This past summer a major controversy erupted on the campus of American University over its president's compensation package.[i] According to the Washington Post, an anonymous letter sparked an investigation by the University into the president's personal and travel expenses.[ii] The board commissioned an audit,[iii] which was subsequently leaked to the press.[iv] Stories about elaborate dinners,[v] a personal chef,[vi] and extravagant travel[vii] began to circulate.
American University President Benjamin Ladner has mounted a strong defense of his action, strongly denying...
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any wrongdoing,[viii] but acknolwedging that a few of personal expenses were improperly accounted for.[ix] President Ladner wrote a check to correct those errors.[x]
Second, President Ladner has given a number of interviews during the
course of the controversy.[xv] It unclear whether he really understood the
significance of the intermediate sanctions when he entered into the
controversial contract in 1997. But by now, President Ladner clearly understands that it
was him, not American University that stood the
benefit the most from the rebuttable presumption under the intermediate sanctions, as well
as compliance with all the minutia in the regulations.[xvi] While every board should obviously be
concerned about setting appropriate compensation for the organization's
personnel, the executives should be the ones who are demanding that the board
obtain comparables, consult with lawyers, accountants, and compensation
professionals, and utilize written employment contracts. Executives should also be sticklers about
substantiating their expenses under accountable reimbursement plans. While the directors can be subjected to
penalties, the executives are the ones who must return any excess
benefits—that's real money.
Third, President Ladner has claimed that he submitted appropriate
reimbursements for many expenses, but that the University had a record
retention policy that resulted in the destruction of those records after a
one-year period of time.[xvii] According to President Ladner, this led the
auditors to recharacterize many business expenditures as personal, when in fact
the expenditures were business-related.[xviii] This could also have implications if the IRS
decides to audit the compensation arrangement. As is true with the intermediate sanctions, a document retention policy
does not just protect the institution. Given the fact that a six-year statute of limitations could apply in
the case of the intermediate sanctions,[xix]
executives should be insisting on lengthy record retention policies when it
comes to expense reimbursements.
Fourth, there has been a great deal of controversy whether the 1997
contract was valid. Those defending
President Ladner have argued that the entire board had the opportunity to review its
terms if they so desired.[xx] Others have said that some of the board members
had not seen the contract.[xxi] It is unclear from newspaper accounts whether
the contract was approved by an executive committee, a compensation committee,
or just by the chairman of the board. Once again, for present purposes, the facts of that particular situation
are largely irrelevant. The lesson: While the chief executive might prefer
negotiating his contract with the chairman of the board or just the
compensation committee, the safer course of action is to seek a decision from the
full board following full disclosure of the contract's terms.
Fifth and finally, President Ladner seems to have suggested that concerns over better governance in the non-profit sector are rooted in the 2002 Sarbanes-Oxely Act,[xxii] applicable for the most part to large, publicly traded corporations, but influencing those serving on non-profit boards.[xxiii] There is no doubt that Sarbanes-Oxley has had an indirect impact on non-profit governance, but the intermediate sanctions predate Sarbanes-Oxley by six years. While the regulations under the intermediate sanctions are mired in technicalities, at their core, the sanctions are directed at conficts of interst and director decisionmaking. Consequently, those regulating non-profits were actually out front when it comes to governance.
[i] V. Strauss and S. Kinzie, Once-Friendly AU Board Splintered into Factions: Attorneys Hired Over Ladner's Future, Washington Post (September 28, 2005); V. Strauss and S. Kinzie, AU Faculty Members Vote No Confidence in Ladner: Information Lacking, Suspended Leader Says, Washgtinong Post (September 27, 2005); P. Fain, Troubles Deepen for American U. President as Reports of Lavish Spending Spur Trustee to Demand His Ouster, Chonicle of Higher Education (September 26, 2005); and V. Strauss and S. Kinzie, Federal Officials Scrutinize Ladner: Sources Say AU Received Subpoena, Washington Post (September 20, 2005).
[ii] Introduction to a Transcript appearing in the Washington Post entitled American University Controversy: AU President Says He Will Consider Legal Action if He's Dismissed (October 7, 2005); and G. Williams, American University Faces Legal Scrutin Over President's Spending, Chronicle of Philanthropy (September 30, 2005); and S. Jaschik, American U. President Placed on Leave, Insider Higher Ed (August 25, 2005).
[iii] V. Strauss, AU Calls in Lawyers, Auditors to Investigate Finances, Washington Post (July 30, 2005).
[iv] Trouble Deepen, surpa Note (i).
[v] Controversy on the Menu, Washington Post (September 25, 2005).
[vi] S. Kinzie and V. Strauss, Layoff Amid Probe of AU Head's Spending, Washington Post (September 16, 2005).
[vii] S. Kinzie and V. Strauss, $500,000 in Ladner Spending Itemized:
Trustees at AU Deeply Divided,
Washington Post (September 22, 2005).
[viii] S. Kinzie and V. Strauss, Attorneys Challenge Au Trustees' Leadership, Washington Post (October 8, 2005).
[ix] Interview, In His Own Words; Benjamin Ladner Takes Questions on His Pay, His Perks, and His Fate, Chronicle of Higher Education (September 29, 2005); S. Kinzie and V. Strauss, AU's Ladner Defends His Spending: Suspended President Says Trustees have Treated him Unfairly, Washington Post (September 24, 2005).
[x] M. Janofsky, Suspended College President Offers to Accept Lesser Pact, N.Y. Times (September 24, 2005).
[xi] S. Kinzie and V. Strauss, American U. Board Split on Keeping President: Some Negotiating New Deal for Ladner, Washington Post (September 25, 2005).
[xii] Concerned Au Students, American University Press Release, Organizing to Oppose Ladner (October
10, 2005); S. Kinzie and V. Strauss , Majority of Trustees Say Ladner Must
Leave: Some Board Members Seek Generous Deal, Washington Post (September 30,
2005); and S. Kinzie and V. Strauss, Ladner Memo in 2004 Sought $5Million Boost:
AU Students Demonstrate Against President,
Washington Post (September 29, 2005).
[xiii] Editorial, Mr. Ladner's "Mistakes," Washington Post (October 8, 2005).
[xiv] L. Romano, AU Scandal Atypical in Post-Enron Era, College Presidents Say, Washington Post (October 9, 2005).
[xv] In His Own Words, supra Note (ix); and American University Controversy, supra Note (ii).
[xvi] In His Own Words, supra Note (ix); and G. Williams, Embattled President of American U. Says Changing Legal Landscape Should Concern Other College Leaders, Chronicle of Higher Education (September 29, 2005).
[xvii] In His Own Words, supra Note (ix)
[xviii] Id.
[xix] Treasury Regulation Section 301.6501(e)-1(c)(3)(ii); and E. Brody, Aministrative Troubes for the Intermediate Sanctions Regime, Tax Notes (July 16, 2001).
[xx] S. Kinzie and V. Strauss, Lawyers' Report Says Ladner Should Repay AU $115,000: Study Raises Doubts on Validity of Contract, Washington Post (October 7, 2005). President Ladner described the process in an interview, indicating that it was he was told that the board was informed of the "actual ingredients or elements of the contract." See, In His Own Words, supra Note (ix).
[xxi] Id.
[xxii] Sarbanes-Oxley Act of 2002, Pub L. 107-204.
[xxiii] In
His Own Words, supra (ix).
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