When individuals agree to serve as board members, they take on fiduciary responsibilities that statutory and common law require. Specifically, they have to comply with three fiduciary duties: care, obedience and loyalty.
If board members understand and embrace these responsibilities, they can fulfill those duties and hold their fellow board members accountable to do the same. However, failure to comply could create serious and costly consequences for a board member, who could be held personally and financially liable for breach of duty, and the not-for-profit organization could face legal liability and have its future success stymied.
Understanding director duties
Let’s look more closely at what’s involved in fulfilling each of the three duties.
1. Duty of care
Duty of care: Handle the business of the organization with the care an ordinary and prudent person would use.
Directors must be engaged. They should actively participate in meetings, review documentation, ask questions, learn about the activities of the organization, understand risks and be intentional when deciding what risks are acceptable. As stewards of the organization, board members must think short-term and long-term, have the depth of knowledge to understand documents like financial statements and strategic reports, and know what questions to ask internal and external advisers.
2. Duty of loyalty
Duty of loyalty: Act in the best interests of the organization, even if it means forfeiting an opportunity that would benefit them personally.
Directors must not profit at the expense of the organization, or receive unreasonable compensation or benefit from the activities of the organization or from serving on its board. They should ensure that the organization’s conflict of interest policy is followed. That may mean disclosing on Form 990 any compensation, familial relationships or business transactions between the nonprofit organization and themselves (or their family member, business interest or other relevant connections).
Directors should avoid even an appearance of impropriety that they are benefiting at the expense of the organization. Any member of governance who is potentially conflicted should recuse themselves from deliberations and decision making related to a proposed transaction in which their objectively may be compromised.
3. Duty of obedience
Duty of obedience: Work to ensure the organization follows all applicable laws, complies with all reporting requirements and follows the organization’s articles and bylaws.
Directors should affirm that the organization is working to fulfill its mission and purposes, while complying with all laws and required reporting.
How duties inform actions
Directors should understand how these duties inform and shape their actions and expectations for performance. If you are a director, especially a member of the audit or finance committee, are you able to read financial statements and investment market reports? If not, you may not be able to fully exercise your duty of care. To fulfill the duty of obedience, all members of the board should understand the laws impacting the entity, so the board can remain compliant. It isn’t enough for members of the board to entrust compliance matters to third parties or rely solely on external advisers.
All members of the board should be familiar with the legal organizing documents of the organization (like articles, bylaws and applications for exemption) so that they can determine if the organization is following its bylaws and accomplishing its stated mission.
