I don't think it's very fair of her to try and kick him out of the reading program because of something unrelated, especially when it hasn't even started yet! I would point out to her that it has already been an incentive for him to improve and that it would definitely be a negative incentive for further improvement if he were to be kicked out like that. I would (knowing me and how I react to things like this) also start signing every single page that he brings home, no matter what it is, just to be contrary.
And I would not continue on as the leader of the program that they kicked my kid out of, either. But that's just me.
