What are your legal obligations as a nonprofit board member?
Whoa, Matt…legal obligations? If you catch yourself asking that after reading this title, you are not alone. I have come across many board members that join nonprofit board without realizing this, or in fairness, being told this. But the fact of the matter is that a nonprofit board and its members individually have three fundamental fiduciary duties as mandated by state and common law. I highlight “and its members individually” here because it is important to recognize that while the nonprofit corporation may protect individuals and their assets, in this case, the member individually is held responsible.
Ok, I’m sorry If I am frightening you — fiduciary duties should not scare you. Let’s take a look at them:
Duty of Care
A board member must actively participate, attend board meetings, be educated on the industry, provide strategic direction, and oversee management (including reviewing financial documents and the annual IRS form 990 as described in this post).
Duty of Loyalty
A board member must operate in the interest of the nonprofit and not to use the position to further personal agenda.
Duty of Obedience
A board must know the state and federal laws and regulations that apply to the organization, including the regulations and guidance issued by the IRS. Obedience to governing documents requires a deep understanding of the operating documents such as by-laws, rules, board manuals. Finally, obedience requires that the board not act outside the scope of the organization’s legal documents.
So, why does this matter?
I hope that you never have to face the music and be held liable, but being held liable is exactly the reason why this matters. To read more about personal liability, I recommend this article — but in short, a board member cannot be held liable as long as mistakes were made in good faith, out of loyalty and obedience to the corporation and with due care (made with the same degree of care a reasonable person would normally exercise on his/her own property). Also, not just as a matter of legality, the fiduciary duties are put in place for ethical reasons as well. Nonprofits have been entrusted to carry about charitable goodwill across the world and in our local communities, and have been granted tax-exemption in order to help these charitable actions occur. Thus, giving these organizations and its trustees an obligation to be good stewards.
Is your organization enforcing these fiduciary duties? Are you as a board member prepared to shoulder these responsibilities? Want to learn more about this topic, or learn how to bring your board up to speed? Contact me today!
PS: I love board members. I even wrote a blog about them for Kindful, check it out.
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