Fulfilling your Fiduciary Duties? 10 Tips for Nonprofit Leaders
Megan Smyth, JD, Senior Policy Analyst, National Association of State Procurement Officials
A nonprofit organization is one that, as a matter of law, does not have shareholders, and the profits of the organization are not distributable to the corporation’s members, directors, or officers. Nonprofit association members often take on great responsibility when they become directors and officers. These people are very passionate individuals who believe in the mission of their organization, and seek to serve those organizations well, working toward the common vision of the membership. Channeling that passion and desire to serve into the association’s leadership is what helps propel nonprofits into new and better places. Members who desire to lead shouldn’t be afraid to step into a leadership role—rather, they should educate themselves about how to govern their nonprofit in an ethical and legally sound way.
In order to serve their organization well, members filling these important roles, who are very often volunteer leaders, must balance focusing their attention in many different directions. Implementing and working within a vision and a strategic plan takes a lot of effort, and the time it takes to serve an association as a director or officer is no small feat. In addition to all of these responsibilities (whew!), nonprofit association directors and officers must also be cognizant of their obligations and duties imposed by law.
Directors and officers are fiduciaries, first and foremost. The term “fiduciary” derives from the Roman law, and means, roughly, “having the nature of trust or confidence.” Generally, a director or officer is required to discharge their duties 1) in good faith; 2) with the care that an ordinarily prudent person in a similar position under similar circumstances would exercise; and 3) in a manner the director reasonably believes to be in the best interests of the organization.
These enumerated duties can be broken down even further to two simple “rules of thumb”—directors have a duty of care, and a duty of loyalty. The specifics often vary among different jurisdictions, and anyone serving in a fiduciary position should review state law, the charter or policies of their organization, and court-established common law to determine their complete obligations under the law.
The duty of care is simply the responsibility to exercise the same care that a reasonable prudent person would in a similar circumstance. Under the duty of loyalty, directors and officers must refrain from “enhance[ing] their own personal interests at the expense of the association, and/or personally profiting or benefiting at the expense of the association, but rather, must promote the interests of the association to the exclusion of their own self-interest.”
Here are a few general tips for directors and officers of nonprofits to ensure they are fulfilling their fiduciary duties appropriately:
- Fully understand and adhere to all the requirements, procedures, bylaws, and policies of your organization;
- Attend as many board meetings as feasible;
- Carefully review meeting minutes, committee reports, and other materials provided in advance of meetings, and be prepared to discuss the topics on the agenda for all meetings;
- Carefully review financial statements, Form 990s, audit reports, and/or materials from the organization’s lawyers or accountants;
- Consider retaining experts for decisions that may fall outside of the expertise of board members, directors, or chief executives;
- Always insist on compliance with all applicable laws and internal policy, even if compliance may increase costs and/or result in difficulty;
- Promptly disclose all potential conflicts of interest and adhere to internal policies regarding conflicts of interest;
- Keep sight of the governance role of the board—looking at the big picture for the organization—and avoid becoming mired down in the day-to-day work of the organization;
- Establish appropriate committees and working groups that can carry out the board’s vision and strategic plan for the organization. These committees and groups can assist in fulfilling the oversight role of the board in specific areas, like finance, member recruitment, etc.;
- Focus on preparing the organization for long-term success, making decisions that will benefit members and make the organization stronger for the future.
Disclaimer: Please note that this article was prepared for general information purposes only, and that the information presented does not constitute legal advice of any kind, is not to be acted on as such, may not be current, and is subject to change without notice; nor is the information contained herein exhaustive when it comes to all of the legal duties and issues related to service as a nonprofit director. Finally, this information is not intended as a solicitation and does not create or constitute an attorney-client relationship. Please seek legal counsel when appropriate at the discretion of your organization.
Some information included in the article is adapted from “Nonprofit Board Governance and Liability” by Randal T. Evans, Evans Law, PLC. And Enquire Consulting, LLC, presented as NBI Seminar, June 29, 2016.