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.
As most people know, the board of directors of a for-profit company represents the interests of the stockholders. That is not the same for those who serve on a nonprofit board. They should represent the interest of those being served by the group. In both cases, board members assume fiduciary responsibility for the resources of the organization and can be held accountable for breaches of that responsibility.
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 the organization’s activities, regularly attending board meetings, reviewing materials, and questioning matters and items brought to the attention of the board that are unclear.
It also includes gathering all material information about the organization that is reasonably available and regularly monitoring the status of the organization’s business and the actions of management. When reasonable and appropriate, you can rely on management and financial or legal advisors. However, in some circumstances, matters should be discussed without management present.
Duty of Loyalty: Avoiding Conflicts of Interest
The duty of loyalty requires the board 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 of the board should avoid:
- Appearing on both sides of a transaction involving the organization;
- Receiving a personal benefit from a transaction with the organization; or
- 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 the board of directors to ensure that the mission of the organization is upheld and perpetuated. To do this, the board must work to ensure a common understanding of the organization's mission among its members, dedicate resources of the organization to the mission, and comply with all applicable laws and regulations. Any diversion of the organization's assets from the mission or not providing protection of the organization's assets is a violation of the duty of obedience.
The Board Member’s Point of View
The board and its members should also be capable of looking at the big picture, including 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 the organization’s 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, fraudulent activity or other issues, including setting and monitoring an internal control structure to provide 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; and
- Know when to ask for help.
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. iBi
Ronald Benjamin is a client leader in CliftonLarsonAllen’s financial outsourcing services practice. He can be reached at (917) 882-6306 or [email protected]. Kyla Greenhoe is a manager in CliftonLarsonAllen’s nonprofit services practice. She can be reached at (309) 495-8867 or [email protected].
