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Nonprofit Board Members: Legal Duties & Obligations

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Jamie R. Schumacher is an associate with the law firm of MacDonald, Illig, Jones & Britton LLP. Schumacher received her Juris Doctorate from the University of Pittsburgh School of Law. During law school, she was a legal writing teaching and research assistant and the lead articles editor of the Journal of Law and Commerce. She is associated with MacDonald Illig’s Litigation Department.

Recent news stories have covered controversies involving national nonprofit groups. These stories often focus attention on the legal obligations not only of management, but also on individual members of the board of directors. It is helpful, therefore, to consider how the law views these duties.

Board members should determine and understand the purpose of the nonprofit. The definition of “charitable purpose” is one designed to benefit, ameliorate or uplift others mentally, morally or physically. It is good practice for board members to review the nonprofit’s articles of incorporation, bylaws, internal operating manuals, minutes of prior board meetings, annual reports and financial statements to determine the purpose within their nonprofit. In addition, members should be familiar with the nonprofit’s organizational structure, financial responsibility policies and conflict of interest policies.

Three Key Categories
Similar to a for-profit board of directors, nonprofit board members are charged with fiduciary obligations. Board members must oversee management as various policies are implemented. Nonprofit boards should monitor, guide and enable management in pursuing the nonprofit’s public purpose. Board members are also granted decision-making powers in matters of policy, direction, strategy and governance of the organization. Along with this authority, the law requires that board members are charged with legal obligations, which are typically broken down into three categories: 1) the duty of care; 2) the duty of loyalty; and, 3) the duty of obedience.

The duty of care obligates board members to remain informed and attentive and to act in a manner reasonably believed to be in the best interest of the corporation. This objective standard requires making reasonable inquiries when analyzing contracts, investments, business dealings and other matters. It also requires ensuring the nonprofit’s prudent use of all assets, including facilities, people and goodwill while providing oversight to advance the nonprofit’s effectiveness and sustainability.

The second obligation, duty of loyalty, is defined as requiring board members to make decisions in the best interest of the nonprofit, as opposed to the individual’s self-interest. Any type of self-dealing would be a breach of this fiduciary duty, for a member may not seek to derive private gain or advancement at the expense of the nonprofit. A board member should avoid any conflicts of interests or even the appearance of impropriety. This translates to abstaining from negotiations and decisions where personal interests could be adverse to that of the nonprofit. The duty of loyalty requires board members to disclose their individual or a relative’s financial, business, or personal interests in an entity with which the nonprofit will be doing business or service as a director, member or employee of either a competitor of the nonprofit or a corporation with which the nonprofit will be doing business.

Finally, the duty of obedience requires a board member to maintain the nonprofit in accordance with applicable laws, acts and ethical practices. For example, board members should honor a donor’s intent in the administration of the organization’s assets.

Establish Roles Upfront
Nonprofit organizations can assist in establishing a successful board by providing an orientation program that introduces board members to the basic roles and responsibilities of serving on the board, including review of governance policies, accountability practices and executive director’s performance and compensation. Further, it is a good idea to confirm that the board members are aware of their legal duties and potential liability for failure to fulfill those duties.

If you have questions concerning your duties and obligations as a nonprofit board member or how to assist your nonprofit’s board, contact Jamie Schumacher at 814/870-7613 or jschumacher@mijb.com.