Does your nonprofit’s board understand its fiduciary duties?
Interest in not-for-profits’ governance practices from lawmakers, watchdog groups and the general public has been growing in recent years. If your board hasn’t reviewed its roles and responsibilities recently, now is a good time.
3 primary responsibilities
Nonprofit board members — whether compensated or not — have a fiduciary duty to the organization. Some states have laws governing the responsibilities of nonprofit boards and other fiduciaries. But, in general, a fiduciary has three primary duties:
- Duty of care. Board members must exercise reasonable care in overseeing the organization’s financial and operational activities. Although disengaged from day-to-day affairs, they should understand its mission, programs and structure, make informed decisions, and consult others — including outside experts — when appropriate.
- Duty of loyalty. Board members must act solely in the best interests of the organization and its constituents, and not for personal gain.
- Duty of obedience. Board members must act in accordance with the organization’s mission, charter and bylaws, and any applicable state or federal laws.
Board members who violate these duties may be held personally liable for any financial harm the organization suffers as a result.
Conflicts of interest
One of the most challenging components of fiduciary duty is the obligation to avoid conflicts of interest. In general, a conflict of interest exists when an organization does business with:
- A board member,
- An entity in which a board member has a financial interest, or
- Another company or organization for which a board member serves as a director or trustee.
To avoid even the appearance of impropriety, your nonprofit should also treat a transaction as a conflict of interest if it involves a board member’s spouse or other family member, or an entity in which a spouse or family member has a financial interest.
The key to dealing with conflicts of interest, whether real or perceived, is disclosure. The board member involved should disclose the relevant facts to the board and abstain from any discussion or vote on the issue — unless the board determines that he or she may participate.
The rules concerning the liability of fiduciaries are complex. But your board members can meet their obligations by acting in good faith, putting the organization’s best interests first, making informed decisions and disclosing any potential conflicts of interest. Contact us for more information.