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Fiduciary" is a legal term that refers to a relationship where an individual, or board, is holding something in trust for another. A nonprofit's board of directors has ultimate responsibility and accountability to the public for the organization's actions. According to the Arnold & Porter law firm, fiduciary duties ensure a board acts in the nonprofit's best interests and works to fulfill the nonprofit's tax-exempt mission and maintain its tax-exempt status.
The Duties
According to the Midwest Center for Nonprofit Leadership, from a legal perspective, a "nonprofit board and its members, individually, have three fundamental, fiduciary duties: duty of care, duty of loyalty and duty of obedience."
Duty of Care
The Minnesota Council on Foundations says "duty of care" means board members actively participate in managing the organization by, among other activities, attending and participating in board meetings, reading reports relating to the nonprofit and overseeing the executive director's performance. Boards also protect, preserve, invest and manage the organization's assets consistent with donor intentions and legal requirements. Arnold & Porter adds that duty of care means board members pay particular attention to an issue that requires the board to make a decision. They read reports relating to the issue and consult with appropriate board committees, officers, nonprofit employees or outside consultants.
Duty of Loyalty
Duty of loyalty means a board member acts solely in the best interests of the nonprofit, according to the Midwest Center for Nonprofit Leadership. The Minnesota Council on Foundations explains that board members "avoid using their positions or the organization's assets in a way that would result in an inappropriate financial gain for themselves or any member of their family," or any other associates apart form the nonprofit. Ignoring this duty opens board members up to being held personally liable for a wrong decision. It also opens the possibility for a court to void the transaction in which the conflict of interest was present, Arnold & Porter warns.
Duty of Obedience
Generally, this duty means board members know the state and federal laws which apply to nonprofits and their work, such as those pertaining to tax-exemption and fund-raising. Boards ensure the nonprofit follows all laws and files necessary government paperwork on time and truthfully. Board members must also know the nonprofit's own governance documents, including its bylaws and board manual, and follow rules and guidance in those. Duty of obedience also mean boards can not take action that is prohibited or beyond the scope of the organization's charter or outside applicable laws, Arnold & Porter says.
Protection from Liability
If a board practices duty of care, duty of loyalty and duty of obedience, board members are generally protected from liability for their actions on the board, because it appears the board was intending to act in the nonprofit's best interests, according to Arnold & Porter.
