In the wake of various scandals and stories of wrongdoing in the nonprofit sector, the federal government has placed an increased emphasis on nonprofit regulatory compliance. A nonprofit is required to provide information about its board's state law fiduciary duty when it files its Form 990 return each year. But what exactly are a board's fiduciary responsibilities?
A fiduciary is a person who has a relationship of trust or confidence with another. In the case of a nonprofit, the fiduciary relationship is one-sided: the relationship is designed to meet the needs of and protect the nonprofit only, and the fiduciary must act without concern for his or her personal needs. A nonprofit's board operates as the primary decision-maker for the nonprofit and bears the responsibility and accountability for the actions of the nonprofit.
Under the laws of most states, the fiduciary duties of a nonprofit board and its members can be broken down into three primary duties: the duty of care, the duty of loyalty and the duty of obedience.
(1) Duty of care: The duty of care requires the board and its members to have a certain level of competence, to exercise reasonable care, to take an active interest in the nonprofit's activities and to act reasonably and in the best interests of the nonprofit. The board and its members must act honestly and with common sense and informed judgment in light of particular facts and circumstances.
(2) Duty of loyalty: This duty addresses the faithfulness of the board and its members. The board members must put the interests of the nonprofit ahead of their own agendas and interests and must avoid any self-dealing. Board members must have undivided allegiance to the nonprofit and their conduct must further the goals of the nonprofit above all else. In order to ensure the duty of loyalty is met, it is important for a nonprofit board to establish and enforce an appropriate conflict-of-interest policy.
(3) Duty of obedience: Board members have a responsibility to be faithful to the mission of the nonprofit and must not act in any manner that is inconsistent with the purpose or goals of the nonprofit. Board members must comply with all applicable laws, regulations and reporting requirements.
By establishing appropriate governance policies, selecting dedicated and educated board members, and ensuring that the members of a nonprofit's board are engaged and faithfully executing their duties, a nonprofit's board can ensure compliance with its fiduciary duties.
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.
