5 Steps Boards Can Take to Avoid Legal Liability Problems

When serving on a nonprofit board, the organization comes first before any personal interests you may have. As a trustee, you are representing the organization, and your fiduciary obligation is to do your part to establish an environment of trust and confidence in the board.

Fiduciary obligations are one-sided and only meet the needs of the organization—not your own. Although most board members do not sign contracts, your relationship with the board is nonetheless a legal one. Board members oversee financial dealings as well as regulatory compliance—it is your central purpose as a board member.

When board members breach any of their fiduciary duties, they can be held personally liable. Some states only hold a board member liable if the breach is one of willful conduct or gross negligence. The nonprofit can sue a trustee as well in a breach of duty case, and so can donors if assets and contributions have been misused. A government case can also be sought if a board member has violated state or federal law.

How to Limit and Avoid Legal Liability

Given all these possibilities, is it possible for boards to limit their legal liability? It certainly is, when boards follow these five cardinal rules.

  1. Establish Measures for Evaluating Board Performance: Metrics are key. The board should define how success of the nonprofit organization will be measured, then you must evaluate it on a regular basis. Many boards provide self-evaluations, and they also survey the nonprofit staff. Finally, many nonprofits benchmark from comparable nonprofit organizations.
  2. Establish Policies: Boards should always, always, always establish appropriate policies regarding their fiduciary duties. Furthermore, boards should establish a written policy that outlines conflicts of interest. To avoid legal liability problems, this policy should clearly state what board members are prohibited from doing, such as doing business with anyone directly connected to the nonprofit. You’d be surprised how often this happens. If the board decides that there are some conditions that are acceptable for conducting business with the organization, these need to be clearly stated in the policy.
  3. Get Disclosure Forms Signed: On an annual basis, it is strongly recommended that each board member sign a disclosure form indicating any actual or potential conflicts of interest. Many boards develop codes of conduct and confidentiality policies. Certainly, appropriate conduct and confidentiality are both a given, but having formal policies do help clarify things. For example, the board may define procedures for making statements to the press and clearly define a list of matters that should remain confidential. To avoid legal liability matters, codes of conduct typically outline the board’s commitment to compliance with regulations and ethics. Avoid Legal Liability by getting board members to sign non-disclosure documents
  4. Establish Committees: Depending on your organization, you may find it helpful to establish a committee or committees to perform detailed reviews outside of board meetings. Many boards establish governance, audit, finance, and nominating committees, for example.
  5. Review Organizational Material: Boards should always be familiar with the nonprofit’s important documents, such as budget and strategic plan, mission statement, and current staffing and programs.

Standards Matter

As a board, you must uphold the highest standards on behalf of the organization. Therefore it is important to follow these five practical cardinal rules to ensure that success, meeting your legal responsibilities, and avoid legal liability. In recent years, the federal government has tightened up on regulatory compliance and enforcement, and boards should definitely pay attention.

Surely you consider it an honor to have been selected for the organization’s board. Now do what you are legally required to do in that position. You must be an informed, active participant in board governance.

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