Board coup prevention is a multifaceted struggle. It is one of many issues that a founder has to consider. When a founder first establishes the organization, they have to consider whether to establish it as a membership or non-membership organization. And they have to write bylaws.
Several attorneys chimed in to the discussion when asked, “Can bylaws protect the founder?” on a free legal advice board. And let’s not get too far into this bad idea of a founder’s protection clause. That’s not to mention the ensuing terrible discussion about it. Just don’t go there.
There are legitimate reasons for making sure the founder of an organization is legally protected from a board coup. The same goes for the Executive Director if they are not the founder. This is the person who serves as the head of the organization. Any attempt to remove this person from the organization without adequate cause inevitably creates chaos within the organization, damages the organization’s reputation in the community, and upends the lives of everyone on the staff.
I do not know of a case where this idea has been established in case law: I would make the case that removal of the head of the organization without adequate cause constitutes a breach of the board’s fiduciary duties.
Many responses to the idea of protecting a founder run along the lines of the right of the board to hire and fire the Executive Director. That argument contains a flawed presumption of the board’s good faith, even as the board is able to wield the power to fire the head of the organization at the drop of a hat. I will have more to say about this in a future post.
Member vs Non-Member Corporation
Depending on who you talk to, one of these two choices will provide a level of protection for the founder. A Member-based nonprofit has members, whose qualifications are defined in the bylaws. The membership elects the board, and the board then governs the organization.
In contrast, a non-Member-based nonprofit does not have members. The founders choose the initial group of people who will serve on the board. From that point forward, the board will then elect their successors.
These are the two basic models for a nonprofit organization. Neither of them automatically carries any guarantee of success in protecting the head of the organization. No matter what, the board can still fire the Executive Director at-will, unless there are specific protections built in to the bylaws.
The Sole Member Nonprofit
Beyond a founder’s protection clause, I have heard of several attorneys who advocate for nonprofit organizations established as a Sole Member Nonprofit. Don Kramer and Audrey Chisholm are probably the most outspoken advocates of this model. Kramer offers very good arguments in favor of the model through his blog. Chisholm’s success in her own business speaks volumes.
At first glance, this seems like an innovative model. The nonprofit organization is formed as a membership corporation, but with only one member: the founder. That one member then has the power to appoint and remove board members at-will. The legality of this model varies from one state to the next. Several states mandate that a membership nonprofit must have at least three members.
When I first heard of this model, I thought this could be a reasonable way to solve the problem. But then I thought, what is the real problem at-hand that needs solving? Is it that the founder or the head of the organization should never be fired? Is it really okay to flip the assumption of the board’s good faith on its head, and to ascribe the same good faith assumption to the founder?
If you search for the term “sole member nonprofit” using your favorite search engine, you should find no shortage of articles that urge strong caution toward this model. Founder’s Syndrome is often cited as a reason against the sole member model. Is the organization truly meant to serve a purpose for the public good, or is it a vanity project?
The Core Issue
In my own opinion, the Sole Member Nonprofit does not adequately solve the core issue. When a founder is at odds with the board of directors, it is up to the board to work with the founder to reach an amicable solution. All too often, a minor issue with the staff or a disagreement on the direction of the organization leads to inflated charges of impropriety on the part of the founder. The first key to preventing this from happening is a set of bylaws and board-approved policies that force the board to make fair decisions or face consequences.
While I have some ideas on how to ensure fairness in these sorts of decisions, I would also love to hear your ideas. You are welcome to leave a comment here or on Twitter.