If you have been asked to be on the board of directors for a nonprofit organization, you probably view it as a great honor. It is flattering to be selected to sit on a board – but it is also a lot of work and responsibility. Before accepting the role, you should understand what exactly it is you will be required to do.
Directors of a nonprofit owe a fiduciary duty to the organization. When they are directing and overseeing the financial, legal, managerial and programs of a nonprofit, they must act in good faith and in the best interests of the organization. Keeping this in mind, a director can work with their fellow board members – and the management of the nonprofit – to help it grow and thrive.
At Daryl Reese Law, we provide legal counsel to nonprofit organizations in California. As a former nonprofit executive, our founder has a deep understanding of both the legal and pragmatic aspects of running a nonprofit. To learn more about how we can help your nonprofit, reach out to schedule a consultation.
What Is the Role of the Board of Directors for a California Nonprofit?
Under California’s Corporations Code, a nonprofit corporation must have at least one director. The board of directors is responsible for exercising or otherwise directing the activities, affairs, and corporate powers of the nonprofit. This authority includes the power to delegate the management of the nonprofit’s affairs to another person (or persons), under the ultimate direction of the board.
The board of directors acts as a collective body that holds all of the governing authority of the nonprofit corporation. The decisions that they make as a board are considered the “acts of the corporation” as a legal matter. The nonprofit is the “person” acting and has all of the liability exposure as a result.
Nonprofits get things done by authorizing or delegating the actual work to the officers. To put it another way, boards have governing authority while officers have executive authority. The board is ultimately responsible for what the nonprofit does and does not do.
This sounds like a big responsibility – and it is. Yet most boards consist of a number of members, given that the Internal Revenue Service (IRS) is unlikely to grant 501(c)(3) tax exempt status to a nonprofit organization with just one director. As such, decisions are made collectively by all members of the board at regularly-scheduled meetings.
Board members should be familiar with and have access to a number of documents related to the organization. This includes:
- Formation documents
- Conflict of interest policy
- Most recent audit or review
- Budget, profit and loss statement, and other financial documentation
- The mission of the organization
- Any policies the board has previously adopted
- Most recent IRS Form 990
- Existence and operations of related entities
- Tax status of the organization
- Management structure and key employees
- Where the organization is conducting activities
- Structure of board committees, if any
- How directors and officers are selected
These documents should be carefully reviewed so that each director is capable of performing their job in accordance with California law.
What Duties Do Board Members Owe to the Nonprofit Organization?
The decisions made by nonprofit directors are guided by the principle that each director owes the organization a fiduciary duty. A fiduciary duty is an obligation that one party has to act in the best interests of another party. For example, investment advisers have a fiduciary duty to their clients.
Directors’ fiduciary duty to the nonprofit can be broken down into four categories: (1) the duty of care; (2) the duty of inquiry; (3) the duty of loyalty; and (4) the duty to follow investment standards. Members of a nonprofit board should familiarize themselves with each of these duties so that they can be sure to uphold their responsibility to the organization.
Duty of Care
The duty of care is both an ethical and legal standard. It requires directors to make decisions in good faith and in a reasonably prudent manner. To fulfill their fiduciary duty, directors must use the highest level of care.
An individual director’s duty of care requires that they make decisions that are financial, ethically, and legally sound. All decisions should be made after taking all available information into account, acting in a judicious manner to promote the nonprofit’s best interests. This may also be referred to as performing due diligence.
Another way of looking at the duty of care is by understanding that as a director of a nonprofit, you must be present, informed and engaged. You should use independent judgment and consult experts for advice when necessary. For example, if a legal matter arises, a director should exercise their duty of care by listening to the advice of the nonprofit’s attorney.
Duty of Inquiry
A director of a nonprofit organization also has an obligation to make a reasonable inquiry. This means that the directors have to be aware of the activities of the organization. If they are put on notice of suspicious circumstances, they are required to make such reasonable inquiry as an ordinarily prudent person would make under similar circumstances.
To fulfill their duty of inquiry, directors can rely on expert opinions, including information prepared or presented by one or more officers or employees of the nonprofit whom the directors believe to be reliable and competent; an attorney, accountant, or other expert; and a committee of the board on which the director does not serve. Importantly, if a director has reason to doubt the information that they are being given, their fiduciary duty requires them to make further inquiry to verify the information supplied, obtain additional information, and/or analyze the situation.
For example, a director of a nonprofit organization learns that a managerial employee has been holding back donated items for themselves instead of selling them at their resale shop. They received this information from a different employee that they don’t know very well, and who has been reprimanded by that same manager for coming to work late. In this situation, they aren’t sure if they can trust the employee’s report, but they are concerned that the manager may be stealing from the organization. The director’s duty of inquiry means that they must make reasonable efforts to learn more about the situation in order to protect the nonprofit’s best interests.
Duty of Loyalty
Broadly speaking, having a fiduciary duty means that you act in the best interests of the person or entity that you are representing. The duty of loyalty breaks this down further by requiring that directors put the interests of the nonprofit organization above their own. As such, directors cannot act against the best interests of the nonprofit or in a way that leads to personal gain.
Under the duty of loyalty, directors must avoid potential conflicts of interest. This reduces the risk of engaging in self-dealing or taking advantage of an opportunity for personal gain. When a conflict arises, a director must make full disclosure and/or recuse themselves from the decision-making process.
Consider the following situation. A California nonprofit is looking to purchase a commercial building for its operations rather than continuing to rent office space. One board member owns a piece of commercial real estate that they are hoping to sell. The real estate is held by a Limited Liability Company (LLC), with no obvious ties to the director. It is one of the properties being considered for purchase by the Board. In this situation, if the director fails to disclose that the property belongs to them and that they stand to personally benefit if the nonprofit buys it, then they will have violated their duty of loyalty to the organization. However, if the director makes the disclosure and the Board determines that their property is the best option for the nonprofit, then they will not have violated their fiduciary duty.
Duty to Follow Investment Standards
Most directors of nonprofit boards are not financial professionals. Nevertheless, part of their fiduciary duty includes a responsibility to follow investment standards. This duty applies to assets held by the charitable organization for investment.
Under the duty to follow investment standards, directors must avoid speculation, considering both the potential gains as well as the risk to the nonprofit’s assets. They must also comply with any additional standards for the investment of the assets imposed by the nonprofits bylaws or the terms of the donation. Finally, in making investment decisions, directors must comply with the duties of due care and reasonable inquiry. They can also delegate their investment powers as permitted by law (such as to a broker or financial adviser).
In addition, directors of nonprofit organizations must also use the organization’s funds and assets in accordance with the provisions of the Uniform Prudent Management of Institutional Funds Act (“UPMIFA”). This law provides important guidance on investment decisions made by charitable organizations, including nonprofit corporations.
What Are the Basic Responsibilities of a Nonprofit Board of Directors?
A nonprofit board of directors is responsible for overseeing the work of the organization. Their oversight role can be divided into four primary categories: legal, management, financial, and program oversight. Of course, understanding these broad categories is not the same as knowing what exactly you should be doing as a director.
According to the National Center for Nonprofit Boards, the directors of a nonprofit organization have 10 basic responsibilities that they must perform. We have summarized them below, but also encourage nonprofit boards to order a copy of the book for additional reading. Familiarizing yourself with these responsibilities can help to ensure that you are effectively managing the nonprofit’s activities.
- Determine the Organization’s Mission and Purpose: the board’s fundamental responsibility is to ensure that everyone connected with the organization understands its purpose. This usually takes the form of a written mission statement.
- Select the Executive Director: the executive director is responsible for the day-to-day operations of the nonprofit. The executive director and other members of the leadership team should be carefully chosen to help fulfill the organization’s mission.
- Support and Oversee the Executive Director: while the executive director will typically handle the large and small tasks associated with running the organization, the board still has a duty to support this work and to provide oversight.
- Ensure Effective Organizational Planning: the board should ensure that the nonprofit has a strategic, long-term plan, and that it is being implemented at all levels of the organization.
- Ensure Adequate Resources: nonprofits require funding to operate. While the executive director is often in charge of fundraising, the board can support their work in a number of ways, including by introducing the executive to potential donors.
- Manage Resources Effectively: an important part of any nonprofit’s work is building the public’s trust. This involves ensuring that any income that it receives from donations, grants, and other sources is effectively managed.
- Determine and Monitor Programs and Services: nonprofit organizations typically have limited resources. The board should ensure that any services or programs that are offered align with the organization’s mission and are being implemented in a cost-effective manner.
- Enhance the Organization’s Public Image: a board of directors can be a critical link between a nonprofit and the community. A sound public relations strategy is vital to any nonprofit organization’s work.
- Serve as a Court of Appeal: while the board should normally not be involved in day-to-day personnel decisions, it may be necessary for the board to assist the executive director with these types of issues.
- Assess Its Own Performance: it is too easy for a nonprofit board to be so focused on their responsibilities and duties that they neglect to look at the overall picture of how they are functioning. Every 3 to 5 years, the board should perform an assessment of its own performance.
Of course, there are a lot of other responsibilities and duties that a nonprofit board of directors might have to undertake. A California nonprofit attorney can help you understand your role as a director – and help to guide the entire board and the nonprofit to success.
Ready to Get Started? Give Our Law Office a Call.
The board of directors plays a critical role in running a nonprofit. Understanding your duties and responsibilities is vital if you have been asked to serve on a board. Our law firm can help both you and the organization as you strive to achieve your mission.
Daryl Reese Law provides legal advice to California nonprofit organizations on issues related to board governance, tax exemption, and more. As a former nonprofit executive, Daryl Reese brings a unique perspective to the table, giving legal advice that is timely, cost-effective, and practical. To learn more or to schedule a consultation with a California nonprofit lawyer, give us a call at (707) 858-5000 or fill out our online contact form.
- One director: https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=CORP§ionNum=5120.
- Directing: https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=CORP§ionNum=7210.
- Delegate: https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=CORP§ionNum=9210.
- Fiduciary duty: https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=CORP§ionNum=5231.
- Assets: https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=CORP§ionNum=5240.
- 10 basic responsibilities: https://boardsource.org/product/ten-basic-responsibilities-nonprofit-boards/