The duties of board members are many. From steering the organization’s mission and purpose, to appointing new directors and overseeing fundraising, it is critical to the success of an NPO that board members understand their responsibilities. One of the most important functions of a board is to oversee the organization’s financials. Lack of proper financial oversight can quickly land you in hot water, so it goes without saying that everyone on the board should have a clear understanding of their fiduciary duties and exercise them with trust. It is important to know that failure to understand your fiduciary duties does not exempt you from any obligations and liabilities that could arise from failing to perform them.
Can you confidently say that every member on your board knows what their fiduciary responsibilities are? If not, it is time to take a deeper look at what they are and what they mean for the organization.
1. Duty of Care
Duty of Care means that board members should show reasonable care and responsibility in the organization’s activities. While the scope of care is not defined, board members should attend all board meetings, read board reports, and have an adequate understanding of the organization’s financial position.
A board member has the responsibility to observe the organization’s activities and make rational decisions. This includes ensuring that necessary controls and policies are in place to reduce the risk of fraud. The board should not be a rubber stamp for management. It is responsible for plan development and execution, as well as attainment of the goals, vision, and mission.
2. Duty of Loyalty
The board of directors should keep the interests of the nonprofit and its stakeholders ahead of their own—as such, they should not engage in any activities that will result in a conflict of interest. The Duty of Loyalty also requires one not to use the board position for personal agendas. A written conflict of interest policy should be drafted and exercised, requiring board members to disclose any conflict of interest on an annual basis. An example of Duty of Loyalty would be a board policy for receiving, documenting, and acting on a whistleblower’s complaint that bypasses the nonprofit’s CEO.
3. Duty to Act in Good Faith.
In acting in good faith, the directors must operate honestly and transparently. The directors must faithfully execute their duties and obligations and work to achieve the organization’s mission. A board member who takes advantage of the organization, their position, assets, or donors is breaching the duty of acting in good faith. A board member should eagerly offer his/her professional or personal advice, and not withhold information that would influence an important decision.
4. Duty of Obedience
The board must ensure that the nonprofit is operating within its tax-exempt purpose and complying with all state and federal laws. This includes filing the IRS 990 annually, paying state and federal employment taxes, property taxes, and unrelated business income tax if applicable. The board should also be aware of applicable state laws stipulating the threshold for requiring an annual independent financial audit.
A committed and effective board understands its mandate to the organization. Board members should be well informed of their responsibilities for effective governance. In doing so, the risk of organizational and personal liability is greatly reduced. If you are not already doing so, consider an annual training session for new board members, and an annual reminder communication to existing board members to ensure that management and the volunteer leadership are aligned.