Defining Termination for Cause in Executive Employment Agreements

Most associations have some sort of written employment agreement with their chief staff executive, even if it takes the form of an offer letter. Whether the executive is hired for a defined term or is employed on an at-will basis, many executive employment agreements include severance provisions that are triggered if the executive is terminated “without cause.”

Usually, no severance is payable to the executive when the employment agreement is not renewed for one of several reasons: The employment term expires (although for longer-serving executives, this is not always the case); the executive resigns, dies, or leaves as the result of a disability; or the executive is terminated “for cause.”

From the executive’s viewpoint, severance provisions provide important protections and become key elements of the negotiated employment package, particularly if he or she is leaving a secure role to join a new organization. Executives also have legitimate concerns about placing their employment security at risk in the event that personality conflicts arise with board members or officers, positions that often experience more frequent turnover than staff positions. Executives therefore often seek to define narrowly the circumstances under which a board may dismiss them for cause.

From the association’s viewpoint, however, a cause definition that is too narrow entails significant risk. In such a case, if the board determines that it needs to remove the chief executive in the best interests of the organization, it may be required to make a substantial severance payment. In another common scenario, a board may try to stretch an ambiguous cause definition to cover its rationale for terminating the executive’s employment. The terminated executive then challenges the board’s interpretation, and the organization finds itself embroiled in an expensive breach-of-contract lawsuit.

Faced with these unpalatable options, some boards may decide to retain an executive until the end of the contract term, even if doing so may be harmful to the association, because the organization cannot afford to pay both severance and the successor’s salary. Other boards negotiate a compromise severance amount to avert litigation or a public dispute.

Common Definitions—and Better Ones

Carefully drafted termination provisions in executive employment agreements can avoid these kinds of outcomes. These provisions should provide guidance to the executive about the association’s expectations, emphasizing both clarity and preservation of the association’s reputation and long-term health.

What does an overly narrow cause definition look like? Examples from the for-profit sector can be found in public filings with the Securities and Exchange Commission, which often include executive employment provisions. One company, for example, defined cause for termination as encompassing only two scenarios:

• “Willful failure of the executive to perform substantially the executive’s duties with the company,” other than due to health reasons, after receiving specific notice of the deficiency and failing to address it.
• “Willful engaging by the executive in illegal conduct or gross misconduct” that is “materially and demonstrably injurious to the company.”

Neither of these provisions would permit the employer to terminate the executive for cause based on negligent or even reckless performance of his or her duties. A stronger cause definition would cover any termination based on failure to meet established performance objectives or goals that had been communicated to the executive, regardless of whether the failure was intentional.

Other common cause definitions, even in narrowly drafted agreements, include conviction of a crime related to the executive’s job duties. These provisions are often too little, too late, given the timeline for many criminal prosecutions. A stronger provision would define cause based on the underlying act or omission that violates criminal law and that relates to the association.

Boards should also consider including terms that underscore behaviors the association values. For example:

• Cause can be defined to include documented acts of dishonesty in connection with the executive’s work. Even if the board lacks evidence that dishonesty has caused damage to the association, an organization cannot function well if the board or staff have reason not to trust an executive’s truthfulness.
• Executives should be held to the same employment policies as other staff, so a material violation of those policies should give rise to termination for cause. Employment agreements should specifically require the executive to adhere to policies against discrimination, harassment, and retaliation.

Protection Against Scandal

Finally, the #MeToo era has taught employers that scandals can render executives ineffective and taint an organization by affiliation, even if the actions that gave rise to the scandal took place years before. Boards should consider preserving the right to terminate executives without severance in such circumstances. A cause provision along these lines could allow termination based on an “executive’s commission of any act, occurring or coming to light during the executive’s employment with the association, that brings the executive into public contempt or ridicule.”

To cover potentially scandalous conduct that the board discovers but that has not yet become public, cause can be defined to include “any act or omission by the executive, occurring or coming to light during the executive’s employment with the association, that the board of directors reasonably judges to be likely to injure the operations or reputation of the association, with those acts disclosed to the executive and with the executive accorded an opportunity to respond in writing to the board.”

In the absence of a public scandal that harms the reputation of both the executive and the association, the executive should, in fairness, be given notice of the alleged cause for termination and an opportunity to respond.

In each of these definitions, acts that precede the executive’s employment with the association would constitute cause only if the act first came to light during his or her tenure. Boards should conduct due diligence before hiring an executive to examine the candidate’s known history. Just as importantly, boards should conscientiously fulfill their obligation to supervise and provide clear objectives to executives. The best outcome, after all, is to avoid ever needing to invoke a cause provision in an employment agreement.