Fiduciary Duties for Non-Profit Board Members

Every non-profit director owes the organization three legal duties: care, loyalty and obedience. They are the yardstick a court, attorney general or donor will use to determine if something has gone wrong, and they apply to unpaid volunteers as much as paid directors. This guide explains each duty, how the law protects directors who act in good faith, and the good habits that help board members fulfill these duties.

It is the third guide in our series, following What 501(c)(3) Status Means for You as a Board Member and What Every Non-Profit Board Member Needs to Know About Form 990.

Where do fiduciary duties come from?

A fiduciary acts for the benefit of another. Directors hold the organization's assets in trust for its mission, so the law expects them to put that purpose ahead of their own interests.

The duties come mainly from state law: the non-profit corporation statute where you are incorporated, and court decisions. They are owed to the organization and, in most states, enforced by the attorney general. 

Duty of care: make informed decisions

Directors must act as a reasonably prudent person would. The test is based on process, not outcome. Did the board gather the information a sensible decision needs?

• Prepare and attend. Read the materials and show up. Voting on papers you haven't read is the classic breach.
• Ask questions, and make sure the answers reach the minutes.
• Oversee, don't manage. Approve the budget, review financial statements, and set and evaluate the executive's pay using comparable data.
• Rely on experts, with judgment. Directors may generally rely in good faith on staff, accountants and attorneys. However, this is not the case if warning signs appear that give rise to reasons to doubt their advice.

Duty of loyalty: put the organization first

Directors must act in the organization's interest, not their own or that of family, friends or another organization. Conflicts of interest are the main test.

• Disclose and recuse. Declare any personal or financial interest before the board, leave the room for the discussion and vote, and record it in the minutes.
• Handle insider deals fairly. Contracts, loans or leases with a director or relative need approval by unconflicted directors, comparable market data and fair terms. They may also be reportable on Schedule L (Transactions With Interested Persons) of Form 990.
• Protect opportunities and confidences. Don't take a grant or property deal the organization was pursuing, or use board information for personal advantage.

A signed, annually disclosed conflict of interest policy is the backbone of this duty. 

Duty of obedience: stay faithful to the mission and the law

The board must keep the organization true to its stated purpose and within the law.

• The mission. Programs and spending should match your articles and IRS exemption application.
• The bylaws. Follow them on elections, meetings and quorum. Actions that ignore them can be challenged.
• The law. Exemption rules (see our 501(c)(3) guide), state filings and donor acknowledgments.

Restricted gifts are the usual test. Money given for a specific purpose generally must be used that way, even when cash is tight. Ask an attorney before redirecting it.

How the law protects directors who fulfill their duties

• Business judgment rule. In most states, courts defer to decisions made in good faith, on an informed basis and without a conflict. It protects the process, not the outcome.
• Volunteer protection. The federal Volunteer Protection Act and many state laws limit the personal liability of unpaid directors for ordinary negligence. They don't cover willful, reckless or grossly negligent conduct, and they don't shield the organization.
• Indemnification and insurance. Bylaws often commit the organization to cover directors' legal costs, and directors and officers (D&O) liability insurance can pay defense costs. Ask to see both, and ask what the policy excludes.

Some risks stay personal. Directors and officers who control the organization’s finances can be held personally liable for payroll taxes withheld from employees but never paid to the IRS. 

A practical checklist for directors

• Read the board packet before every meeting.
• Disclose conflicts and leave the room for those items.
• Check that the minutes record your questions and your votes.
• Sign the conflict of interest disclosure each year.
• Review the financials and the Form 990 before it is filed.

Keeping the evidence in one place

A board that has met its duties should be able to show it. A board portal such as BoardCloud can hold packets, minutes, signed disclosures and policies together, so the board can show what it received and decided.

Frequently asked questions

Do unpaid directors have the same duties?
Generally yes. Volunteer protection laws may limit liability, not the duties.

Can a director be personally liable?
Yes, though it is uncommon for directors who act in good faith and follow a sound process. Self-dealing, fraud and ignoring warning signs carry the most risk.

What if I disagree with a decision?
Say so and have your dissent recorded in the minutes. In many states, a director who is present and silent is presumed to agree.

Further reading

• IRS: Charities and Non-Profits
• Volunteer Protection Act of 1997 (Public Law 105-19)
• National Association of State Charity Officials (state charity regulators)

This article is general information, not legal or tax advice. Fiduciary duties and director protections are set largely by state law and differ by state. Check current rules with your state regulator, and consult a non-profit attorney about your organization's situation.