Non-profit organizations are frequently governed by board of directors. Directors for a non-profit are considered “fiduciaries.” A fiduciary is a person who owes to another a duty of “loyalty, civility, self-sacrifice, vocational excellence, and high standards of honesty.”[1] When non-profits are governed by a board, their acts typically require a board of directors approval and monitoring. Since non-profit board members are volunteers, and they are not allowed to be compensated for their work on the board, there may be a temptation for a nonprofit board of directors to act as a rubber stamp for the executive director’s or management’s recommendations.[2] It is important to avoid this type of blind allegiance to management, as it clearly does not satisfy even the most minimal due diligence obligations.
How can you fulfill your duties and do a great job for your organization?
Actively Participate
A director must actively participate in the management of the organization including attending meetings of the board, evaluating reports, reading minutes, reviewing the performance and compensation of the Executive Director and so on. If you do not have the time to participate as required, you should not agree to be on the board.
Scrutiny & Investigation
Directors are responsible for the committees and staff and should periodically scrutinize their work. A director should not only be familiar with the content of the books and records, but should also assure that the organization’s records and accounts are accurate. This may mean the director must take steps to require regular audits by an independent certified public accountant.[3] At the very least, the director should be aware of what the financial records disclose and take appropriate action to make sure there are proper internal controls.
Books & Records
A director should have general knowledge of the books and records of the organization as well as its general operation. The organization’s articles, bylaws, accounting records, voting agreements and minutes must be made available to members and directors who wish to inspect them for a proper purpose.
Trust Property
A director has the duty to protect, preserve, invest and manage the corporation’s property and to do so consistent with donor restrictions and legal requirements. Instituting proper internal controls will aid in the protection of assets.
Loyalty
A director has the duty to avoid conflicts of interest and avoid usurping corporate opportunities. Directors of nonprofit organizations are under a fiduciary obligation not to divert a corporate business opportunity for their personal gain. This duty means that a director may not engage in or benefit from a business opportunity that is available to and suitable for the corporation unless the corporation decides not to engage in the business opportunity and conflicts of interest procedures are followed.
Obedience
Directors should be familiar with state and federal statutes relating to nonprofit corporations, charitable solicitations, federal employment tax withholding and other requirements of the Internal Revenue Service. Directors should see to it that their organization’s status with state and federal agencies is protected. They must comply with deadlines for tax and financial reporting and be familiar with and follow the provisions of their organization’s governing documents.
You are not the only one who owes a fiduciary duty in your nonprofit organization. Executives owe the fiduciary duty to their boards of directors. If you are on a board, your executive director owes you and your fellow board members the same duty that you owe to the organization. Accordingly, this list of duties applies to your executive staff of your organization.
To learn more, read Punctilios and Nonprofit Corporate Governance: A Comprehensive Look at Nonprofit Directors’ Fiduciary Duties by Thomas Lee Hazen and Lisa Love Hazen, 14 U. Pa. J. Bus. L. 347.
[1] See, e.g., Scott Fitzgibbon, Fiduciary Relationships Are Not Contracts, 82 Marq. L. Rev. 340 (1999) at 340.
[1] Judith L. Miller, The Board as a Monitor of Organizational Activity: The Applicability of Agency Theory to Nonprofit Boards, 12 Nonprofit Mgmt. & Leadership 429, 438 (2002); Consuelo Lauda Kertz, Executive Compensation Dilemmas in Tax-Exempt Organizations: Reasonableness, Comparability, and Disclosure, 71 Tul. L. Rev. 819, 855 (1997) (stating that “[b]oard membership often consists of the executive’s friends and cronies, and there is often reciprocity–individuals sitting on one another’s boards”).
If you have more questions and concerns please don’t hesitate to ask for our assistance. Please email us at info@jmuirandassociates.com.
Pro-McConnell nonprofit hit with IRS complaint
