Guidelines for Nonprofit Directors and Officers: What to Expect When You are Leading

Board service can be extremely rewarding, challenging at times, and beneficial to many. The following guidelines are intended to help nonprofit board members understand their responsibilities and to serve with excellence. 

1.         Who’s in charge?  All directors and officers have fiduciary duties, which means they are entrusted with responsibilities to govern the organization.  Under Illinois and other state laws, these fiduciary duties fall within the following three categories:  (1) duty of care (or diligence); (2) duty of loyalty; and (3) duty of obedience (to the mission).

            A.         The duty of care can cover extensive areas of responsibility, such as governance over personnel, finances, real estate, and tax-exempt activities.  At a minimum, it means that board members show up to meetings, require and review financials, handle problems as they arise, and otherwise actively participate in governing the organization.  The directors may delegate responsibilities to others, such as for accounting, legal, and investing advice.  Ultimately, however, the proverbial buck stops with the board.

            B.         The duty of loyalty, broadly speaking, means that each director and officer must put the best interests of the organization first.  Directors often may wear additional “hats,” such as business owner, relative, or board member of another organization.  But when it comes to evaluating and deciding what the nonprofit should do, each director either must (a) put the organization’s interests first or, in the event a conflict of interest arises, (b) excuse themselves from any related decision-making process and vote.  For pervasive conflicts of interest, the board member may need to resign.

            C.         The duty of obedience simply means that the board should pay attention and hew to the organization’s mission.  This should be stated in the organization’s current corporate documents, such as articles of incorporation and bylaws.  In the event that the board decides to adjust the mission, then the organization’s corporate documents should likewise be updated to reflect this change.

Who Benefits?

Whether starting a new nonprofit or running a well developed one, leaders nonprofits should carefully evaluate their activities to ensure that they are, in fact, serving appropriate beneficiaries within the meaning of applicable exemption laws.  Consider the following cautionary tale involving a new section 501(c)(4) social welfare organization, which provides lessons for other tax-exempt organization as well.