"Fiduciary" is one of those terms that gets thrown around constantly in boardrooms. It sounds impressive, and maybe a little intimidating, but do your board members actually know what it means for them?
You might hear the word used most often regarding financial advisors or trustees, but it is just as critical for not-for-profit boards. In simple terms, being a fiduciary means having a legal and ethical obligation to act in the best interests of a beneficiary. For your board members, that beneficiary is your organization.
At the end of the day, your board members must prioritize what is best for the nonprofit, even if that conflicts with what might benefit them personally. If your board doesn't already know its specific duties, it is up to leadership to ensure they get up to speed. Here is a breakdown of what that responsibility looks like in practice.
Board members generally have three core fiduciary duties. Understanding these pillars helps ensure the organization stays compliant, effective, and mission-driven.
Think of this as the "pay attention" rule. Members must exercise reasonable care when overseeing your organization’s financial and operational activities. While they don't need to manage day-to-day affairs, they cannot be asleep at the wheel.
A board member fulfilling the duty of care should:
This duty requires board members to act solely in the best interests of your organization and its constituents. They cannot use their position for personal gain. The organization's health must always come before the individual member's wallet or personal agenda.
This isn't about blindly following orders; it's about adhering to the rules. Board members need to act in accordance with your organization’s mission, charter, and bylaws. They also must ensure the organization complies with all applicable federal, state, and local laws.
These duties aren't just suggestions. If a board member knowingly violates them, the consequences can be severe. In extreme cases, director malfeasance could lead to IRS sanctions and even the loss of your nonprofit’s tax-exempt status. Furthermore, board members can be held personally liable for financial harm the organization suffers due to their negligence.
If a member is failing to uphold these standards, you must consider removing that person from your board to protect the organization.
One of the most challenging components of fiduciary duty is the obligation to avoid conflicts of interest.
Generally, a conflict exists when a nonprofit does business with a board member, a company where a board member has a financial interest, or another organization where they serve as a director.
However, it is not just about actual wrongdoing. In the nonprofit world, the appearance of wrongdoing matters almost as much as reality. To avoid even the hint of impropriety, your nonprofit should treat transactions as conflicts of interest if they involve a board member’s spouse or other family members.
Conflicts happen. The key to dealing with them—whether they are real or just perceived—is disclosure.
Board members involved should disclose all relevant facts to the rest of the board immediately. Crucially, they should abstain from any discussion or vote on the issue unless the board specifically determines they may participate. Transparency is your best defense.
You may have chosen honest, trustworthy, and charitable individuals to serve on your board, but you cannot expect them to automatically know their legal duties. It is not their job to be legal experts; it is their job to support the mission.
To bridge the gap, provide all directors with a clear list of duties and explain the concept of fiduciary responsibility during new-member orientation. When everyone understands the rules of the road, your organization can move forward with confidence.
If you need assistance navigating governance issues or structuring your board for success, we are here to help. At SD Mayer, we act as partners in your success, helping you make smart decisions that keep your organization compliant and thriving.