One factor which can contribute to the long-term success of a nonprofit organization is the presence of an able board of directors who can complement the vision and resources of the organization.  However, unlike large for-profit corporations who elect their directors based on the individual’s business and legal savvy, most nonprofit organizations elect their board of directors based upon the individual’s loyalty and dedication to the organization.  As a result, many persons serving on their nonprofit organization’s board may not have a clear understanding of their rights, responsibilities and, most importantly, their potential personal liability.  In an effort to fill this gap, the Church Law Group is focusing this month on training for board members.  Our goal is to to set-out the basic rules which all directors should follow and to discuss a few ways in which nonprofit organizations can limit the potential exposure faced by its board members. 

Let’s start with the traditional duties of individual board members:

The duties of the board of directors of a nonprofit organization can be encapsulated in the three D’s: duty of care, duty of loyalty, and duty of obedience.  Defined by case law, these are legal standards against which all actions taken by directors are held.  They are collective duties adhering to the entire board and require the active participation of all board members.  Accountability can be demonstrated by showing the effective discharge of these duties.

1. Duty of Care.  The duty of care requires that directors of a nonprofit organization be reasonably informed about the organization’s activities, participate in decisions, and do so in good faith and with the care of an ordinarily prudent person in similar circumstances.  The duty of care could be carried out by attendance at meetings of the board and appropriate committees, advance preparation for board meetings, obtaining information before voting to make good decisions, use of independent judgment, periodic examination of the credentials and performance of those who serve the organization, and frequent review of the organization’s finances and financial policies.

2. Duty of Loyalty.  The duty of loyalty requires board members to exercise their power in the interest of the organization and not in their own interest or the interest of another entity, particularly one in which they have a formal relationship.  When acting on behalf of the organization, board members must put the interests of the organization before their personal and professional interests.  In practice, the duty of loyalty is carried out by disclosure of any conflicts of interest, adherence to the organization’s conflict-of-interest policy, avoidance of the use of corporate opportunities for the individual’s personal gain or benefit, and nondisclosure of confidential information about the organization

3. Duty of Obedience.  The duty of obedience requires that directors of a nonprofit organization comply with applicable federal, state, and local laws, adhere to the organization’s bylaws and existing policies, and remain the guardians of the mission.

Tags: board of directors, church, Church Law Group, duty of care, duty of loyalty, duty of obedience, fiduciary, Governance, liability, nonprofit, religious organization