April 24, 2018 Reprint

Nonprofit Board Responsibilities: The Basics

Herrington J. Bryce

A board is needed to incorporate a nonprofit, get it tax exemption, apply for a bank account, properly file annual reports, and do most important transactions.

This is because the principal roles of the board of directors are to represent the public or membership interests in the organization and to represent the organization as its legal voice.

In virtually every state, a nonfunctioning board is a cause for the involuntary closure of the organization by the attorney general because this means it has no guiding or accountable voice. What specific actions are required of the board to demonstrate and exercise its roles in guiding and representing the best for the organization?

To fulfill these roles, the board must be able to accomplish at least the following essential tasks:

  1. Approve
    1. Changes in the number, composition, qualifications, authority, or duties of the governing body’s voting members; and in the number, composition, qualifications, authority, or duties of the organization’s officers or key employees.
    2. Changes in the organization’s name and address.
    3. The budget.
  2.  Authorize
    1. Collaborations, other commitments of the organization, and their terms.
    2. Liability, bonding, and other insurance and indemnification.
  3. Be prepared to authorize lawsuits by the organization, receive them, and dispose of them by settlement agreed upon by them, if necessary.
  4. Create committees and hire consultants.
  5. Discharge and replace its members for reasons authorized by the bylaws.
  6. Keep records of its activities.
  7. Meet annually and as needed, even if only electronically.
  8. Provide and be prepared to receive complaints and allegations of wrongdoing that affect the senior staff—its omission or commission, including conflicts of interest.
  9. Request dissolution and carry out its terms.
  10. Require accountability, transparency, loyalty, and conformity by key employees, and protect the identity and integrity of the organization.
  11. Review and approve
    1. Amendments to the bylaws.
    2. Major changes in retirement, benefits, and compensation for all employees, with a special focus on reasonableness for top executives.
    3. Major gifts, including the terms of the gifts.
    4. Plans for major asset sales and acquisition.
    5. Plans of reorganization, growth, and contraction.
    6. The organization’s investment policy and plans to open banking and other financial accounts.
    7. The organization’s plans to do major borrowing.
  12. Review and authorize personnel policies relevant to hiring, promotion, dismissal, compensation, whistleblowers, independent contractors, key employees, sexual harassment, and fairness to the disabled and other groups.
  13. Review, sign, and assure the submission of annual reports.
  14. State
    1. The conditions and procedures for calling emergency meetings.
    2. The requirements for a quorum or for any class of issue.
  15. Write policy and review status of its own membership for independence, conflict of interest, self-dealing, competence, the performance of duties, and compensation.

Board Members and Conflicts of Interest, Nonindependence, and Self-Dealing

The relationship of the trustee to a family, a business, and the organization itself matters. Therefore, there should be a concern for conflict of interest, the independence of a board member, and self-dealing.

Dealing with Possible Conflicts of Interest

A conflict of interest occurs when a person stands to gain from decisions he or she makes that are likely to benefit themselves, family, or business associates at the expense of benefit to the organization. Every nonprofit organization needs to consider ways to avoid conflicts between the interests of the organization and those individuals in management, governance, and decision-making roles in the organization. The IRS has recommended that organizations consider adopting a conflict of interest policy that includes provisions to which these individuals should conform when considering transactions in which they have a potential, actual, direct, or indirect financial interest.

The Risk of Self-Dealing

Self-dealing is invariably a consequence of a conflict of interest. If the latter were the signal of a likely opportunity, the former is the action that takes advantage of the opportunity for personal, family, or business-related gains or the gains of another manager or independent contractor, such as excessive compensation.

These types of transactions should always be approached with very careful legal and ethical scrutiny and within the scope of a carefully crafted and existing policy. Discussions involving the questioning of the involved parties, decisions, and the supporting or exculpatory information should always be retained.

Dealing with Nonindependence

Each member of the board must be classified as independent or not. Moreover, there is no prejudgment that is correct about the relevance of nonindependence. Knowing where board members may be coming from is important in evaluating the possible impact or perspective they might bring to specific board decisions—especially transactions with financial implications.

Standards at the Root of All Trustee Actions

At the root of conflicts of interest, nonindependence, and self-dealing are three simple standards: the duty of loyalty, duty of care, and duty of obedience. Together they define the fiduciary responsibility of the trustees and the officers of a nonprofit, both of whom can be held personally liable for monetary damages for breaching these duties. These standards recognize the possibility of error, so they judge only unintentional negligence—not whether the decision was fruitful or intelligent.

Duty of Loyalty

The duty of loyalty means that while acting in the capacity of a trustee or manager of a nonprofit, a person ought to be motivated not by personal, business, or private interest but by what is good for the organization. A trustee is not prohibited from engaging in an economic or commercial activity with the organization. Such a transaction can be construed as self-dealing if it can be shown that: the trustee gained at the expense of the nonprofit, the trustee offered the nonprofit a deal inferior to what is offered to others or what the nonprofit could acquire on the open market, or the nonprofit was put in a position of assuming risks on behalf of the trustee. Another form of self-dealing can occur when two or more nonprofits merge assets or transfer assets from one to the other, and they have the same trustees.

Duty of Care

The duty of care requires trustees of nonprofits to act in a manner of someone who truly cares. This means that meetings must be attended, the trustees should be informed and take appropriate action when needed, and the decisions must be prudent. It is this duty that makes many compassionate but busy people reluctant to serve on nonprofit boards.

Duty of Obedience

The duty of obedience holds the trustee responsible for keeping the organization on course. The organization must be made to stick to its mission. The mission of a nonprofit is unlike the mission of a firm. Unlike a firm, a nonprofit cannot simply change its mission without the threat of losing its nonprofit, tax-exempt status, or both.

Duty of Organizations to Trustees and Their Rights

Trustees have the right to expect that the nonprofit organization has the same duty to them as they have to the organization. They should expect obedience to their policies that are consistent with the mission of the organization. Therefore, trustees have a right to know, and the organization has a duty to keep them informed. This includes being kept up to date on major changes in the organization’s direction or assets, annual budgets and financial statements, changes in key employees, new risks to which the organization is exposed, employee compensation packages, and evaluations of the organization’s performance. The duty to the trustees also encompasses loyalty. To put it simply, they have a right to expect that they are not being used or “set up,” that the information given them to form the basis of their decisions is as clear, complete, correct, and relevant as possible, and that the organization will not act imprudently.

Closing Remarks

A board of directors or trustees of a nonprofit organization is an essential part of the design of the organization and how well it abides by its mission, the expectations of its members, its clients, and state, local, and federal governments. The way a board is constructed is important because it affects the representation of various interests and the efficacy of the board. This means putting the organization first (loyalty to it and the care it takes to do that well). Self-dealing is to be avoided; conflicts of interests ought to be avoided, managed, and made known by both the member and the organization.

The issues here are not just ethical; they are also legal and therefore given attention as the core duties of the board. The single best advice is that board members must care sufficiently to be fully informed, fully involved, and fully compliant.

Society depends upon nonprofit organizations for a variety of essential functions—from education, health, art, social services, housing to the general welfare. The success of these organizations in serving the public depends not only upon monetary resources but also on the ability of these organizations to function in an orderly and efficient manner. When a nonprofit organization fails, promises fail—and so do the expectations of the public and the direct clients and donors. Then society has one less organization that it can call upon to provide needed services.  The risk of organizational failure lies in the way the organization is managed and at the very top of management is the board of directors.

Herrington J. Bryce

Herrington J. Bryce is Life of Virginia Professor of Business at the College of William & Mary in Williamsburg, VA, where he specializes in corporate finance and nonprofit finance and management. He is also an affiliate of the Thomas Jefferson Program in Public Policy. His two most recent books are Nonprofits as a Policy Solution to the Burdens of Government and the 4th edition of his Financial and Strategic Management for Nonprofit Organizations.

Editor's Note: The American Bar Association has reproduced and adapted this article from the Summer 2017 edition of Nonprofit Quarterly (adapted with permission from Chapter 7, “Decision-Making and Governance Structure in Lessening the Burden of Government,” in Herrington J. Bryce’s book, Nonprofits as Policy Solutions to the Burden of Government (De|G PRESS, 2017)) with permission from the copyright holders for the April 2018 issue of Voice of Experience. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the copyright holders.