Nonprofit board directors only have three fiduciary responsibilities, and each of them is very important. It’s critical for board directors to practice them in word and in deed, and to make sure that their fellow board directors do as well. The three fiduciary responsibilities of all board directors are the duty of care, the duty of loyalty and the duty of obedience, as mandated by state and common law.
It’s vitally important that all board directors understand how their duties fall into each category of fiduciary duties. Not understanding fiduciary duties — or not being well-informed about them — doesn’t relieve board directors from any obligations or liabilities they may face if they fail to fulfill these important duties.
Board directors are called fiduciaries because they are legally responsible for managing a nonprofit entity’s assets. Fundraising is one of the primary activities of a charitable nonprofit organization. Board directors are responsible for overseeing funds from philanthropists, donors and grant-makers, and making sure that the funds are being used for their intended purpose in financially supporting the organization. Board directors who diligently perform their fiduciary duties responsibly protect the organization’s reputation, which also falls into the category of a fiduciary duty.
Defining Fiduciary Duties
Nonprofit board members make many important decisions, such as recruiting and appointing new board directors, hiring and firing managers and other staff members, monitoring financial reports and conducting an annual audit. All of these duties fall under the duty of care, duty of loyalty or duty of obedience.
Duty of Care
Duty of care means that board directors must give the same care and concern to their board responsibilities as any prudent and ordinary person would. This means board members should be actively participating in board meetings and on committees. It also means that they should be actively working with other board directors to advance the organization’s mission and goals. They can fulfill their responsibilities by overseeing and monitoring the nonprofit’s activities. Board directors should be able to read and understand financial reports and be willing to question expenditures and examine variances. They are also responsible for strategic planning and achieving the nonprofit’s short- and long-term goals.
Duty of Loyalty
Duty of loyalty means that board directors must place the interests of the organization ahead of their own interests at all times. Duty of loyalty means publicly disclosing any conflicts of interests and not using board service as a means for personal or commercial gain.
Duty of Obedience
Duty of obedience means that board directors must make sure that the nonprofit is abiding by all applicable laws and regulations and doesn’t engage in illegal or unauthorized activities. The duty of obedience also means that board directors must carry out the organization’s mission in accordance with the purpose they stated in getting qualified as a nonprofit organization.
Assessing Your Board’s Understanding of Their Fiduciary Duties
Oftentimes, nonprofit board directors recruit and accept anyone who is willing to serve on the board. Recruiting board directors with little or no board experience can be a good way to refresh a board, as long as board directors get proper training about their duties and responsibilities.
The performance of an annual board evaluation is a good time to assess whether each board director understands the duties of care, loyalty and obedience. Board evaluations should also reveal whether directors understand how their fiduciary responsibilities relate to their duties of strategic planning, risk management and oversight.
Board members should spend some time during the year discussing ways that the board could be exposed to liability for breaching their fiduciary duties. These discussions may form the basis for new policies or changes within the organization.
Forming Policies and Procedures That Support the Fulfillment of Fiduciary Responsibilities
Board director orientations are a good place to begin talking about the responsibilities that comprise fiduciary duties. This gives board directors a basis to have meaningful conversations about how their speech, actions and responsibilities fall under their fiduciary responsibilities as they pertain to the overall mission.
Board directors may already be practicing some things that directly coincide with their fiduciary responsibilities, whether they realize it or not. Some of the responsibilities only arise intermittently or occasionally, so it’s important for board directors to think through situations that relate to their fiduciary duties so they can fulfill them responsibly all the time.
Nonprofit boards have a duty of loyalty to make thoughtful decisions about board composition. Some organizations find it helpful to form a governance or nominating committee to recruit candidates for board directorship so that they always have an active pool of resumes in the pipeline from which to draw. This committee may begin getting acquainted with potential candidates by getting them involved in the organization as volunteers or in other areas of service. This process also helps the board to compose a board of directors that has all of the necessary skills and abilities it needs to achieve its goals.
All board members should participate in some form of board development or training so that they have the necessary skills to read financial reports and make the best decisions for the organization. Board directors may need to hone their communication skills so they can maintain their independent viewpoints while working collaboratively with other board members.
The board chair or secretary should be sure that board directors sign a conflict of interest policy and store it in each board member’s file as proof that they understand the requirement to disclose any real or potential conflicts of interest.
Ordinary and prudent people get advice and guidance from outside experts when they need assistance in understanding issues that aren’t familiar to them. In much the same way, board directors sometimes need to seek advice and guidance from experts who can help them understand the issues they face so that they can make informed decisions about the organization’s activities.
Fulfilling fiduciary duties means that boards should set policies and standards that ensure adequate internal controls. Clear policies will help boards measure the effectiveness of their activities, prevent fraud and designate financial responsibilities.
Nonprofit boards should also have clear job descriptions for various roles and responsibilities. This particularly applies to fulfilling legal obligations like filling out Form 990, conducting an annual audit, documenting executive compensation, and withholding and paying employment taxes.
Bringing Fiduciary Duties Full Circle
Learning about fiduciary duties should be a work in progress for nonprofit board directors. By fully understanding the definitions of duty of care, duty of loyalty and duty of obedience, board directors will be able to assess whether they are fulfilling them as individual directors and as a board. They can then fill any identifiable gaps by forming new policies to address them. It’s also prudent and wise to re-evaluate board director performance related to fiduciary responsibilities periodically to ensure that best practices for corporate governance are continually in force.