By Diane Sparks, CPA | Nonprofit Practice Leader
“Fiduciary” is a term that gets used often in nonprofit governance discussions, but it’s not always fully understood. As boards plan for the year ahead and organizations prepare for audits, financial reporting, and increased oversight, understanding fiduciary responsibility is more important than ever. Fiduciary duty refers to the legal and ethical obligation to act in the best interests of the organization. While the term is often associated with trustees and financial advisors, it applies just as directly to nonprofit board members. Board members are expected to put the organization’s mission and sustainability first, even when doing so may conflict with personal or professional interests. Ensuring your board understands these responsibilities is a critical step in protecting your organization and supporting sound decision-making.
Primary Duties
Board members have three primary fiduciary duties, the first of which is care. Members must exercise reasonable care in overseeing your organization’s financial and operational activities. Although disengaged from day-to-day affairs, they should understand your nonprofit’s mission, programs and structure; make informed decisions; and consult others including outside experts when appropriate.
The second duty is loyalty. Board members must act solely in the best interests of your organization and its constituents, and not for personal gain. Obedience is the third duty. Board members need to act in accordance with your organization’s mission, charter and bylaws, as well as any applicable federal, state and local laws. If any board member knowingly violates these duties, consider removing that person from your board. Board members can be held personally liable for financial harm your organization suffers. In extreme cases, director malfeasance could lead to IRS sanctions and the loss of your nonprofit’s tax-exempt status.
Conflicts of Interest
One of the most challenging, but critical, components of fiduciary duty is the obligation to avoid conflicts of interest. In general, a conflict of interest exists when a nonprofit organization does business with a board member, an entity in which a board member has a financial interest or another company or organization for which a board member serves as a director or trustee. The appearance of conflicts of interest matters almost as much as reality. To avoid even the appearance of any conflicts or impropriety, your nonprofit should treat transactions as conflicts of interest if they involve a board member’s spouse or other family member. Also off-limits are transactions with entities in which a board member’s spouse or relative has a financial interest. The key to dealing with conflicts of interest, whether real or perceived, is disclosure. Board members involved should disclose the relevant facts to the rest of the board and abstain from any discussion or vote on the issue unless the board determines they may participate.
Educating your Board
Even experienced and well-intentioned board members may not fully understand how fiduciary responsibilities connect to financial oversight, compliance, and governance. ATA works with nonprofit leaders and board members to strengthen understanding, reduce risk, and support long-term sustainability.
If you have questions about fiduciary duties, board governance, or financial oversight, our nonprofit team is here to help.