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Nonprofit Directors’ Legal Duties and Responsibilities (Part 2)

Last week’s Nonprofit Alert covered the factual context you need to be aware of prior to committing your time, reputation, and checkbook to serve on the board of a nonprofit. This week we’ll consider the equally important areas of the duty of care, and the duty of loyalty.

What is the duty of care?

The duty of care is broad. It requires directors to exercise ordinary and reasonable care in performing all their duties for the nonprofit, with honesty and good faith in the best interests of the nonprofit.

This means that each director must approach each decision with the same care and responsible inquiry as would an ordinarily prudent person in a like position and like circumstances. Specifically, a director must at all times act in good faith for the benefit of the organization by attending meetings, processing pertinent information from management regarding matters requiring board action, reviewing all documentation submitted to the board, requiring additional information when necessary, and monitoring the organization’s activities for compliance with programmatic as well as financial objectives.

What additional responsibilities are imposed by the duty of loyalty?

This imposes the duty of faithfulness to the nonprofit organization. The duty of loyalty dictates that officers and directors of nonprofits always act in the best interest of the organization and not in their own personal interest.

Loyalty requires undivided allegiance to the nonprofit. Board members may not put their personal interests above those of the nonprofit. Personal interests are as broad as they sound – any personal business, professional or financial interests; any family interests; any interests arising from involvement with other nonprofits, etc. These additional hats worn by a board member create the potential of conflicts of interest.

A latent conflict of interest arises and becomes actual when the nonprofit is considering a transaction or collaboration where a director (or senior manager with decision-making influence) also has a personal interest triggered by the proposed deal.

As a new board member what are some of the best practices I and other board members should be following to avoid breaching the duty of loyalty?

The IRS and nonprofit best practices encourage every nonprofit to have a conflict-of-Interest policy. Here is a link to the IRS Sample Conflict of Interest Policy. This Policy essentially established 6 key steps to assure that private interests are properly fenced in, and the directors’ duty of loyalty is not breached.

Examination of 6 elements is required:

  1. Any potential personal interest is timely and fully disclosed to the rest of the board
  2. The board has market comparable or similar information to objectively access and confirm that the proposed transaction in which a director (or relative) has a personal interest is clearly favorable to the nonprofit.
  3. The board has an opportunity to fully discuss the proposed transaction with the conflicted director(s) and have all their questions answered before the conflicted director(s) is excused.
  4. Final discussion and voting on the proposed transaction take place with the conflicted director(s) excused from that portion of the meeting.
  5. The board reasonably determines, with adequate fair market value and other relevant data, that the proposed transaction is fair to the nonprofit organization overall and despite the potential conflict of interest, there is a demonstrable absence of personal benefit or self-dealing.
  6. Finally, all the above steps should be noted and recorded in contemporaneous minutes.

What are your next steps to decide if you want to join your friend’s board?

With these FAQs, your notes, and a pen, schedule a visit or Zoom call with your friend and make sure her answers jibe with or exceed your understanding of duties.

Confirm that you are on the same page as to board members’ legal duties and best practices. Then you can join your talents to this good cause without unduly sacrificing your time, your bank account, or your sleep.