What Are the Duties of Nonprofit Directors?
State law sets out which type of management and governing structure is acceptable for nonprofit corporations in that state. In some states, nonprofit organizations can be managed by a board of directors, by voting members, or by a combination of directors and members. The founding documents of the organization (often called the “Articles of Incorporation or “Certificate of Formation” in different states) will set out what type of management is in place. Very often, the board of directors is its legal, governing body.
This article discuss the board of directors as the top governing body of the nonprofit organization. It does not address different rules for trustees of charitable trusts. Each state has specific requirements for how boards of directors must operate. Check with your legal counsel for specifics.
Boards of directors of nonprofit corporations may be designated by other names:
But regardless of the name, if management of the nonprofit corporation is placed with the board, the board has legal and ethical duties that cannot be delegated to others.
The board must follow the fiduciary duties of care, loyalty, and obedience to the nonprofit.
What are Nonprofit Directors’ Legal Duties and Obligations?
While state laws differ, generally directors are required to perform their duties in good faith, with ordinary care, and in the best interest of the nonprofit.*
- In good faith. Good faith is shown by honesty and faithfulness to duties and obligations.
- With ordinary care. Ordinary care is the use of good judgment and common sense. It means doing what an ordinarily prudent person in a similar position would do under similar circumstances. Ordinary care may differ from director to director based on their background and experience and the role they play in the organization.
- In the best interest of the nonprofit. A director acts in the best interest of the nonprofit if the director reasonably believes that the action will benefit the nonprofit. Doing what is in the best interest of the nonprofit means being loyal to the nonprofit – it means the nonprofit’s interest prevails over the director’s personal or business interest.
- Doing what is in the best interest of the nonprofit means that directors are obedient to the “laws” of that nonprofit, which include adhering to the Articles of Incorporation (or Certificate of Formation), bylaws, federal IRS tax-exempt rules, and faithfully following the organization’s mission and purpose.
- It means that directors know and follow all laws applying to the nonprofit – federal, state, and local laws and regulations.
- A director’s personal interests cannot prevail over the nonprofit organization’s interest. It is important to pay attention to perceived or actual conflicts of interest and deal with those.
Some of these tasks may include:
(1) Legal Oversight.
- The board generally ensures that it is operating in accordance with its mission and the purpose for which it was granted tax-exempt status. Are board members checking that mission is tied to all of the organization’s activities?
- As safeguards of the public trust, board members generally are responsible for protecting the organization’s assets.
- The board should ensure legal and ethical integrity and maintain accountability.
- Is the board following its founding documents and bylaws?
- Is the board holding meetings and keeping minutes?
- Is the organization filing its required state and IRS reports? Is the board reviewing those reports before they are submitted?
(2) Management Oversight.
- The board is responsible for ensuring that the nonprofit corporation is being run well.
- The board selects the chief executive and decides his/her role. (The chief executive is often called the executive director.)
- The board supports the chief executive and assesses his/her performance.
- The board usually has the power to hire and remove the chief executive.
(3) Financial Oversight.
- The board provides proper financial oversight, including setting and approving an annual budget.
- Are board members reviewing the financial data closely?
- Are board members making sure there is no private inurement to insiders?
- Is compensation to staff reasonable?
- Is there an independent body conducting a salary survey and using that independent data in setting the executive compensation?
- Is the organization keeping accurate financial records and able to provide those for public inspection?
(4) Program Oversight.
- The board ensures that programs are in place to further the mission and goals of the organization.
How should the nonprofit board and its executive director work together?
Strong nonprofit organizations have boards and staff with respectful working relationships. It is often the job of the executive director to keep the board informed on various legal, financial, planning, and policy, personnel issues. And since it is the board’s job to provide oversight of the executive director to ensure that the nonprofit is being run well, it is helpful for the two to find a healthy balance of guidance and supervision.
You can learn more at Who’s in charge here? Role of the board of directors vs. executive director.
What about advisory boards or committees?
Depending on the articles of incorporation and bylaws, the board of directors may be able to create any number of advisory boards or committees.
Generally, a committee or advisory board works to give advice and support to the organization in some particular way.
Even though the word “board” is included in an “advisory board” or “fundraising board” or “medical board,” these likely are committees of the governing board. These groups often are not the top, ultimate governing board, and they may not have the same legal duties as the board of directors. Check the governing documents!
Some typical types of advisory boards include
- Fundraising and special event planning
- Program support, policy creation, expert guidance
- Specific skill set: medical board, academic advisory board, marketing board.
Because the names and jobs on the “board of directors” and an advisory board can seem similar, sometimes there is confusion. It is often helpful to set out the duties and purpose of any committee or advisory board. Members of the committee should receive information on their expectations and responsibilities in their role.
Are there any protections for nonprofit directors?
In some states, there are some protections for directors, including the following:
- Reliance on certain information prepared by others. In some cases, a director may rely on information prepared by others. If the director is acting in good faith and with ordinary care, the director may rely on reports, financial statements, and information prepared by another director or by an employee, a board committee, legal counsel, accountants, or other professionals hired. However, the director is not protected from liability if she has knowledge that makes the information unreliable.
- Delegation of Investment Authority. If the board acted in good faith and with ordinary care in selecting a financial advisor for the nonprofit, the board may have no liability from any action taken or omitted by an investment advisor who invested the funds of the nonprofit.
- Indemnity. Occasionally a person is sued simply because he or she is or was a director of a nonprofit. In some situations the nonprofit may indemnify (pay the legal expenses for) the director; in other situations the nonprofit must must indemnify the director. Check the organization’s documents.
- Insurance and other protections. A nonprofit may provide certain insurance for directors — Director’s and Officer’s liability insurance. Learn more about D & O Insurance.
You should check with your legal advisor in your state for specifics.
What directors should know about the organization. What documents directors should have
Decision makers of nonprofit corporations that engage in ongoing operations should understand that their duty of care goes beyond financial or business decisions to reach all decisions made in the course or scope of their duties as directors.
Directors should keep the following:
- Formation Documents — the Articles of Incorporation/Certificate of Formation — from the Secretary of State
- Conflict of interest policy
- Minutes of the previous year
- Most recent audit/review
- Budget and most recent financials (Profit and Loss; Balance Sheet)
Board members should know details concerning the following matters:
- Legal form of the organization (is it a corporation or an unincorporated association?)
- Mission of the organization
- Any policies affecting decision makers (Conflict of Interest Policy)
- Financial Picture (budget and financials)
- Most recent IRS Form 990
- Existence/operations of related entities
- Where the organization is conducting activities
- Tax status and applicable legal requirements of the organization (is it a 501(c)(3)?)
- Management structure and key employees
- Committee structure
- How directors and officers are selected
*In Texas, the law to check is the Texas Business Organization’s Code, which sets out the conduct of corporate boards – for-profit or nonprofit boards of directors. Chapter 22 sets out requirements for notice of board meetings, duties of directors, and more.
The Cullinane Law Group works exclusively with the tax-exempt sector. We set up and maintain strong and legally compliant organizations that have solid bases for long-term success. We provide risk management and offer practical solutions for sound governance and help you understand the duties of nonprofit directors. We help nonprofits, foundations, and professional associations who seek to create positive change.