Board candidates that seek a position on the board of directors of nonprofit organizations are typically passionate about the organization that they want to serve. It’s important that all board members of nonprofit organizations understand the legal responsibilities that they hold relative to their positions on the board. Failing to fulfill their responsibilities according to the law may have dire consequences to the individual, as well as to the organization.
A nonprofit board oversees the organization’s assets and makes sure that the nonprofit is on sound financial footing. Active oversight includes watching over the organization’s operations and people. The board has responsibility for maintaining legal and ethical accountability for its staff and volunteers.
The Three D’s
The principles of non-profit corporation law are well established. All board members must meet certain standards of conduct and pay strict attention to their individual and collective responsibilities to the organization and its members. Individual states may have their own laws regarding legal responsibilities of board members that serve on nonprofit boards. Nonprofit board members should be aware of any state laws that affect their position on the board. In addition to state laws, the legal duties of nonprofit board members are defined nicely as “the three D’s,” which include duty of care, the duty of loyalty, and the duty of obedience.
Duty of Care
Board members use their own judgment to participate in decision-making on behalf of the organization. The responsibility for making informed judgments lies with the board member, which means they need to secure facts and ask questions to get clarity of the issues. Duty of care also means that board members should seek out independent professional advice when decisions relate to buying or selling significant assets or when entering into material contracts.
The Office of Inspector General and the American Health Lawyers Associations state that board members are responsible for two facets of legal compliance with regard to duty of care:
- To ensure that an information and reporting system exists
- The reporting system is adequate to flag board members in a timely manner when the organization is threatened by legal concerns
Duty of Loyalty
Having a duty of loyalty means that board members must cast aside any personal or professional interests and place the interests of the non-profit ahead of them. Loyalty also means respecting the confidentiality of the organization’s affairs by not disclosing them to outside individuals in a way that leads to loss of opportunity for the organization.
Duty of Obedience
Board members have the responsibility for making sure that the organization complies with all federal, state, and local laws and regulations. It also means that board members should remain faithful to the organization’s vision and mission.
Directors vs. Trustees
When it comes to liability, definitions hold significant value, so it’s important to use the correct label for the position. The terms director and trustee are often used interchangeably, despite the fact that they have different legal significance.
Their similarities lie in having identical fiduciary duties. The difference is that the term trustee is used with regard to charitable trusts and the term director is used with regard to non-profit corporations. This is important because trustees are subject to higher standards than directors under most state statutes. One example is that trustees are held to a higher duty of loyalty than directors. Trustees must refrain from engaging in any self-dealing, even when it has been approved by fellow trustees, whereas directors may be in a position to engage in financial transactions with the corporation as long as the conflict is disclosed and approved by the other directors.
When it comes to legal matters, it helps to define terms such as director and trustee in the bylaws and to adhere to those definitions in the strictest sense.
Legal Consequences of Nonprofit Actions
When an individual board member or a full board fails to comply with statutes, they can be held legally liable for criminal or civil monetary penalties that have the potential to bankrupt the organization. From a legal perspective, the duty of care is commonly expressed as “care that an ordinarily prudent person would exercise in a like position and under similar circumstances.” Board members of nonprofit organizations should be familiar with this definition.
Facing legal matters is a frightening venture for any board member, especially for unsuspecting members of a non-profit board. It’s best to avoid potential liability at all costs. Let’s look at an example of how a nonprofit board member might unsuspectingly cross the line, exposing the board to legal liability.
Let’s say that a nonprofit organization states that its mission is with regard to education, support, and advocacy for people living with mental illness. The bylaws clearly outline that the nonprofit restricts its activities and duties to education, support, and advocacy. One of the board members receives a phone call from an individual who is having a mental health crisis and has to make a choice between directly helping the person in crisis or referring the person to the emergency room. Since the organization’s mission clearly limits activities to education, support, and advocacy, and does not include crisis intervention, the board member should only intervene by referring the person to the emergency room or by calling 911 and reporting the incident. If the board member chose to directly help the person and the person’s behavior escalated and the person in crisis harmed self or others, the board member and the organization could be legally liable for acting outside the organization’s stated purpose.
Since the board member is also responsible for its members and volunteers, board members should educate their members and volunteers about the consequences of their actions in acting outside of the organization’s mission and purpose.
Courts will typically apply “the business judgment rule” when rendering judgments. The judge will assess whether the board member made decisions based on an informed and independent basis and acted in good faith and in the best interests of the organization.
A good way for nonprofit organizations to avoid legal troubles is to spend some time during regular meetings to talk about the roles and responsibilities of board members. The discussion should include the importance of active financial oversight and reviewing the definitions of duty of care, duty of loyalty, and duty of obedience. Discussions should include potential areas of acting outside the position and mission in ways that force legal liability on the organization.