Understanding the Critical Legal Duties of Nonprofit Board Members

We get asked by a lot of our clients about boards – how to educate them, how to engage them and how to get them to raise money. Starting our three-part series on board education and management, I’ll cover the four key legal duties that all nonprofit board members must understand and uphold: the duty of care, duty of loyalty, duty of compliance and duty to manage accounts. By educating your board about these vital responsibilities, they can become an even more effective and impactful board member for your organization.

Duty of Care

The duty of care is the most fundamental legal obligation for nonprofit board members. It means they must actively participate in the governance of the organization by attending and engaging in board meetings. They cannot just lend their name to the board roster - they must make a concerted effort to stay informed and contribute to the decision-making process.

The duty of care also requires board members to thoroughly review all relevant reports, financial statements and other materials prior to meetings. This allows them to make informed, prudent decisions that are in the best interest of the organization. When issues or concerns arise, they investigate them diligently and seek out the information needed to understand the situation fully.

An essential component of the duty of care is the responsibility to oversee the organization's executive leadership, typically the CEO or executive director. Board members must carefully evaluate the performance of this individual to ensure they are upholding their duties and be prepared to take corrective action, if necessary. This provides a critical system of checks and balances to safeguard the nonprofit's operations.

Duty of Loyalty

While the duty of care focuses on overall organizational stewardship, the duty of loyalty centers on ensuring board members make decisions that prioritize the best interests of the nonprofit above all else. This means board members must avoid conflicts of interest, whether real or perceived, that could compromise their judgment or decision-making.

Board members must proactively identify situations where their personal, professional or financial interests could intersect with those of the organization. This could include relationships with vendors, employment at a competing nonprofit or even familial ties to staff members. Once identified, these conflicts must be transparently disclosed to the full board.

Beyond disclosure, board members should also abstain from participating in any discussions or votes related to matters where they have a conflict. This prevents them from using their position to unfairly benefit themselves or others at the expense of the nonprofit.

Violations of the duty of loyalty can have severe consequences, including the board member being held personally liable for any resulting harm to the nonprofit. Strict adherence to this legal obligation is essential for maintaining public trust and preserving the organization's integrity.

Duty of Compliance

Nonprofit board members are to ensure the organization is operating in full compliance with all applicable laws and regulations. This includes upholding the mission, vision and values that form the very foundation of the organization, as outlined in its founding documents and bylaws.

Board members must ensure the nonprofit adheres to the parameters of its tax-exempt status, whether that's a 501(c)(3) designation or another classification. Straying outside the bounds of this status can jeopardize critical funding sources like charitable donations and government grants. Boards must also oversee compliance with labor laws, fundraising regulations, accounting standards and a host of other legal requirements.

Fulfilling the duty of compliance also means the board is responsible for regularly reviewing and, if necessary, updating the organization's bylaws. These governing documents outline crucial operational procedures, such as how board members are appointed or removed, how meetings are conducted, and how conflicts of interest are handled.

Failure to uphold this duty can expose the organization to debilitating fines, loss of tax-exempt status and even legal actions that threaten its very existence.

Duty to Manage Accounts

The final key legal duty for nonprofit board members is the responsibility to ensure the organization's financial resources are being used appropriately to further its mission. This duty to manage accounts encompasses several critical elements:

Oversight of Finances

Board members must carefully review all financial statements, budgets and audit reports to develop a comprehensive understanding of the organization's fiscal health and performance. This allows the board to identify any irregularities, make informed decisions about resource allocation and take corrective action if needed.

Appropriate Use of Funds

The board has a legal obligation to ensure donated funds, grants and other revenues are being spent in a manner that directly advances the nonprofit's mission and purpose. Misuse of these resources, whether through fraud, waste or simple mismanagement, is a serious breach of the board's fiduciary duties.

Safeguarding Assets

Board members must take steps to protect the organization's physical, intellectual and financial assets from misappropriation, theft or destruction. This could involve implementing robust internal controls, purchasing appropriate insurance coverage and regularly reviewing asset management policies.

Maintaining Transparency

To uphold public trust, nonprofit boards must be transparent about the organization's financial activities. This typically involves publishing annual reports, IRS Form 990 filings and other documentation that allows donors, grantmakers and the community to assess the nonprofit's fiscal responsibility.

By fulfilling the duty to manage accounts, board members demonstrate their commitment to the organization's long-term sustainability and ensure its resources are being used to maximum impact. Neglecting this legal obligation can severely undermine public confidence and expose the nonprofit to significant legal and financial risk.

Serving on the board of a nonprofit organization is a tremendous honor and responsibility. As a board member, they have a legal obligation to uphold the duties of care, loyalty, compliance and account management. Fulfilling these critical responsibilities is essential for safeguarding the organization's integrity, protecting its assets and maintaining the public's trust.

By deeply understanding and consistently fulfilling these legal duties, board members can become an invaluable asset to the nonprofit's leadership team and play a vital role in advancing its mission.

Contact us to learn more about board support and our nonprofit board training resources.