Serving on an organization’s board of directors is an honor. If you’ve been invited to serve, it’s because someone views your expertise or experience to be essential to that organization’s future. Recognizing your value as one the “mission specialists” is exciting stuff, but it also shouldn’t be taken lightly.
The majority of people who accept an invitation to serve on a board understand their basic role and responsibilities. However, for the well-intentioned minority who may be passionate about the mission but don’t quite grasp the seriousness of their obligations, it’s important to make sure everyone — prospective and current board members — fully understands their fiduciary duty. After all, in the unlikely event something “happens,” a board member’s excuse of not fully understanding his/her fiduciary duty doesn’t relieve your board from any liabilities it may face in litigation.
Let’s take a moment to define “fiduciary.” Serving as a fiduciary means a board member is acting on behalf of the organization and in the best interest of the public and the constituencies the organization serves. BoardSource, formerly the National Center for Nonprofit Boards, explains it as follows:
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 the benefit of themselves. They need to exercise reasonable care in all decision making, without placing the organization under unnecessary risk.
That said, a board member’s fiduciary decision-making falls under three official categories of obligation: Duty of Care, Duty of Loyalty, and Duty of Obedience.
So, here’s what you and your board need to know about each duty of board service:
- Duty of Care requires a board member to be familiar with all information and facts under his or her purview, be prepared for and attend board meetings, and use his or her best judgment in decision making.
- Attend meetings regularly
- Ask questions
- Make sure the meeting minutes reflect your attendance
- Vote independently
- Duty of Loyalty requires a board member to place the interests of the organization above his or her own.
- Disclose existing and potential conflicts of interest before joining a board and immediately when they arise
- Do not use your connection with the organization for personal or professional gain
- Maintain confidentiality at all times
- Duty of Obedience requires board members to comply with applicable laws, adhere to the organization’s by-laws, and remain a guardian of the organization’s mission.
- Read the organization’s by-laws in their entirety when you join a board
- Understand the organization’s mission
- Make sure the majority of the organization’s programs reflect its mission and that they are regularly monitored and evaluated for effectiveness
While not specifically defined as an official duty, but definitely related to the above, the duty of financial oversight is also very important as board members are considered stewards of the public’s trust and, therefore, have the ultimate oversight of the organization’s financial affairs. So we add a fourth fiduciary obligation for board members:
4. Duty of Financial Oversight requires board members to have a basic understanding of financial terminology and financial statements — enough to judge their soundness and to recognize warning signs of financial misconduct.
- Review, approve, and monitor the annual budget; ask questions if something appears ambiguous or unsubstantiated
- Review and approve the annual audit and Form 990
- Ensure clear financial policies are in place
- Make sure donated and, most importantly, restricted funds are being used for their intended purpose
- Make sure employment taxes are being withheld and paid
- Conduct an annual review of the CEO or Executive Director; document all justification for compensation increases or paid bonuses
If you are a CEO or Board Member and question whether your board fully understands its fiduciary duty, it can be helpful to include this information in board orientations and trainings.
If you’re interested in learning more about McKinley Carter’s professional training programs for Nonprofit Boards, please contact Nonprofit Advisory Services Director Kathleen McDermott at firstname.lastname@example.org or 866.306.2400. Kathleen has more than 25 years’ experience in nonprofit management and board governance.
For more information about what board members should understand about a nonprofit's financial "story," click here to download our Financial Oversight Checklist: