Board members are essential to the success of nonprofit organizations. Their insights and connections are key to mission accomplishment. They serve with passion and care, yet many don’t receive formal board training and may lack a fundamental understanding of their legal responsibilities.
Individual states regulate nonprofit organizations and determine the legal requirements for serving as a board member. In many states, these rules are under the Secretary of State’s office, while some states have a dedicated nonprofit division.
Although there are similarities between nonprofit boards and their for-profit counterparts, nonprofit board members represent stakeholders rather than shareholders. Stakeholders are those who have a vested interest in the organization’s success. This includes staff and board, volunteers, donors and supporters, other organizations, and the people of the community who utilize the organization’s programs and services or care about the cause.
Nonprofit boards have three fiduciary responsibilities:
Duty of Care
This duty requires members to act in a manner of someone who cares. In this case, “care” implies members should use the same level of caution and wisdom as if they were overseeing their personal assets.
This duty includes regular attendance at meetings and special events, keeping updated on important organizational matters, and being active in planning and decision making. Members must be committed to placing the organization’s interests above their own interests or gain.
Board members should be aware of meeting dates and make plans to participate. Whether in person or virtually, members should attend meetings and be prepared to discuss important matters. This often includes a thorough review of the “board packet,” which contains documents provided to members before meetings.
It is important to note that in some cases, members who do not attend meetings may be bound by the actions taken at those meetings and held responsible if such actions are deemed negligent.1
Another important aspect of the Duty of Care is “loyal opposition,” where members regularly raise proper questions and avoid rubber-stamping every senior management recommendation. This type of openness encourages free exchange of ideas, both good and bad, and improves group decision making.
Duty of Loyalty
Loyalty requires directors to serve as ambassadors, placing the organization ahead of personal gain. The opposite is disloyalty, using the organization to advance a personal benefit or agenda.
One of the critical elements of this responsibility is the conflict of interest. A conflict of interest exists when a board member has influence over a decision that could result in personal gain (financial or otherwise). When the personal or professional concerns of a board member affect their ability to put the organization’s welfare before personal benefit, this presents a conflict, also known as “duality of interest.”
The IRS and some states require every incorporated organization to have a written conflict of interest policy.2 This important policy helps prevents members from participating in the review, reporting, or decision making on any issue where there is a real or perceived conflict.
Duty of Obedience
Board members have a legal responsibility to make sure the organization complies with all relevant federal, state, and local laws and stays “true north” by remaining focused on its stated mission.
Duty of Obedience includes:
- Approving/denying key contracts
- Hiring and supervising the executive director
- Helping the organization remain solvent by evaluating financial reports and approving the annual budget
The Duty of Obedience requires board members to serve in accordance with the nonprofit’s purposes and goals as defined in its articles of incorporation and bylaws. Both the articles and the bylaws are considered legal documents that define binding rules used to dictate how the board governs.3 For this reason, boards should perform regular reviews and updates of their bylaws.
Understanding and following the three legal responsibilities can help board members remain in compliance and fulfill their goal of leading an effective, sustainable organization.
If you have any questions or need assistance, please reach out to a professional at Forvis Mazars or use the Contact Us form below.