In the first few weeks of any new year, there is a ritual among nonprofit organizations that is as regular as the changing of the guards at Buckingham Palace. Boards of directors come together to map out the year ahead, review budgets, and welcome their newly elected members. Typically, new members have been selected because of their potential fundraising abilities or their expertise in a particular field. It is the board’s hope that the new director will bring a fresh perspective and help further the organization’s mission. But as power is transferred from the old directors to the new, it is important for the newcomers to fully understand the responsibilities behind the roles they are accepting—i.e., how to effectively guard their posts.
There are three basic principles of nonprofit corporate law that can help serve as a moral compass and govern the decisions of a board member throughout his or her term.
- Duty of care. Duty of care refers to a board member’s responsibility to act in the same manner that any other “reasonable” person might act in the same circumstances. It implies that a person must make decisions in good faith and use rational judgment. This can also include taking precautions to avoid any reasonably foreseeable harm that might come to others or to the organization.
- Duty of loyalty. Board members have a duty of loyalty, or a responsibility to always act in the best interest of the organization without any conflicts of interest. This can become a gray area for many board members who own businesses or hold positions in companies that stand to gain from the activities of the nonprofit. It is always a best practice to make any potential conflicts of interest known to the board so that the appropriate approval processes can take place and there is never a perception of self-dealing.
- Duty of obedience. The duty of obedience refers to a board member’s obligation to remain faithful to the organization’s mission statement. Board members have been entrusted by their constituents to ensure that resources are being used to accomplish the organization’s stated goals and not being diverted to other purposes. The mission statement of any 501(c) organization can be found on their Form 1023.
The first meeting of a new year is an excellent time for boards to dust off their Form 1023 and make sure that all of their planned activities align with their original mission statement. It is also a time for reviewing the legal and fiduciary responsibilities of the board so that they can effectively guard and protect the organizations they serve—just like the guards at Buckingham Palace, but without the bearskin caps.