J.C. Penney Board Flap: A Lesson for Nonprofits!

By: Eugene Fram

The Penney board wanted to fire one its leading directors. The Wall Street Journal reported that the board “… accused him of breaching his board room duties by disclosing confidential information about the CEO search and financial condition.” The director, William Ackman, initially refused to resign. It was only after days of tense negotiations and details hammered out by lawyers that a resignation agreement was forged, finally ending the flap. *

What Nonprofit Boards Should Learn.

• It is difficult, if not impossible, to dismiss an elected director even if he or she commits an egregious act similar that executed by Ackerman. Some nonprofits believe if a director violates the attendance regulation cited in many bylaws or other bylaw regulations, the board majority can unilaterally dismiss a director. Before taking such a step, the board should review the action with its legal counsel, since state laws vary greatly.

• In the Ackman case, the Penney board, with its huge legal power, could only wait until his elected term was over before refusing to reelect him. Such an occurrence in the nonprofit environment would significantly impact the organization’s reputation. Penney’s stock dropped 3.7% when the resignation was announced. While the nonprofit’s reputation can’t be measured in such a quantitative manner, it needs to plan to take protective PR actions should it find itself in such a difficult position, such as the Penney case.

• My experience with a similar situation occurred when a director did not attend board meeting but refused to resign. In such a case, it is likely the board will be divided into three groups. One group will find a rationale for retaining the director, although he/she is not attending meetings.** A second group will want to directly or indirectly pressure the director to resign; the obligation is clearly established in the bylaws. The third group, although understanding the need for the resignation and abandoning ethical considerations, will chose to do nothing, fearing the perceived conflict will impact staff performance and significantly harm to the organization’s professional reputation as well as the board’s image.

What can a nonprofit board do to avoid, on a smaller scale, the problem that has afflicted the Penney board?
• Selected and vet potential board candidates carefully.
• Clearly define the director’s responsibilities at the outset.
• Get lucky! There can be a wide chasm between what volunteers promise to do and what they actually do. Unlike Ackerman, who has a substantial investment in Penney, the volunteer can only potentially suffer a modest reputational loss.

*Suzanne Kapner, Emily Glazer and Joann S. Lubin (2013)
“Ackman Resigns From J.C. Penney Board,” The Wall Street
Journal, August 13th.

** In this case, the director had made a substantial financial contribution.