Why Board Fiduciary Responsibility Is Critical To Nonprofit Success

One of the primary roles of a nonprofit board is its fiduciary responsibility to the organization. The Internal Revenue Service (IRS) Form 990 requires nonprofits to provide financial reporting, but also requires boards to report on governance issues like board member fiduciary duty.

But what exactly is fiduciary responsibility? What context does it have for a nonprofit board?

Why Board Fiduciary Duty Is So Important

A fiduciary is someone who acts on behalf of another person or another organization. The nonprofit’s management team depends on the board to represent them well. Board members are the fiduciaries who steer the organization. The best way the board can serve the nonprofit is to adopt legal and ethical principles of governance as well as sound financial management policies.

For this role to be successful, there must be a two-way trust between the nonprofit and its board. Management teams look to the board as the central decision making authority for that organization. The board is ultimately responsible—and accountable—for the organization’s actions.

The Three Fundamental Board Fiduciary Duties

Nonprofit boards are entrusted with three fundamental and important fiduciary duties: care, loyalty, and obedience.

  1. Care: Board members must take care in the organization and actively participate, performing important duties such as attending board meetings, providing strategic direction, and providing management oversight. Part of this duty is becoming educated on the nonprofit and the appropriate industry.
  2. Loyalty: This duty means that the board member should not use the position to further a personal or professional agenda. The board member is there to solely operate in the interest of the nonprofit—nothing else. Board members should avoid conflicts of interest to this effect, and be diligent about reporting perceived or potential conflicts of interest so that the board member’s loyalty to the nonprofit remains above suspicion.
  3. Obedience: Finally, there is the duty of obedience, in which board members must always stay knowledgeable regarding how local, state, and federal laws and regulations apply to the nonprofit and to themselves as board members. For example, the IRS is a federal agency and as such they issue their own set of regulations. It may not be the most entertaining or rewarding part of board service, but the board member is responsible for having an extensive knowledge of by-laws and other governing rules and regulations. Board members should never act outside the scope of the nonprofit’s legal documents, and board members should keep each other in check on this very important duty.

Sometimes in a nonprofit, the roles between the board members and the management team can become blurred, so it is important to remember that the board’s role is strategic, not operational. Leave the day-to-day operations to the management team. As a board, make sure you have sound financial management policies in place that ensure the nonprofit will have adequate resources well into the future.

Working with Board Management and New Board Members

Perhaps one of the board’s most important fiduciary responsibilities involves hiring a talented executive director and setting his or her compensation. In the absence of a director, board members can find themselves taking on extra duties until a director is hired. While this is helpful to the organization in the interim, it can blur the lines of roles and responsibilities. However, once the director is in place, it is no longer the board’s role to steer the boat.

Instead, the board can turn their attention to “sight” roles—insight, foresight, and oversight. As a board, focus on providing the all-important strategic direction for the nonprofit. While different, both the board role and the director role are important in ensuring the nonprofit operates efficiently and effectively.

If you have a new board member, start that person off on the right foot by stressing their fiduciary duties to the nonprofit. Discuss special issues or conflicts of interest specific to your organization, and make sure the new person has a healthy dose of governance policy familiarization.

The fiduciary role is a lot of work for any board member, but the effort put in does pay off in the end—for all individuals and for the nonprofit organization. Without the diligence to fiduciary responsibilities, most nonprofits would cease to exist, and the world would be lacking the great benefits these amazing organizations provide.

So go forth and conquer. Be diligent. Be committed. Be successful. Be fiduciary!

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