Should a CEO sit on the board of his/her own directors' companies?

Tuesday, April 27, 2010

Should We Insure the Founder?

Q: I’m on the board of an all volunteer organization. The founder plays the role of a full-time – albeit uncompensated – executive director. Lately, as more and more has fallen on this individual’s shoulders, some of the board members have brought up the idea of taking out life insurance and disability policies on her. The rationale being expressed is two-fold. First, there is a desire to provide the organization with a financial cushion if she can no longer shepherd the organization forward and we have to go with no or greatly reduced funding during the period required to find and train someone new. Second, there are some who wish to compensate this person for all she has done thus far, and feel that taking out an insurance policy to benefit either her or her beneficiaries is an inexpensive way to accomplish this. I’ve never heard of this before and feel uncomfortable about it. Am I out of touch or are the members of this sub-group?

A: There are a number of issues inherent in your question. We have to look at each individually if you are to have an idea of how best to proceed. But, let me start by answering your direct question. Providing life insurance and disability policies to management-level employees is fairly common. These are usually relatively small policies that are included as part of an overall benefits package and negotiated or provided at the time of hire. The benefit generally equals a percentage of the annual salary and is paid out to the employees and/or their beneficiaries, not the organization.1

The provision of “key person” life insurance, to which I believe your board colleagues are referring, is less common in the nonprofit sector, but not unheard of. In this case, where the founder is, I assume, the face of the organization, the chief fund raiser, the administrator, and more, key person life insurance is appropriate because you are seeking to cover the organization for the loss of such critical skills over the period of time that it takes to get back on track. In fact, the situation you describe is a textbook example of when to purchase such insurance.

However, to me, more important than whether this sort of action is typical or appropriate, is the potential impact of these options. You indicate that the founder is doing all the work. Where is the board? The direct service volunteers? Succession planning is all about having the infrastructure in place whereby the organization can keep running smoothly even without the key player(s). (Read or listen to the 2010 CoreStrategies’ Consultants’ Roundtable on Succession Planning.) Your organization seemingly does not have such an infrastructure. My fear is that with your organization so reliant on a single individual, it will be hard to find someone with the desire or capability to take over the organization under such conditions. And, unless you do so in a timely manner, the organization will be forced to dissolve. This means that the insurance money that you collect will end up being turned over to another organization, since all assets of a nonprofit must go to another nonprofit with a similar mission upon its dissolution. I might suggest that you consider whether the premium money would be better spent on board training and/or the hiring of staff to provide some redundancy of skills so that the organization is not so dependent on the founder going forward.

If, as you indicate in your question, the board is concerned about recognizing the efforts of the founder/de facto executive director, it might choose to use the funds it intended to use to pay these premiums to provide her with an annual salary, even if it is a small one. That way the individual is guaranteed some compensation for her efforts at a time when she can personally benefit from it.

1 About a year ago it was learned that a number of Fortune 500 companies had taken out life insurance policies on staff level employees, as opposed to management personnel as is typical. This was unbeknownst to the employees. The named beneficiary was the corporation. This created a public relations nightmare because the corporations were seen to be betting on and benefiting from their employees’ deaths – especially in those cases where the families of the deceased were unable to pay medical bills that had amassed or even burial costs and the corporations walked away with tens of thousands of dollars.

1 comment:

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