Legal & Financial Responsibilities of Nonprofit Board Members
In wise words attributed to Voltaire (and the Spider-Man comic book), “With great power, comes great responsibility.” Never have these words been more true than when it comes to serving on a nonprofit’s board of directors. Being asked or elected to serve on a board can be a huge honor, but it also comes with great legal and fiscal responsibilities.
Let’s start with three of the major legal duties:
- Duty of care: This means that board members are expected to actively participate in making decisions, resolving issues, and participate in planning.
- Duty of loyalty: Board members must put the interests of the nonprofit ahead of their own personal and professional interests. This means that even merely potential conflicts of interest must be studiously avoided. (Your nonprofit MUST have a Conflict of Interest Policy that each board member signs.)
- Duty of obedience: Compliance with all local, state, federal regulations, and laws applicable to the nonprofit is an essential responsibility for board members.
Additionally, these three major legal duties also encompass ensuring the organization is committed and stays true to its stated mission.
Board members must act as fiduciaries in closely overseeing the nonprofit’s finances. Board members are tasked with reviewing financial reports (like donations received and expense reports), evaluating policies (such as a cash handling policy or a Gift Acceptance Policy), and approving budgets. They must also take into account the resource needs of the organization in addition to accountability to donors, parties served, and the general public.
Whether you’re donating your time and serving on a nonprofit board, or are running a nonprofit and are training the board (sometimes called “managing up,” and not an easy thing to do), it’s important the aforementioned duties are fully explained and understood by all parties.
Let me suggest two good and very practical ideas. First, consider providing a board orientation, once a year, where the entire meeting is devoted to an outsider explaining and discussing with the board the full extent of its legal and fiscal duties. Second, consider drafting and distributing a “job description,” not only for your employees, but also for your board members. Put in writing what you expect of the board, including the legal protection they must offer.
Working with nonprofit leaders is one of my passions and a critical part of my main mission to promote and maximize charitable giving in Iowa. If you’re on the board of or work for a nonprofit that is facing challenges, or if you simply want to be prepared to avoid challenges, don’t hesitate to reach out. I can be contacted at anytime by phone (515-371-6077) or email to schedule a free consultation.