced into the day-to-day operation.
Most boards of non-profit organizations have what they refer to as a Chair – and many utilize the executive director as the Secretary in an ex-officio board status. I have previously written articles and answered questions regarding the executive director as an ex-officio member of the board and explained in what cases I consider it to be appropriate (most typically when the executive director serves as the corporate secretary). In the case of boards that utilize the title of Chair for the chief volunteer person heading the board, that person is considered to be the President of the non-profit organization and generally would sign as such when the corporation submits its annual report to the state agency under which it was incorporated and remains accountable. So, technically, the Chair is really the Chair/President. The title CEO (chief executive officer) does not even come into play in most state statutes of which I am familiar; again, the chief executive officer goes by the title of President.
I am aware of a for-profit company who recently needed to sign a document that was to go to the agency of incorporation for a certain state and the signatures of the persons titled Chair/CEO and President/COO (chief operating officer) were actually rejected by the state. The requirement was for the President and Secretary (who must be two different people) to sign the document to be filed. The officers of this company were confused by the regulation, but it was in fact the correct interpretation by the state agency.
However, back to the non-profits, the use of President/CEO for the executive director can be very misleading and should be avoided. The remainder of this article makes the case and provides a suggested course of action to remedy the situation.
The meeting I was attending required a decision on the part of several executive directors. The subject matter was indeed both important and complex and would bind the organizations to a partnership in perpetuity. Accordingly, it made sense for the executive directors to acknowledge that they needed to brief their respective boards and receive approval before proceeding to sign a memorandum of agreement. Technically, if the board was following strict governance protocol, either the board president would sign the memo or the board would adopt a resolution specifically authorizing the executive director to sign the memo on behalf of the board. Such resolutions are common in well-governed organizations and make the intent of the board clear.
After the meeting, I was asked to summarize my thoughts. I explained that I expected more leadership from the President/CEO of the one non-profit organization and less hiding behind his board. Given the title he used, I believe I was correct to expect a higher level of participation than the other executive directors in the room. See how titles (when taken literally) can become confusing?
The confusion centers on an executive director who represents himself/herself as the President/CEO but then proceeds to use the board to hide behind. Members of a group should be able to rely on the title of the organization's representative as an indicator of the authority that person has within the organizational structure. Technically speaking, this non-profit executive director has assumed the role of President/CEO as would be applicable in a for-profit situation. In the typical for-profit situation, the President has considerably more authority (and, presumably, more accountability under Sarbanes-Oxley and other federal and state regulatory requirements) and is, therefore, able to act on behalf of the corporation and approve such documents as memoranda of agreement. In those for-profit situations, the President may or may not brief the board of directors, even after the fact, depending on whether or not the memo is deemed to be material or outside the normal day-to-day operations of the corporation for which the president is both authorized to perform and accountable for those actions.
At what point in time did the title of Executive Director cease to satisfy the holder of that position and cause the title of President to come into play?
I notice the change in title is occurring more and more frequently. In another recent meeting, this subject arose and one of the attendees observed a pretty noticeable "title creep" in organizations today, particularly in the vice president arena. Does the board realize that it is ceding authority to the executive director that is outside the bounds of proper governance? Somehow I rather doubt the board understands; although, undoubtedly, there came a specific point in time when the issue of titles had to come before the board for discussion – or not – depending on how the executive director and president chose to handle the conversion of executive director to President at that point in time. I could argue that any intentional decision not to make the board aware, if perpetrated by the executive director and/or the president, would be fraudulent. Further, I could argue that silent and benign neglect of this information by existing board members, if they noticed a change and chose not to speak up, would be negligent. Matters of this significance deserve board discussion and informed action.
In order to remain in keeping with espoused excellence in non-profit governance, ethics, and accountability, I would recommend the following:
- The board of directors should resist any request by the executive director to be named President and/or CEO.
- If the title designation has already been bestowed, the board should review the situation, explain the issues, and reverse the decision that was previously made.
- The board should double-check to make sure that the chair of the board of the non-profit organization is, in fact, signing regulatory documents as president of the corporation.
- The board, or its executive committee (if it has one), should review the titles and governance issues utilized by the non-profit organization and include an agenda item for the next meeting to fully brief the board on the action being taken and the reasons for the action.
- The board should make clear to the executive director that he or she may not act in the assumed role of president of the organization and make clear the limits of the authority of the executive director.
The meeting that I attended was harmless enough, but it really brought to the forefront the importance of clearly identifying roles and respective titles within an non-profit organization. By taking the opportunity to be proactive in the review of the existing governance practices – and correcting them if necessary – a board can prevent misleading titles and potentially unintended and unwanted problems. It has long been my contention that Sarbanes-Oxley (or something very similar to it) will ultimately be enacted and applied to non-profit organizations. Continued missteps, such as the actual one described in this article and the hypothetical ones, will only hasten the need for additional federal regulations to keep non-profit organizations from exceeding their bounds. If non-profit organizations intend to argue the fact they can be self-policing with a community-based board, the time to demonstrate that ability is now.
About the author
Rob Glenn is the founder of The Center for Ethics, Governance, and Accountability (CEGA), a consulting firm which exclusively serves the Non-Profit Sector. He can be contacted by Email.