Make Sure Your Nonprofit Directors and Officers Know Their Fiduciary Duties
Supporting a nonprofit organization with cash donations is very charitable (and highly encouraged), but serving on the board of directors can be an even more valuable measure of support, especially to small nonprofits with limited resources.
Most people know that the board of directors of a for-profit company represents the interests of the stockholders, but those who serve on a nonprofit board should represent the interests of society or the community served by the group. In both cases, board members assume a fiduciary responsibility for the resources of the organization and can be held accountable for breaches of that responsibility.
Video: See Ron Benjamin’s presentation on board member duties at New York Nonprofit Media’s Nonprofit BoardCon in January 2017.
The laws incorporating nonprofit organizations define fiduciary duties in three broad categories:
- Duty of care
- Duty of loyalty
- Duty of obedience
Before proffering a board position to someone, it is important for the candidate to understand the duties, responsibilities, and risks of the role, and to know when is appropriate to seek counsel.
Duty of care: good faith and regular monitoring
Duty of care requires a director to act with diligence and in good faith. In other words, do what an ordinary, prudent person would do in a like position under similar circumstances. Typically, this includes staying well informed of corporate activities, regularly attending board meetings, reviewing materials, and questioning matters that are not clear.
It also includes gathering all material information about the organization that is reasonably available and regularly monitoring the status of business and the actions of management. When reasonable and appropriate you can rely on management and financial or legal advisors, but in some circumstances, matters should be discussed without management present.
Duty of loyalty: avoiding conflicts of interest
The duty of loyalty requires directors to act in good faith and in the best interests of the organization rather than their own interests or those of other parties. Being loyal means avoiding conflicts of interest or conduct that is not transparent.
A director should avoid:
- Appearing on both sides of a transaction involving the corporation
- Receiving a personal benefit from a transaction with the corporation
- Usurping or appropriating a financial opportunity for personal gain
To support the duty of loyalty boards should establish a conflict of interest policy that addresses the handling of transactions with related parties. This may include the disclosure of possible conflicts when an individual joins the board and on an annual basis.
Duty of obedience: being a champion for the mission
The duty of obedience obligates directors to ensure that the mission of the organization is upheld and perpetuated. To do this, directors must work to ensure a common understanding of the corporation’s mission among the board members, dedicate the resources of the organization to its mission, and comply with the law. Any diversion of the corporation’s assets from the mission is a violation of the duty of obedience. Accordingly, the directors must provide for the protection of the corporation’s assets.
The board member’s point of view
Board members should also be capable of looking at the big picture that includes the future, the present, and the past.
A view of the future involves review and approval of strategic planning, material capital allocations, budgets, and projections. It also includes the selection, evaluation, and compensation of management.
A view of the present includes monitoring corporate performance against plans and budgets, fundraising activities, investment performance, and liquidity. Board members also need to be conscious of “red flags” that could point to conflicts of interest, fraud, or other issues, and of limitations on management’s authority.
A view of the past involves reviews of financial statements and governmental annual returns, overseeing the annual audit process, and following up on prior requests and discussions.
Make it a positive, productive experience
Board service is a rewarding experience and can provide significant benefits to the nonprofit organization that receives it. To make the most of a volunteer’s time and effort, the board should make sure all of its members are aware of their individual and group responsibilities:
- Understand their fiduciary duties
- Stay informed and inquisitive
- Pay attention to red flags
- Ensure that assets are managed properly
- Implement best practices, policies, and procedures
- Know when to ask for help
How we can help
Our nonprofit professionals can work with your organization to develop detailed criteria for choosing and training board members. The board should also consult an attorney experienced in nonprofit law to advise its directors as to their fiduciary duties.