The Board’s Responsibility to Keep the Nonprofit Legal

The Chicago Tribune recently reported that the Evangelical Council for Financial Accountability ousted a Chicago megachurch from its membership because the church’s board failed to exercise appropriate control and oversight of the church’s finances, resulting in over a million dollars being spent inappropriately. As a result, all five members of the church’s executive committee of the board of directors resigned. The board had previously terminated the pastor’s employment.

Other news outlets recently reported that a major non-profit settled a lawsuit for $37 million with tens of thousands of donors. While the nonprofit did not admit guilt, it agreed to refund approximately $37 million in donations after it was accused of using the donations in a manner inconsistent with the donors’ intent. The nonprofit insists that it is engaged in an effort to better train its board of directors regarding their legal responsibilities.

Both of these recent news stories involve board members allegedly failing to fulfill their fiduciary duties to the organization.

So, that begs the question: What are the fiduciary duties of a board member?

Board members are fiduciaries, meaning they are persons in whom special trust has been reposed. In the context of a nonprofit or church, board members are in a fiduciary relationship with the organization and its members—meaning, that the board members have been trusted by the organization and its members to act in the best interest and on behalf of the organization and its members. This fiduciary relationship involves certain legal duties, including the duty of care, the duty of loyalty, and the duty of obedience.

Duty of Care

The duty of care requires board members to actively involve themselves in the life of the organization: attending meetings, asking questions, reviewing reports, reading and revising meeting minutes, staying up-to-date on the organization’s goals, and serving on committees. The duty of care requires board members to take care to ensure the prudent use of the nonprofit’s assets, including its property, personnel, and goodwill. In the above-mentioned scandals, board members admitted that they did not exercise the necessary care in reviewing the nonprofit’s financial reports and other activities. Sadly, this lack of oversight led to both nonprofits showing up in the news for all the wrong reasons.

Duty of Loyalty

  The duty of loyalty requires board members to act in a manner that, first and foremost, advances the interests of the organization. Every board should adopt a Conflict of Interest Policy and Annual Affirmation that is signed each year by all directors that discloses any potential conflicts of interest that a board member may have.

Duty of Obedience

Finally, the duty of obedience requires that board members ensure that the nonprofit obeys applicable state and federal laws and regulations, follows its own bylaws, and adheres to its stated corporate mission. 

Finally, the Board has the responsibility to maintain corporate formalities. Once a church or nonprofit organization is incorporated, it must continue to maintain corporate formalities or risk losing its corporate or nonprofit status. Most importantly, the Board must ensure that meetings of the board and membership take place according to the organization’s bylaws, that corporate records are maintained, and that officers and directors are elected according to the bylaws.

When a board takes the responsibility to exercise its fiduciary duties under the law, it does not interfere with the role of the executive director or pastor but focuses on doing its part to make sure the corporation operates safely and legally.

If you would like a free template for a Conflict of Interest Policy and Annual Affirmation, simply request one by emailing assistant@reynoldslawgroup.net and we will send you one.