When you join the board of directors for a nonprofit organization, you take on significant fiduciary responsibilities. These duties are essential to the effective oversight and governance of the organization, ensuring its lawful and ethical operation.
Board directors must wear many hats, often balancing roles as directors and officers. The distinction between these positions is crucial because each role carries specific legal obligations. The core fiduciary duties of a director include:
Duty of Care: Directors must act in good faith, with the care an ordinarily prudent person would use in similar circumstances. This includes attending meetings regularly, reviewing financial reports, and being prepared for discussions and votes.
Duty of Loyalty: Directors must prioritize the interests of the organization over personal or third-party interests. This duty is critical when conflicts of interest arise, such as contracts between the organization and a director’s business.
Duty of Inquiry: When something seems off, directors are required to ask questions and, if necessary, hire experts to investigate. Ignoring red flags can result in serious legal consequences.
Duty to Follow Investment Standards: Nonprofits often hold charitable funds that must be invested conservatively. Risky investments like placing all assets into one volatile stock could violate this duty.
As I explained in an educational presentation to a nonprofit to educate them in their fiduciary duties, board members must also understand the organization’s bylaws, financials, and compliance obligations, including tax filings and conflict of interest policies. Fulfilling these duties is not just about avoiding legal trouble - it ensures the nonprofit remains aligned with its mission and continues to serve its community effectively.
For prospective board members, it's critical to do your homework: review the nonprofit’s legal standing, financial health, and bylaws before accepting a role. And remember, attending meetings and reviewing materials thoroughly is not just a recommendation - it’s your legal obligation.
If your non-profit or corporate board members could benefit from fiduciary duty training, please contact me - I provide this service. I can be reached at my accounting firm at (424) 248-8866.
