Board Members, Fiduciary Duties, and Staying Out of the News
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 good will. In the above-mentioned scandals, board members admitted that they did not exercise the necessary care in reviewing the nonprofits 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.
If you would like a free template for a Conflict of Interest Policy and Annual Affirmation, shoot Grant Reynolds an email at Grant@ReynoldsLawGroup.net or give us a call at 757-219-2500 for a free strategy session to find out your legal risk.