There is considerable disagreement on how boards of directors should function.  For a religious nonprofit organization, the board of directors is (or should be) the critical body that determines the entity’s programs and investments and provides management guidance.  The role of the officers and employees is important, but the board of directors has the responsibility to frame the organization’s overall policy directions and objectives.  The governing board has the ultimate responsibility for the organization’s activities—and can be a prime target when matters of liability arise.

 

One of the main responsibilities of board members is to maintain financial accountability and effective oversight of the organization they serve.  Board members act as trustees of the organization’s assets and must exercise due diligence to see that the organization is well managed and that its financial situation remains sound.  Fiduciary duty requires board members to stay objective, unselfish, responsible, honest, trustworthy, and efficient.  Board members, as stewards of public trust, must always act for the good of the organization, rather than for their personal benefit.  They need to exercise reasonable care in all decision making, without placing the organization under unnecessary risk.

 

It is important to remember, however, that individual board members have responsibilities but not personal authority over the organization.  Since members have no individual authority to make organizational decisions, the board collectively is responsible for:

 

1) Developing and maintaining the organization’s mission;

2) Maintaining the organization’s tax-exempt status and (if applicable) its ability to attract charitable contributions;

3) Protecting the organization’s resources and approving the budget;

4) Hiring and evaluating the chief executive, and generally overseeing the organization’s management; and

5) Supporting any fundraising that the organization undertakes.

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One factor which can contribute to the long-term success of a nonprofit organization is the presence of an able board of directors who can complement the vision and resources of the organization.  However, unlike large for-profit corporations who elect their directors based on the individual’s business and legal savvy, most nonprofit organizations elect their board of directors based upon the individual’s loyalty and dedication to the organization.  As a result, many persons serving on their nonprofit organization’s board may not have a clear understanding of their rights, responsibilities and, most importantly, their potential personal liability.  In an effort to fill this gap, the Church Law Group is focusing this month on training for board members.  Our goal is to to set-out the basic rules which all directors should follow and to discuss a few ways in which nonprofit organizations can limit the potential exposure faced by its board members. 

Let’s start with the traditional duties of individual board members:

The duties of the board of directors of a nonprofit organization can be encapsulated in the three D’s: duty of care, duty of loyalty, and duty of obedience.  Defined by case law, these are legal standards against which all actions taken by directors are held.  They are collective duties adhering to the entire board and require the active participation of all board members.  Accountability can be demonstrated by showing the effective discharge of these duties.

1. Duty of Care.  The duty of care requires that directors of a nonprofit organization be reasonably informed about the organization’s activities, participate in decisions, and do so in good faith and with the care of an ordinarily prudent person in similar circumstances.  The duty of care could be carried out by attendance at meetings of the board and appropriate committees, advance preparation for board meetings, obtaining information before voting to make good decisions, use of independent judgment, periodic examination of the credentials and performance of those who serve the organization, and frequent review of the organization’s finances and financial policies.

2. Duty of Loyalty.  The duty of loyalty requires board members to exercise their power in the interest of the organization and not in their own interest or the interest of another entity, particularly one in which they have a formal relationship.  When acting on behalf of the organization, board members must put the interests of the organization before their personal and professional interests.  In practice, the duty of loyalty is carried out by disclosure of any conflicts of interest, adherence to the organization’s conflict-of-interest policy, avoidance of the use of corporate opportunities for the individual’s personal gain or benefit, and nondisclosure of confidential information about the organization

3. Duty of Obedience.  The duty of obedience requires that directors of a nonprofit organization comply with applicable federal, state, and local laws, adhere to the organization’s bylaws and existing policies, and remain the guardians of the mission.

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