What is the Fiduciary Duty of a Nonprofit Board Member? 

      Today I want to share about fiduciary duties, and I'd like to begin by telling you a little story. I was serving a nonprofit a few years ago as a board member, and a matter came to our attention. The Executive Director was creating what might be called a hostile work environment for the employees.        Fortunately, this board was well structured and had a track record of meeting their fiduciary and other duties. 

     So, we gathered together quickly and designed a process. We consulted an attorney regarding the law in our state, and then we began working through the situation. We did that because we wanted to protect the reputation of our nonprofit and our community. We wanted to ensure that the funding sources were not interrupted through this process. Most importantly, we wanted to guard our highest priority, which is making sure that this organization and its staff and leadership were fully present to serve their mission within our community. 

    I share that story with you because in the world of nonprofit organizations, board members play a crucial role in making sure the organization is meeting its mission and ensuring its long-term success. One of the ways board members do that is by fulfilling fiduciary duties. These duties are legally and ethically mandated to ensure that board members are acting in the best interest of the nonprofit. So I thought it'd be helpful today to develop a deeper understanding of these fiduciary duties. 

Whether you are a board member, a staff member, or a donor, it's important for you to understand fiduciary duties within a nonprofit. They break down into three primary duties:

Duty of Care

     The duty of care requires board members to act with the same level of care that they (or a reasonably prudent person) would act in those same situations or circumstances. This means that board members have to make decisions that are made with diligence, thoughtfulness, and informed judgment to fulfill this duty. Here are some examples of things that board members would do to carry out the duty of care: 

•  Stay informed: What does that mean? Well, board members should be regularly reviewing the financial documents, the strategic plans, and the governing or organizational documents. It also means being present for board meetings, reading the materials that are provided, and being prepared to engage in those discussions. 
•  Ask questions. It's very important in a boardroom to create a culture where conversations and questions are normal. It just takes one person to break through that ice, and then once they do, it creates the culture. So let's create a culture of conversations before we move to a vote on a matter.
•  Act prudently. What does that mean? Well, based on the reasonable analysis of the available information, you will either seek advice when necessary or you will move to clear decisions. You’ll make prudent decisions, and you’ll avoid making impulsive and uninformed decisions. 

Duty of Loyalty

     Loyalty requires that board members prioritize the interest of the nonprofit over their personal interest. This is essential for maintaining trust and integrity within each nonprofit. Here's some examples of what that might look like:

•  Avoid a conflict of interest. This is so important. Sometimes conflicts of interest exist. If you can't avoid them, you need to disclose them and you need to recuse or dismiss yourself from the discussions for anything that might give even an appearance of personal gain from a decision in that nonprofit. 
•  Act in good faith. What does this look like? It's acting with honesty and integrity. It’s absolutely keeping the nonprofit's interest at the forefront and making sure that the decisions align with its mission and goals. 
•  Protect confidentiality. This means maintaining the confidentiality of all the information. There is so much sensitive information within a nonprofit. This may include financial details, donor information, client information, and strategic planning. 

Duty of Obedience

     Finally, a board member has the duty of obedience. No, I'm not talking about, “Do what I say right away” obedience. Instead, I'm talking about the obedience of a nonprofit to comply with the applicable laws and regulations, as well as adhering to its own governing documents and mission. This duty is crucial for a nonprofit to maintain legal and ethical standing. Here’s a few examples of what this might include:

•   Adhere to the governing documents. This includes your bylaws, your articles of incorporation, or a certificate of formation. It includes specific policies and procedures, but also making sure that all actions align with what's found in those documents. 
•  Comply with the laws and regulations. There are federal, state, and local laws that can govern a nonprofit organization. These may be related to reporting, approval for solicitation of charitable giving, and tax matters. So it's very important to be in compliance with all of these laws and regulations. 
•  Uphold the mission. Ensure that the nonprofit’s activities and expenditures align with its stated mission and purpose. Make sure you avoid things that deviate from your core mission because they can jeopardize your nonprofit status. 

     In conclusion, fiduciary duties are the cornerstone of effective governance. By adhering to these duties of care, loyalty, and obedience, board members can ensure that the nonprofits they serve are operating effectively, ethically, and in alignment with their mission. 

     If you're not familiar with the roles and responsibilities of board members in your nonprofit, I want to direct you to a free resource to help you plan how to train your board in financial governance. If you're not sure where to start, you can check out my Nonprofit Board Financial Literacy Assessment today!