What Nonprofit Boards Need to Know About Their Fiduciary Duties

By January 4, 2021 Nonprofit
What Nonprofit Boards Need to Know About Their Fiduciary Duties

Broadly defined, a fiduciary duty is one owed by an individual in a leadership or management position to the organization itself as well as its members. Although the phrase usually pops up in the context of for-profit companies, it also applies to the religious and nonprofit sectors. Fiduciary obligations are in place whether or not a person is paid for serving on a board.

A director’s fiduciary duty is to execute his or her obligations in accord with the following distinct obligations:

Best interest obligation. Directors should make choices based on the best interest of the nonprofit and make sure that the nonprofit’s activities are actually advancing its mission. This fiduciary duty consists of the disclosure of any conflicts that could influence impartial decision making.

Act with appropriate care. Directors frequently enter into problems by failing to pay sufficient attention and do what is necessary to collect essential details before making choices. Be aware that a choice might involve considerable risk for the ministry although it does not involve an economic component. For instance, directors may need to examine potential employment candidates (or ensure that such examination is undertaken by appropriate staff) lest a candidate’s criminal history remains hidden until it’s way too late.

Act in good faith. “Good faith” involves acting within the scope of the ministry’s mission and the tenets of the religion itself. In executing the duty of acting in good faith, a director is allowed to rely on the guidance of legal professionals, church managers, and also religious experts. Instances of bad faith consist of failing to disclose an individual interest in a deal (such as a third-party contract) or making an unapproved disclosure of secret information.

Duty of obedience. A director has a duty of obedience to ensure the organization is following its own rules, follows applicable regulations and guidelines, and abides by its purpose.

A breach of any of these fiduciary duties can result in litigation, exposing the organization’s directors as well as officers to personal liability. However, directors and officers are not liable if their actions were reasonable and made in good faith.

Provident Law’s nonprofit attorneys can help churches and religious organizations and their boards. We stand ready to counsel and serve churches, charities, and foundations, as well as private schools, colleges, universities, and other types of nonprofit organizations—providing broad transactional and general counsel services in Arizona and surrounding areas. Contact us to learn more.