To whom does a nonprofit board owe their duty?
During an interview with a nonprofit board, I asked a current board member about his primary responsibility. The response was “to support and protect the CEO.” A year later the organization was hit by wrongdoing accusations against the CEO. The organization’s reputation was damaged, and donors quickly exited. The board ultimately admitted their failure to hold the CEO accountable.
This board lacked a good understanding of their “fiduciary duty”. But if a nonprofit board’s fiduciary duty isn’t to the CEO or executive director, then to whom do they owe their duty? Beneficiaries of the nonprofit’s services? Donors?
Nonprofit fiduciary and advisory boards
A fiduciary duty is a legal term which describes the obligation of one party to act solely in the interest of another party. Fiduciary duty applies to boards of directors, not advisory boards. So, before we go too far, let’s make sure the differences between the two boards are clear:
Fiduciary board
Formal group of elected members as defined by the nonprofit organization’s bylaws
High levels of fiduciary responsibility
Each director has voting rights defined by the organization’s bylaws
Has the power to make decisions for the organization, including appointing or removing the CEO
Financially liable for their actions or advice, which is why many organizations provide directors & officers insurance coverage
Advisory board
Informal committee of people selected based on their knowledge to advise or mentor the CEO or staff
No fiduciary responsibilities
No legal responsibilities or voting rights
No legal requirement for their advice to be followed
Advisory board members are not financially liable for their advice
Who is owed fiduciary duty?
So, if a nonprofit board of directors has an obligation to act in the interest of another party (their fiduciary duty), then who is the party?
The nonprofit board owes their fiduciary duty to the nonprofit organization they serve. Board members have a duty to act with care, loyalty, and obedience for the protection of the nonprofit organization.
To be clear – the nonprofit board does NOT owe their fiduciary duty to:
The CEO or staff. Duty to the nonprofit organization come before duty to employees. That’s not to say that a board doesn’t support employees in their accomplishment of the organization’s mission. But if for example, the behavior of an employee puts the organization at risk, the board must ensure action is taken to protect the organization.
Donors. Boards support many activities to cultivate donors. But if a donor wants to fund a program outside of the nonprofit’s tax-exempt purpose, the board must say no. Protecting the organization’s tax-exempt status comes before the wallet of a donor.
Program beneficiaries. Giving away all the organization’s resources may help many people, but a nonprofit board should vote against any budget that puts the organization’s future at risk.
Three areas of nonprofit board member fiduciary duty
Nonprofit board members should understand their three areas of fiduciary responsibility:
Duty of Care: Take the responsibility of board membership seriously. Understand the organization and your role so you can make the best decisions as a board member
Duty of Loyalty: Put the organization ahead of your interest or the interest of others (which is why it’s important for board members to disclose conflicts of interest.)
Duty of Obedience: Ensure the organization is following all laws, regulations, and its own policies and bylaws.
As mentioned earlier, nonprofit board members can be held financially liable for their actions. A board member who properly exercised his or her fiduciary duties may be able to use this as a defense against personal liability.
Act with fiduciary duty or resign
If you find yourself on a board confused about their primary duty, then for the sake of the organization, do your best to change the situation. Bring in legal experts and identify board member training.
If you can’t bring about change, its best to resign. Board members can’t escape fiduciary liability. Perhaps your resignation will help the organization realize their risk before it’s too late.