Legal Duties of Board Members
Post by Janetta Cravens, VP of Programs
What are the legal duties of a board member?
Being recruited to serve on a board of directors may be quite an honor, it also comes with specific legal duties and obligations. Board members are trustees of the nonprofit organization and all nonprofits must have a board of directors. Boards of Directors are responsible for governing the organization which they do by exercising powers and duties delegated to it by its status as a nonprofit corporation. Board members are responsible for ensuring that the organization’s resources are being used to achieve its purpose and mission. Board members carry this out by exercising what are called the “3 Legal Duties” of being a board member.
The main legal responsibilities of a nonprofit board are summarized as the Duty of Care, Duty of Loyalty, and Duty of Obedience.
Duty of Care:
Board members are expected to fully participate in the organization’s planning and must make informed decisions. Board members should review board packets prior to the board meeting and other materials that may be distributed, as well as ask questions in a board meeting to fully understand all aspects of a decision. To exercise the duty of care, boards stay informed of the activities of the organization, read the materials prior to a board meeting, ask questions during the meeting, and engage in informed discussion during the meeting.
One way to think about this is that board service is akin to being given the power of attorney for the nonprofit, the way we might become power of attorney for a parent or aging grandparent. The board makes decisions for the organization that cannot make decisions for itself — because organizations are not living persons. Board members need accurate, timely, information in order to make informed, sound decisions. This may mean that board members should require management of the organization to provide sufficient information, or question it if reports are invalid or incomplete. Board members are responsible for what they know. If the organization should ever fall under investigation, “I didn’t know that was going on” is not a defensible position. The Duty of Care asks that board members attempt “in good faith” to assure that a reporting system exists and the reporting system is adequate to ensure that the board can comply and respond in a timely manner as a part of their ordinary operations.
Duty of Obedience:
Board members, by their positions, agree to ensure that the organization will comply with all applicable federal, state, and local, laws. In this way, board members should not make decisions that are counter to federal or state laws in which the organization must comply. This includes submitting an annual 990 (Federal), but registering annually with the secretary of state (state) or food handling, childcare, or other laws that may pertain to your particular mission (federal and state).
Many also extend to the Duty of Obedience the board’s responsibility to uphold its own mission, bylaws and policies. Boards have a responsibility to be faithful to the organization’s stated mission and not act in ways that are counter to that mission or use the organization’s resources in ways that are incompatible with the mission.
This includes the laws they conferred upon themselves when the bylaws were established. If a board cannot follow its bylaws, it should adopt changes to the bylaws that keep the organization current with its own practices. Board decisions are the legal decisions of the organization, and thus should be supported by the individual board members. In this way, a board members also exercise the Duty of Obedience by following — and supporting — the board’s decisions once the decision has been made.
Duty of Loyalty:
Board members must uphold the mission of the organization and set aside their personal, or professional interests, in the mission or the organization. The mission of the organization is greater than any of our individual interests in the success or future developments of the mission. When making decisions for the organization, it is important that board members set aside their personal aspirations, or professional interest in the organization. This is challenging, because organizations recruit board members that have some stake in the success of the organization, but when making a decision, it is the organization and what is good for the organization that must come first.
The counter-balance to the duty of loyalty is to have clear conflict of interest policies and forms so that board members disclose where their duty of loyalty might be compromised. This could be in professional ties to the organization, personal connections, or other board service. Organizations also may ask board members to sign confidentiality statements to preserve the confidentiality of the organization’s affairs. Simply put, disclosing opportunities to outside individuals is a breach of the Duty of Loyalty and may lead to loss in reputation, in status, and in revenue, for the organization.
When making decisions for the organizations, board members with the disclosed conflict of interest must be handled as part of the official business. Organizations may take multiple bids for service from vendors, of which a board member may be one. The business is discussed and voted on once the person recuses themselves from that portion of the meeting and it is recorded in the minutes. They may reenter the meeting once the decision has been made. Named conflicts of interest illustrate the need for the Duty of Loyalty most clearly, but all board members are held to the duty of Loyalty, even when there is no clear conflict at play.
Boards also have a fiduciary responsibility which they exercise by maintaining oversight of the nonprofit’s finances. Board members must evaluate financial policies, approve budgets annually, and review financial reports to ensure that the organization has the resources it needs to carry out its mission, and that those resources are being used to support the upholding of the mission. The fiduciary responsibility runs through all the 3 Legal Duties of being a board member as finances touch on every aspect of the organization’s mission and operations.
Complying with the Legal Duties of being a board member can protect the organization. As long as the boards’ decisions are made on an informed basis, in good faith, and in the best interest of the organization, they are not subject to being challenged in court. The consequences of breaching any of these duties harms the organization, its clients, and other stakeholders, and board members may be personally liable for failing to comply. Though negligence may be difficult to prove in court, the allegation is still expensive for the organization to defend. Boards of Directors can use this knowledge to help prepare new board members to the full weight of their service to the organization, and monitor their own proceedings by establishing appropriate policies for the organization, and the board, to follow. Establishing standards for a board members’ engagement on the board, such as attendance policies, are other good ways to help board members understand the full nature of their service during their term as a board member and to protect the organization.