Can the Board of Directors Fire the CEO of a Nonprofit Company?

by John Cromwell

    The board of directors can fire the CEO, otherwise known as the executive director, of a nonprofit company. It is the responsibility of the board to appoint and oversee the officers of a nonprofit. Those duties necessarily grant the board the ability to dismiss the executive director. There are numerous grounds to dismiss a CEO, but the process will be defined by the nonprofit’s contract with the executive and its bylaws. Although a board is able to dismiss a CEO, there are circumstances in which the termination gives the dismissed director grounds to sue the nonprofit for wrongful termination.

    Reasons for Dismissal

    Grounds for dismissal for cause include embezzlement, sexually harassing a subordinate, and other unethical behavior. An executive director can be dismissed if the board feels she fails to meet her responsibilities. An executive director of a nonprofit company is responsible for running the day-to-day operations of the nonprofit and carrying out the strategy established by the board. The board is obligated to closely monitor the performance of the nonprofit’s officers. If the CEO fails to meet her responsibilities, the board should be in a position to document her shortcomings and determine if she is unable to competently fill the post.

    CEO Contracts

    The responsibilities of the executive director may be defined by the CEO’s contract. Contracts between nonprofits and executive directors are becoming increasingly popular, with 60 percent of active CEOs under contract in some nonprofit sectors as of September 2008. Often the contracts differentiate between termination “with cause” and “without cause.” “With cause” terminations are defined within the contract and normally include events like felony convictions or embezzlement. If terminated with cause, the executive is normally given no severance. All other instances of termination are classified as “without cause.” If terminated without cause, the CEO is normally granted some sort of severance package.

    Nonprofit Bylaws

    The bylaws of the nonprofit are the company’s rule book. The bylaws define how the business is run, how the property is used, and the responsibilities of different positions in the organization. The bylaws may provide two important bits of information regarding a CEO’s dismissal. First, it may define the role of the CEO. If the CEO is under contract, the bylaws and contract should be harmonized prior to the candidate joining the organization. The bylaws may also define the procedure for terminating a CEO, including when a vote on a CEO’s future can be taken and how many votes are necessary to dismiss the executive director.

    Wrongful Termination

    Although a board can fire a CEO, the reasons for the dismissal may leave the nonprofit open to a lawsuit. If the discharged CEO can demonstrate that the board dismissed her because she was part of a protected class, she may sue the nonprofit for wrongful termination. Examples of protected classes include race, age, sex, national origin, and disability. Executives dismissed because they reported illegal actions by the nonprofit or because they participated in legally protected activities, such as filing a worker’s compensation claim, may also sue under wrongful termination.

    About the Author

    John Cromwell specializes in financial, legal and small business issues. Cromwell holds a bachelor's and master's degree in accounting, as well as a Juris Doctor. He is currently a co-founder of two businesses.