For the last two weeks of "The Board Series", we will explore the roles the Board plays. This week? The legal role.
Nonprofit boards can provide valuable direction and governance to charity organizations, but not if they lack an understanding of their legal responsibilities. Nonprofits can help provide documentation on legal responsibilities, but nonprofits must have a clear understanding of the legal responsibilities of the board of directors. First and foremost, as the fiduciaries, a board of directors has a legal responsibility to a nonprofit organization. The three legal duties a board of directors has to an organization are:
1. Duty of care
2. Duty of loyalty
3. Duty of obedience
Duty of Care
Simply put, a board’s duty of care is the responsibility to ensure the organization's assets, which includes the building or facilities, and people—both staff and volunteers—are being properly used for the betterment of the organization. The duty of care is based on the legal reasonable standard of care, which is defined as “the degree of caution and concern an ordinarily prudent and rational person would use in similar circumstances.” Fulfilling the duty of care does not mean the board needs to be involved in the daily details of staff or volunteer management. Instead the board needs to provide organizational oversight by ensuring the executive director is appropriately managing, running and maintaining the staff and facilities, as well as ensuring the board does not have a conflict of interest, can read organizational financial statements and is actively involved in board meetings.
Duty of Loyalty
The board of directors, as a governing entity and as individuals, must place the interests of the nonprofit they serve first. As a board member, an individual as part of his or her legal duty of loyalty, must make public any conflicts of interest. Serving as a board member is not an opportunity to create business opportunities for oneself, friends, or acquaintances, but instead an opportunity to make decisions that benefit the organization at every turn. Board members are in the unique position as part of their duty of loyalty of having and providing oversight that can shape a nonprofit’s long-term vision. Board members must seek to advance the mission of the organization, not the interests of someone or some other entity.
Duty of Obedience
The duty of obedience requires board members ensure the nonprofit they serve is obeying applicable laws, regulations, and policies at the federal, state, and local levels. Additionally, as part of this duty, the board needs to ensure that its members are following the bylaws and policies. Finally, as part of the duty to obedience, a board of directors ensures their nonprofit is not acting in an unauthorized manner by taking on or acting in a way that is against regulations, the organization’s mission, or policies.
Since the board is legally liable for the actions of the organization, it is vital that the board and the nonprofit they serve understand the board’s duties.
The nonprofit can help support the board by providing board training from a third party. Training can help provide necessary clarity to board members, allowing them to provide the valuable oversight that can help the nonprofit fulfill and grow its mission.