Good Fences Make Good Neighbors

By Raymond D. Cotton

A "contract" is, in its essence, a collection of legally enforceable promises that are intended to satisfy the desires of two or more parties. In the sphere of university presidents, employment contracts normally are in writing and contain not only the agreed-upon economic terms but also the hopes and dreams of the individuals involved. Those contracts are supposed to set out in writing the terms of the relationship -- the boundaries -- between the president and the trustees.

It is almost customary now for the first contract between a new president and a governing board to be for a three-year period so that both sides can "try each other out" and make sure there is a "cultural fit." Thereafter, the president is usually interested in additional job security and the board wants greater stability at the top. Renewal contracts, by mutual agreement, tend to be for five or more years.

Because presidential contracts involve issues at the very heart of the operation of a college or university, those documents have grown in length. It is not unusual to see contracts that are 10 to 15 pages long and refer to additional legal documents, such as deferred-compensation plans or spousal agreements.

Yet according to a 2007 study of college presidents by the American Council on Education, less than half of those surveyed had sought any outside advice when they were negotiating their contracts. Of those presidents who did seek advice, most did not consult a lawyer. In fact, the most-favored people from whom advice was sought were "colleagues in the field." We lawyers call that the blind leading the blind.

So of the two parties involved in the negotiation of a presidential contract, only one side -- the governing board -- typically had its own lawyer. A majority of trustees come from the business world and apply business concepts to their responsibilities as trustees, which is why most university boards would not think of entering into a three- to five-year employment contract involving potentially more than $1-million of the institution's money without first seeking legal advice.

When campus presidents consult with me about problems they are having with their trustees, the first document I ask to see is their employment agreement. After reviewing scores of those contracts, I have found, in all too many cases, that the presidents have little if any job protections.

So I ask my clients: How can that be? How did it happen? In response I hear time and time again that they did not have their own lawyer review the contract before they signed it. Most say something like, "The numbers were what we agreed upon, and I thought the university attorney would take care of the rest. I thought he/she would be fair to me."

It is way past time for college and university presidents to understand that in our country's legal system, it is unethical for the lawyer on the other side of the table -- i.e., the university's attorney -- to look out for the presidents' interests. It is predictable -- and expected -- that a contract drafted by the board's lawyer will reflect only the concerns and interests of the board.

Where does that leave the president? Outside. In the cold. Unless you as the president have had your own lawyer review the contract before you sign it.

Undoubtedly some readers will be suspicious of a lawyer writing a column urging presidents to hire a lawyer. It's in my interest that they do so, right? It's kind of like when my doctor advises me to come in more frequently for blood-pressure monitoring. It's necessary for me as the patient, but it also means more revenue for his medical practice. I can follow the advice, or not.

In the case of presidential contracts, far too often I see the consequences for leaders who do not have any legal representation when things fall apart. I see presidents getting taken advantage of out there in the market place. So I will lay out my advice for those of you who are presidents; you can follow it, or not.

Every presidential contract covers two major subject areas. The first deals with levels of compensation and executive benefits for such things as salary, raises, performance bonuses, housing, automobiles, deferred compensation, and travel expenses.

The second area is job security. In a multiple-year contract, what happens if the board wishes to end it early? Can the president be fired without having engaged in seriously bad behavior? If so, is any notice required? Will a severance be paid and, if so, how much? What about giving the president (and the president's family) adequate notice to leave the university-owned home? Will moving expenses of a departing leader be paid by the institution?

Too many presidential contracts either do not deal with those issues at all or, if they do, provide inadequate protections for the president.

A president called me recently to say he was not getting along with the new board chair. He told me he was expecting trouble and asked for my advice. I requested a copy of his contract and then had the difficult task of informing him that his contract provided virtually no protection for him and his family. Subsequently he was fired in the middle of the academic year and ordered to leave his office immediately and vacate the presidential home within 90 days.

"How could this happen?" he asked. He told me he had had the same agreement for more than eight years and "it had always worked before."

Sometimes I represent boards in these disputes, so I know how they look at presidential contracts. Most want to be fair but do not want to waste the institution's money. Their lawyers are charged with "protecting the college."

When I represent presidents, I look upon my assignment as though I were in the safety-net business. At the beginning of a presidency, relations with the board are usually excellent and everyone has high hopes for success. Many people, myself included, cheer the president on. We wish the new leader well and hope for great achievements. But given what I do, I must also look at the situation and ask, "What happens if things go awry?" And then I act accordingly to build defenses so that no matter what happens, the president will be protected financially.

Many presidencies end prematurely. I see five ways that can happen: presidents can resign, die, become permanently disabled, be terminated for cause (no severance), or be terminated without cause (generally that means a severance will be paid).

The president's lawyer is responsible for considering each of those possible outcomes and building protective clauses into the contract for the sake of the president and his or her family.

Can a president address those contract issues adequately without the advice of a qualified lawyer? After what I have seen in the field, I must say the answer is a resounding no! The study of contracts is a basic, year-long course in most law schools. Experience with employment contracts in general, and presidential contracts in particular, is also necessary. Even then, a lawyer specializing in presidential contract law must understand such matters as intermediate sanctions, the Sarbanes-Oxley Act, ERISA, and deferred-compensation rules. Any layperson who enters into negotiations about such things without an experienced lawyer close at hand is just plain foolish.

Take the matter of "termination for cause." Many presidents believe (incorrectly) that they must violate a criminal law, engage in an act of great moral turpitude, or otherwise exhibit extremely bad behavior to be terminated "for cause" and fired without severance.

Last fall, in a case involving Western Michigan University, the board attempted to terminate the president's employment agreement "for cause" because she was not attaining mutually agreed upon performance goals "fast enough." When faced with that action, the president hired a lawyer and fought back. Ultimately the parties reached a financial settlement. However, because the contract was both one-sided and poorly drafted to begin with, all of those events played out in public, to the detriment of both the university and the president.

You can't prevent things from going wrong in a presidency. But you can protect yourself and your family. In "Mending Wall," Robert Frost wonders about the necessity for a wall that separates his apple orchard from his neighbor's pine trees. But his neighbor simply says: "Good fences make good neighbors." Such sage advice should be taken to heart by all hard-working university presidents and those who seek such positions.