Many individuals asked to join a board of trustees or board of
directors of a nonprofit organization are prominent members of the
community whose experience, community relationships and, often,
financial support are sought by that organization. These
individuals are generally honored to have been chosen and, at
times, even view this position as somewhat "honorary" and
not involving any significant commitment of time or heavy lifting
in terms of responsibilities.
However, trustees or directors of any nonprofit institution are, in
fact, under applicable law, "fiduciaries" of that
organization, with fiduciary responsibilities to be satisfied by
each individual trustee or director, not unlike the fiduciary
duties of directors of publicly held corporations.
Trustees and directors of nonprofit organizations need to be aware
they have three basic fiduciary duties that must be satisfied in
their role and capacity as trustees or directors: the duty of care,
the duty of loyalty and the duty of good faith.
Duty of Care
The duty of care requires each trustee or director to obtain and
consider all significant and available information related to the
matter being considered by the board and to take adequate time to
review that information in connection with a board decision on a
matter. The same holds true for each member of a committee of a
board that is considering a particular matter or making a
particular decision.
In short, trustees and directors must act on an informed basis, be
diligent in obtaining and reviewing relevant information, act in
good faith, and act in the best interests of the organization and
all of its constituents.
Trustees and directors can rely on a variety of sources in
informing themselves, including information provided by the
organization's management or by outside financial advisers or
legal counsel. Such reliance, however, cannot be
"blind."
In order to meet his or her fiduciary duty, each trustee or
director must at all times remain actively involved and actively
participate in the consideration of the matter to be acted on and
retain the authority and willingness to say "no" if the
circumstances require.
Duty of Loyalty
The duty of loyalty requires that each trustee or director place
the interest of the organization and its constituents above any
personal interest.
If a trustee or director has a personal interest in any transaction
or other matter involving the nonprofit organization, the
organization and its board, as well as the individual trustee or
director, need to adhere to and satisfy clear conflict-of-interest
policies and guidelines, which generally involve both full
disclosure and action by independent decision-makers so the
integrity of the particular transaction or decision, and of the
organization, are fully protected.
Duty of Good Faith
No court, either in the private company sector or with respect
to nonprofit organizations, has precisely defined what constitutes
a violation of a fiduciary duty to act in "good faith" by
a trustee or director. It is clear, however, that a trustee or
director could be found to have ignored his or her duty to act in
good faith if the trustee or director consciously and intentionally
disregards his or her responsibilities in the face of a known duty
or consciously fails to monitor or oversee the particular matter
subject to decision-making or oversight of the trustee or director
-- adopting a "we don't care about the risk" attitude
by reason of a failure to exercise proper oversight.
In observing each of these fiduciary duties, trustees and
directors, first and foremost, need to ensure proper processes are
followed by the board and by the particular nonprofit organization.
Meetings need to be held and attended; significant or important
decisions need to be fully vetted, considered and approved;
finances and financial matters need to be vigorously overseen and
tested; and information concerning all matters needs to be
free-flowing and made available to trustees or directors.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.