12/01/2009 01:50:01 PM EST
Jack B. Siegel on Yeckel v. Abbott and Nonprofit Executive Compensation
The compensation paid to senior executives of nonprofits has come under scrutiny, with the spotlight being directed by state charity regulators, the IRS, grantmakers, and members of Congress. In this Emerging Issues Analysis, Jack B. Siegel discusses Yeckel v. Abbott, 2009 Tex. App. LEXIS 3881 (Tex. App. Austin June 4, 2009) and examines the perils that senior nonprofit executives take when they set their compensation without the full and informed approval of the organization’s board of directors or trustees. He writes:
Background. In 1966, a Texas oilman established the Carl B. and Florence E. King Foundation as a Texas nonprofit corporation (the Foundation). The Foundation also applied for and received recognition as a Section 501(c)(3) charitable organization. Carl L. Yeckel is the Kings' grandson. Yeckel was elected a Foundation director in 1971 and became a full-time employee in 1975. In 1993, Yeckel became the Foundation's president. Shortly thereafter, Yeckel sent a memorandum to the board proposing raises for him and two other Foundation employees. Yeckel's memorandum prompted one board member to raise concerns as to whether Yeckel's proposed compensation was reasonable or might create tax problems. In the years that followed, Yeckel did not again disclose employee salaries to the board. By 2002, Yeckel's base salary had reached $974,978. Yeckel also received what might be described as lavish benefits, including a retirement benefit that had a present value of $10.5 million. Additionally, Yeckel had the use of vehicles, private club memberships, and Foundation credit cards for personal charges. In 2002, the evidence revealed that employee salaries and benefits constituted a larger proportion of total Foundation expenses than charitable grants.
Yeckel's sister blew the whistle, resulting in the Texas Attorney General suing the Foundation, Yeckel, and other directors. After a highly publicized two-week trial, the jury returned a verdict against Yeckel and another Foundation employee. The jury awarded the Foundation $10.5 million in punitive damages and required Yeckel to forfeit $5.28 million, which represented excess compensation received by Yeckel, the attorney's fees incurred by the Foundation, and prejudgment interest.
Few will argue that Yeckel acted admirably or that his compensation was appropriate. In that sense, the jury's verdict was more than justifiable to the extent it required disgorgement of ill-gotten gains.
Holding. The appeals court sustained all of the probate court's judgment except for the award of punitive damages, which the appeals court reversed.
Best Practices and Lessons. Yeckel offers some important lessons and best practices for nonprofits and executives when setting executive compensation.
Full Disclosure is Advisable. Yeckel is not the first case involving allegations of excessive compensation in the nonprofit sector. One recurring theme has been whether the board that approved the compensation or acquiesced in the decision was presented with the full facts. Notable in Yeckel is the behavior of Carl Yeckel once he encountered some concerns over the first proposed increase in his compensation. He failed to disclose subsequent increases to the board. Yeckel or someone working on his behalf went so far as to establish a separate bank account for the payment of compensation. Nobody but Yeckel and an employee who also received pay increases saw the checks written on the account.
. . . .
Boards Must be Proactive in Evaluating the CEO and Setting Executive Compensation. Nonprofit boards are sometimes uncertain exactly what they must do in order to discharge their duty of care. Most laypeople have no idea what the duty of care means in practical terms. Governance experts are engaged in an ongoing debate as to how much oversight a board should exercise, but there is universal agreement that one of the primary functions of a nonprofit's board is to evaluate the chief executive officer and set his compensation. While Yeckel may have attempted to keep the Foundation's board in the dark, the Foundation's board had an independent duty to evaluate his performance and set his compensation. If Yeckel and others were not providing sufficient information, the board should have asked for it. Moreover, the board should have told Yeckel that he was not to change his compensation at will, but that the board would evaluate and set his compensation annually or at other appropriate intervals.
(footnotes omitted)