Guidelines for a Nonprofit Board of Directors

nonprofitboardCharities are required by state and federal law to have board members, also called “directors.” The purpose of the board is to ensure integrity and accountability in operation of the organization.

It is an honor to be asked to serve on the board . . . but board membership carries significant responsibilities.

 DUTIES OF THE BOARD

Directors have fiduciary duties to ensure that the organization’s mission is carried out and that its resources are used wisely in furtherance of the Organization’s charitable purposes.[1]

Board members of a tax-exempt organization have four fiduciary duties:

  • The Duty of Care
  • The Duty of Loyalty
  • The Duty of Compliance
  • The Duty to Maintain Accounts

DUTY OF CARE

Board members have a responsibility to be active in and knowledgeable of the Organization’s activities, and to exercise reasonable care in making policy and operational decisions. To fulfill the duty of care, directors should do the following:

  • Attend board meetings.
  • Prepare for board and committee meetings by reading reports, minutes, and other materials distributed for the meeting.
  • Ensure that the Board Secretary keeps appropriate minutes of board meetings.
  • At each meeting, review and approve the minutes from the prior meeting.
  • Ask questions and obtain the information necessary to make informed decisions.
  • Obtain insurance for the organization and the board (e.g., general premises liability, Directors & Officers insurance (“D&O”), Employment Practices Liability Insurance (“EPLI”)).
  • Hire and oversee the performance of an Executive Director (sometimes called the Chief Executive Officer or President); and delegate day-to-day operational responsibilities.
  • Create committees, as necessary, to plan or oversee certain projects or operations and to report to the board.
  • Retain an accounting professional to handle the organization’s tax accounting and Form 990 reporting.
  • Review and approve leases and other major contracts.
  • Ensure that ALL of the Organization’s operations are in furtherance of the organization’s charitable mission.

DUTY OF LOYALTY

Board members have a duty of loyalty to always act fairly and in the best interest of the Organization without concern for their own interests. To fulfill the duty of loyalty, directors should do the following:

  • Approve a written conflicts of interest policy, and require directors to sign it.
  • Refrain from engaging in any transaction or making any statement that would have a negative impact on the Organization.
  • Refrain from engaging in any activity (other than fundraising for another nonprofit) that competes with the Organization’s financial interests.
  • Refrain from diverting a the Organization business opportunity for personal or family gain.
  • Assist with raising funds.
  • Ensure that no director (or member of a director’s family) benefits financially from any activity of the Organization.

Exception: The organization may conduct business with a board member or a board member’s family, if all four requirements below are met:

    • The organization may not pay more than market value for the product or service; and
    • The board must conduct due diligence that the same or similar product or service is not available elsewhere for a better cost or on more favorable terms; and
    • The board must approve the transaction by a majority vote, which must be recorded in the minutes; and
    • The board member that would benefit from the transaction must abstain from the vote.

DUTY OF COMPLIANCE

Board members have a duty to be faithful to the Organization’s purpose and mission. They must adhere to the Organization’s governing documents and to laws and regulations that apply to the Organization and its operations.  To fulfill the duty of compliance, board members should do the following:

  • Read and be familiar with the Organization’s articles of incorporation, bylaws, and policies.
  • Comply with state and federal laws applicable to nonprofit entities, fundraising, and taxation.
  • Require and approve appropriate employment law and privacy law policies.
  • Retain and consult board counsel for legal questions that arise.
  • Ensure that someone is tasked with filing the Organization’s annual Form 990 with the IRS; review and approve the Form 990 before filing.
  • Ensure that someone is tasked with filing Texas Public Information Reports as required (usually every 4 years); review and approve prior to filing.
  • Register in each state that requires the organization to register.
  • Ensure that the organization’s legal acknowledgment letters are prepared and sent for donations of more than $250.
  • Prior to conducting the following types of highly regulated fundraising activities, ensure that the activity will be conducted in compliance with applicable law:
    • Raffle
    • Charitable sales promotions with a third-party for-profit company
    • Solicitations via a paid independent fundraising agent

DUTY TO MANAGE ACCOUNTS

Board members are responsible for the Organization’s financial stability and accountability. To fulfill the duty to manage accounts, directors should do the following:

  • Develop and approve annual budgets that provide clear direction for organizational spending. Monitor, track, and revise the budget as necessary.
  • Ensure that accurate records of all income and expenditures are maintained.
  • Review current income and expenditures at each board meeting.
  • Commission an audit by a nonprofit organization financial auditor, at least once every two years.
  • Implement checks and balances, and division of financial responsibilities, so that no single staff member or volunteer has total control over finances.
  • Prudently invest assets.
  • Monitor and control fundraising activities.

LEGAL CONSEQUENCES

The legal consequences of a board’s failing to do its job can be serious, including the following:

  • An organization’s failure to follow the rules is likely to result in the loss of donor respect and support.
  • An organization can be held financially responsible by the courts for negligent or willful violation of the law.
  • A director can be held individually responsible for breach of a fiduciary duty. (The organization should purchase D&O insurance to protect its directors from liability.)
  • Transactions improperly benefitting a board member can result in monetary penalties to the organization and the board member, as well as the organization’s loss of tax-exempt status.
  • Failure to follow fundraising laws and income reporting laws can result in monetary penalties to the organization and, in willful cases, criminal penalties to the individuals involved.

Among many other legal and ethical considerations, the tax-exempt status of the organization is always at stake when board members ignore their duties.  If the organization loses its tax-exempt status, all of its donors lose the ability to deduct donations from their tax returns, sometimes for prior tax years as well as for the year in question.

CONCLUSION

Although these guidelines convey that a board member’s responsibilities are serious indeed, the responsibilities should not act as a deterrent to service. If a director follows these nine rules of thumb, he or she will do just fine:

  1. Show up.
  2. Pay attention and ask questions.
  3. Get the organization good insurance policies.
  4. Hire a good executive director, and let that person do his or her job.
  5. Watch the money very closely.
  6. Make sure your Form 990 is filed with the IRS annually, and your franchise report is filed with the state of Texas when required.
  7. Keep tabs on programs and fundraising.
  8. Consult professionals where appropriate.
  9. Absent compelling circumstances, do not allow the organization to do business with board members or their families.

[1] The general legal duties of directors are spelled out in the Texas Nonprofit Corporation Code (Texas Business Organizations Code, Section 22). Because the Organization has received tax-exempt status from the Internal Revenue Service, also known as 501(c)(3) status, the Internal Revenue Code also imposes additional requirements.

Copyright 2017 Farrow-Gillespie & Heath LLP