Fiduciary Responsibility: A Complete Guide with Examples
A fiduciary responsibility is an obligation that prevents one party from acting in their own interest rather than in the interest of the organization. For nonprofits, this ethical commitment makes it possible for them to fulfill their missions.
Board members in nonprofits must be aware of their fiduciary duties and what constitutes a breach of responsibility. A lack of understanding or being underinformed regarding these duties results in liabilities for the organization and is considered poor board governance. Instituting a program like governance training can help directors avoid inadvertently violating their obligations.
In this blog, you’ll discover the following topics:
- A definition of fiduciary responsibilities
- Why fiduciary duties are important and how they relate to corporate governance
- A comprehensive list of board members’ fiduciary obligations
- Examples of fiduciary responsibilities
What Is a Fiduciary Responsibility?
If you haven’t yet served in a capacity that carries fiduciary responsibilities, the term may sound unfamiliar. What does fiduciary responsibility mean?
The following fiduciary responsibility definition will clarify its meaning. The term fiduciary comes from the Latin term for “faith” or “trust.” A fiduciary responsibility speaks to the relationship between one party who is obligated to act in the best interest of another party.
In its truest sense, a fiduciary duty implies that a person who has this type of responsibility conducts themselves according to an ethical standard above what may be legally required. In simple terms, a fiduciary duty demands that a person does what is right, no matter the circumstances.
The responsibilities of fiduciaries are governed by federal and state laws, as well as common law. The Uniform Fiduciaries Act and the Uniform Trustees’ Powers Act are two laws that guide fiduciary responsibilities.
Why Are Fiduciary Responsibilities Important?
Fiduciary responsibilities are important because they establish a high standard of care for individuals or organizations. In the case of nonprofit boards, members are responsible for managing the organization’s interests, so they are bound to legal and ethical obligations, thus protecting the nonprofit from abuses of power or conflicts of interest.
Fiduciary responsibilities are important because they provide the following:
- Protection of an organization’s assets from misuse of power
- Prevent conflicts of interest
- Provide greater transparency and accountability
- Promote a higher level of professionalism from the organization’s leaders
It’s important to note that nonprofit board directors are legally bound by their fiduciary responsibilities. This is because governments need the assurance that nonprofit organizations — and all those involved with them — aren’t profiting from the organization’s efforts, which would otherwise subject them to paying taxes.
Good Governance and Ethical Behavior
Board directors who diligently perform their fiduciary duties responsibly protect the organization’s reputation — a central tenant of good governance.
How important are fiduciary duties? According to the Association of Governing Boards of Universities and Colleges, “Fiduciary duties are at the heart of governance.”
What Are the Primary Fiduciary Duties?
Each duty has a specific meaning and context and fall into one of the following six categories:
- Duty of Care
- Duty of Loyalty
- Duty of Obedience
- Duty of Confidentiality
- Duty of Prudence
- Duty to Disclose
Duty of Care
Duty of care means that board directors must give the same care and concern to their board responsibilities as any prudent and ordinary person would manage their personal matters.
At a minimum, the following fiduciary responsibilities fall under this duty:
- Participating actively in board meetings
- Serving on at least one committee
- Working to advance the nonprofit’s mission and goals
- Practicing oversight of programs and activities
- Choosing a qualified executive director
- Monitoring the budget and financial reports
- Questioning expenditures
- Engaging in strategic planning and goal setting
Duty of Loyalty
Duty of loyalty means that board directors must place the interests of the organization ahead of their own interests at all times. Board members are required to publicly disclose any conflicts of interest and not use board service as a means for personal or commercial gain.
Duty of Obedience
Duty of obedience means that board directors must make sure that the nonprofit is abiding by all applicable laws and regulations and doesn’t engage in illegal or unauthorized activities. The duty of obedience also means that board directors must carry out the organization’s mission in conjunction with the purpose stated in their nonprofit organization’s registration forms.
Duty of Confidentiality
Duty of confidentiality means board members must keep certain types of information confidential. They must not use the information they see or hear in the scope of their position for personal gain.
Duty of Prudence
Duty of prudence refers to being aware of risks and exercising caution in decision-making. Board members are expected to handle matters with a high degree of professionalism and be accountable approving expenditures wisely.
Duty to Disclose
Duty to disclose requires board members to be forthright in their speech and behavior. If they have information that would influence their decisions or impact the decisions of other board members, they have a duty to make that information known.
Fiduciary Responsibility Examples
A few real-life examples of situations nonprofits have faced will make some of the fiduciary responsibilities for nonprofit organizations clear. They are listed below.
Examples of Fiduciary Duties
|Duty of Care||A nonprofit board learned their executive director had become ill with a long-term illness. The executive director would not be able to return to work. Fortunately, the board had planned well for such a situation. They had a backup plan for an interim director and a pipeline of qualified candidates to interview for the position.|
|Duty of Loyalty and Duty to Disclose||When it came time to vote to renew the director’s and officer’s insurance policy, a particular board member abstained from the discussion and voting. The board member made this decision because they worked for the insurance company offering the policy and needed to avoid a conflict of interest.|
|Duty of Obedience and Duty of Prudence||A donor offered a significant monetary contribution to a nonprofit if they agreed to use it for a purpose disconnected from the board’s mission. The board voted not to accept the donation as it would require them to engage in activities that did not align with the nonprofit’s purpose and goals.|
What Constitutes a Breach of Fiduciary Duty?
Before there can be a breach of fiduciary duty, there must be an established relationship between the fiduciary and the beneficiary. In the case of a nonprofit, the board members are fiduciaries, and the nonprofit is the beneficiary.
A board member is considered to have breached a fiduciary duty when they did or said something that was not in the nonprofit’s best interest. In a legal sense, the breach must also have resulted in some loss for the nonprofit. Furthermore, the breach must have directly caused the damage.
Assessing Your Board’s Understanding of Their Fiduciary Duties
Often, nonprofit board directors recruit and accept anyone willing to serve on the board. Recruiting board directors with little or no board experience can be an excellent way to refresh a board, as long as they get proper training about their duties and responsibilities. The best way to do this is to include a section on fiduciary responsibilities for nonprofit organizations in your board orientation program, which you can store securely on your BoardEffect platform.
The practice of an annual board evaluation is a good time to assess whether each board director understands their fiduciary duties. Board evaluations should also reveal whether directors understand how their fiduciary responsibilities relate to strategic planning, risk management and oversight.
During the year, board members should spend some time discussing ways that the board could be exposed to liability for breaching their fiduciary duties. These discussions may form the basis for new organizational policies or changes to existing policies.
A Practical Approach to Fiduciary Duties
It’s prudent and wise to re-evaluate board director performance related to fiduciary responsibilities periodically to ensure that best practices for corporate governance are continually in force. With the BoardEffect survey tool, boards can efficiently assess their board members’ understanding of fiduciary duties and other competencies.
By fully understanding the fiduciary definitions, board directors can assess whether they are fulfilling their duties as individual directors and as a board.
While it’s vital to ensure that new board members understand what fiduciary duties are and why they are important, it’s common for situations to come up where fiduciary duties come into question. When a fiduciary responsibility is in question, board members must be willing to call them to the board’s attention and discuss them openly.