What are Nonprofit Board of Directors Fiduciary Duties?
A nonprofit board of directors helps to manage many aspects of an organization. Here’s a look at their fiduciary responsibilities.
A nonprofit board of directors helps to manage many aspects of an organization, including strategic planning, overseeing finances, and mitigating conflict.
Just like boards in the for-profit world, a nonprofit board of directors fiduciary duties fall into three categories: Duty of Care, Duty of Loyalty, and Duty of Obedience. But rather than a corporate board that focuses on increasing annual profits, a nonprofit board’s fiduciary responsibilities strive to show the nonprofit is fulfilling its mission and meeting the needs of the communities it serves.
Nonprofit board members serve as fiduciaries because they are legally responsible for managing a nonprofit’s assets and making financial decisions for the organization they represent. As part of their board fiduciary duties and responsibilities, they must understand the organization’s budget, financial statements, and accounting practices.
A nonprofit organization’s assets may come from many sources, including grants, fundraisers, or charitable donations. The nonprofit board’s fiduciary responsibility ensures the organization uses these assets appropriately for their intended purpose, whether that’s for hunger relief, animal welfare, literacy, or other noble causes.
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What is a Fiduciary Responsibility?
What does it mean to have a fiduciary responsibility? Fiduciary responsibility means maintaining a legal and ethical relationship on behalf of a third party, such as a nonprofit organization.
Since this often involves managing money and other assets, a nonprofit board of directors’ fiduciary duties include establishing a strategic plan, making short- and long-term goals, analyzing cash flow, regulating expenses, and establishing procedures to prevent mistakes and protect against fraud or misappropriations.
Nonprofit Board Fiduciary Duties
In terms of oversight for a nonprofit organization, the fiduciary duties of board members include three key critical components: Duty of Care, Duty of Loyalty, and Duty of Obedience.
But what is the main fiduciary duty of the board of directors? Simply put, a nonprofit board must act for the good of the organization. Each duty above plays a vital role to ensure the organization runs smoothly, avoids costly or embarrassing oversights, and follows all laws and financial mandates.
Duty of Care
Nonprofit board members pay attention to the organization’s overall well-being. While individuals serving on nonprofit boards often already lead busy professional lives, they are expected to attend regular meetings and actively participate in discussions or volunteer for various committees.
Nonprofit board fiduciary duties involve organizational oversight and maintaining transparency. Everyone involved should know what the organization does and how assets are being managed and distributed, including members of the public. Duty of Care often goes above and beyond normal expectations, such as electing diverse board members who offer different perspectives. New board members often require training to better understand their roles and responsibilities.
Duty of Care also includes:
- Maintaining accurate records, such as recording meeting minutes.
- Providing a clear definition of the organization’s mission and vision.
- Ensuring the organization’s products and services are effective.
- Maintaining a clear picture of the organization’s goals, both short- and long-term. Board members often work with the nonprofit organization’s staff to develop, implement and carry out these goals.
Duty of Loyalty
Nonprofit board members must operate with integrity, acting in the best interest of the organization they serve without any thought to personal gain.
It’s beneficial for nonprofit boards to establish written policies outlining steps to follow should a conflict of interest arise. Regularly reviewing these policies with all members of the board mitigates potential discord and promotes accountability.
Board fiduciary duties include hiring the organization’s executive director, setting an appropriate salary, and overseeing their performance. Nonprofit board members have a fiduciary responsibility to represent the best interests of the organization, not the executive director.
Other loyalty duties include:
- Helping secure operating funds, so the organization continues to fulfill its mission.
- Reviewing and approving major gifts, as well as the terms associated with those gifts.
Duty of Obedience
Nonprofit board members are responsible for making sure the organization meets all state and federal regulations, and abstains from any illegal or unsanctioned activities. Fulfilling this Duty of Obedience also includes monitoring for violations of the organization’s own codes of conduct and ethics.
Because nonprofit organizations maintain a tax-exempt status with the Internal Revenue Service (IRS), board members must ensure the organization functions within the boundaries stated on its tax application, following all state and federal laws. Nonprofit organizations don’t pay income taxes, but they still must file tax returns on time for all other applicable taxes, such as property taxes on buildings owned, etc.
Other board of directors’ fiduciary duties pertaining to obedience include:
- Understanding the organization’s basic finances and maintaining stability.
- Setting up protocols and policies that promote effective growth and guide decision-making.
Fiduciary Oversight: Assessing Your Board’s Understanding of their Fiduciary Duties
Many nonprofit organizations welcome board members to serve on their boards, even those without previous board-member or industry experience. Making sure new board members receive proper training and clearly understand their roles and obligations prevents future problems and liability issues. Nonprofit organizations that operate with proper fiduciary oversight ensure their board members fulfill the core duties of care, loyalty and obedience.
Yearly board performance reviews are a good time to evaluate strategic planning, set goals, and minimize risks associated with violating fiduciary responsibilities. Part of a board’s fiduciary oversight involves monitoring the performance of the organization’s executive director without interfering or micromanaging the organization’s daily operations. Nonprofit organizations also rely on public and private donations to support and implement their missions and programs, so maintaining a positive public image and ensuring board members follow protocols is crucial to success.
Forming Policies and Procedures to Support the Fulfillment of Fiduciary Responsibilities
Much like the first day of college or the first day on a new job, newly elected board members typically attend orientation as they prepare for their new role and responsibilities. Orientation might include training on how to properly read a financial statement, fine-tuning collaboration skills, and improving written and oral communication.
Discussing a nonprofit board of directors’ fiduciary responsibility during orientation is a good way to ensure everyone is on the same page in terms of the organization’s overall values, mission, and focus. Fiduciary responsibilities don’t happen all at once. Some responsibilities, such as evaluating monthly financial statements, happen on a recurring basis. Other fiduciary responsibilities, such as goal-setting, take time to design, implement, and carry out.
Most nonprofit boards elect officer positions to effectively support the fulfillment of fiduciary responsibilities. These positions include a board chairman, a vice chairman, a board secretary, and a board treasurer.
- The board chairman runs meetings, creates committees, recommends members to various committees, and remains in close contact with the organization’s executive director.
- A vice chairman assists the chairman, or steps in to complete the chairman’s duties in the event of an absence or illness.
- A board secretary maintains each board member’s profile, which includes signed conflict of interest paperwork. The secretary also records meeting minutes, files them appropriately, and ensures compliance with national, state and local bylaws.
- A board treasurer creates a budget, prepares financial statements, pays bills, completes necessary audits, and keeps other board members apprised of the organization’s general financial status. The treasurer is often responsible for filing IRS tax form 990, which provides public financial information about a nonprofit organization.
Much like a homeowner contacts a plumber to fix a water leak, nonprofit board members have a fiduciary responsibility to seek out information from professionals to help them understand important issues. Seeking expert advice allows board members to gain information that’s imperative for good decision-making, and establishing internal control mechanisms to prevent fraud, scandal, or abuse protects the organization. These policies also ensure the board meets its legal obligations, such as filling out tax forms.
Other control mechanisms deployed by nonprofit boards include:
- Outlining clear job descriptions for all board members and paid staff.
- Generating processes for financial and accounting matters, such as signing checks, approving expenses, etc.
What is the Penalty for Failing in a Fiduciary Capacity?
Carefully fulfilling fiduciary responsibilities often protects nonprofit board members from legal and moral repercussions.
Violating board fiduciary duties, especially those involving government agencies like the IRS, can come with severe consequences.
In terms of business practices, nonprofit organizations must not show favoritism. For instance, let’s say a nonprofit building needs electrical repairs and a board member owns an electrical company. The board is obligated to consider multiple outside bids for the job, rather than jumping straight to hiring the board member’s company to perform the work.
If the IRS suspects private benefit or unreasonable compensation occurs between board members, the executive director, or their personal businesses, individuals on the nonprofit board can be held personally accountable.
Furthermore, misappropriating donor funds could result in legal recourse. Donors may sue a nonprofit organization for mismanagement of funds or failing to meet its board of directors’ financial responsibilities.
Besides government and legal ramifications, board members are morally obligated by their fiduciary responsibilities to safeguard both the organization’s financial attributes and overall reputation. Public scandal could negatively affect the organization’s reputation and permanently damage future fundraising and subsequent distributions.
Nonprofit board members face tremendous pressure to meet fiduciary responsibilities, legal regulations, and moral obligations. Staying organized, collaborating with others, and maintaining transparency creates success.
Understanding what are fiduciary responsibilities for a nonprofit board of directors requires care, obedience, and loyalty. Track progress, create templates, and increase productivity with board management software designed to keep everyone on your nonprofit board working toward the same goals.
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About The Author
- Adam Wire is a Content Marketing Manager at OnBoard who joined the company in 2021. A Ball State University graduate, Adam worked in various content marketing roles at Angi, USA Football, and Adult & Child Health following a 12-year career in newspapers. His favorite part of the job is problem-solving and helping teammates achieve their goals. He lives in Indianapolis with his wife and two dogs. He’s an avid sports fan and foodie who also enjoys lawn and yard work and running.
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