Fiduciary Duties of
Board Members
NAEYC Affiliate Leadership Day
November 18, 2009
Therese M. Myers
Fiduciary Duties of Board Members
What is a Fiduciary?
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Board members of nonprofit corporations are
Fiduciaries
A Fiduciary is “a person who stands in a special
relation of trust, confidence or responsibility in
his or her obligation to another” (Webster)
“The law requires the highest level of good faith,
loyalty, and diligence of a Fiduciary, higher than
the common duty of care that we all owe one
another.” (www.moranlaw.net)
Fiduciary Duties of Board Members
Source of the Requirement
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Not-for-profit corporate law states that board
members have the fiduciary obligation to
manage the corporation.
Breach of fiduciary duties can result in personal
liability of board members
The corporation itself can enforce these duties,
or members or nonmembers if they are harmed
by any breach.
Fiduciary Duties of Board Members
Duty of Care
Duty of Loyalty
Duty of Obedience
Duty of Care
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Exercise reasonable care in acting on
behalf of the corporation
Duty to act honestly and in good faith
Duty to act diligently
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attend meetings and participate
Duty of Care
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Act on an informed basis
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You may rely on competent staff and outside
consultants like attorneys and accountants
unless you have reason to know such reliance
is unwarranted
Duty of Care
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Maintain confidentiality of non-public
corporate information
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Personnel, financial
Executive sessions
Attorney-client privilege
Bottom line: pay attention, ask questions
and be careful in handling the
corporation’s matters
Duty of Loyalty
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Duty to have undivided loyalty to the
corporation
Act in the best interest of the corporation,
not your own or anyone else’s interest
Duty of Loyalty
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Do not directly compete with the corporation
Do not participate in self-dealing transactions
(board member on both sides)
Do not usurp corporate opportunities
(taking for yourself a business idea or that fits
within corporation’s current or future plans)
(ok to pursue for yourself but only after you
offer it to corporation and disinterested
members reject it)
Duty of Loyalty
Conflicts of Interest
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Duty of loyalty requires avoidance of conflicts of
interest, unless fully disclosed and determined to
be in the best interest of the corporation
Conflicts may be actual, potential, or perceived
Board members should avoid the appearance of
a conflict of interest, to protect the integrity of
Board decisions.
Duty of Loyalty
Conflicts of Interest
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A conflict of interest is when a board
member participates in the corporation
work and at the same time has other
personal, financial or professional interests
that could bias the board member one
way or the other.
Duty of Loyalty
Examples of Conflicts
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Board Member’s spouse applies to become
the executive director of the corporation.
Board Member holds a significant
investment in Company A, which may sell
goods to the corporation.
Board Member is an early childhood
educational consultant who works in a
consulting firm, which offers to provide
consulting services to the corporation.
Duty of Loyalty
Conflicts of Interest
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How to address and resolve a conflict of interest
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Minimum requirement is Disclosure
Disclosure of a minor conflict will often resolve it
Recusal from discussion and voting on an issue where
a more serious conflict exists
Resignation if there is a serious, ongoing conflict that
precludes meaningful involvement on the Board
The Board, upon motion, may exclude a Board
member from participation in deliberations and vote
Duty of Obedience
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Obey the law and faithfully pursue the
corporation’s purpose
Comply with the governing documents
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Articles of Incorporation
Bylaws
Board Policies and Procedures
Duty of Obedience
Comply with Governing Documents
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Articles of Incorporation: give the entity
its separate legal existence; purpose
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Agreement between the state and the
corporation
Comply with corporate filing requirements
and deadlines
Duty of Obedience
Comply with Governing Documents
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Bylaws: Rules of management and governance
 Agreement between the corporation and its
members
 An important legal document that merits
careful review -- likely the best statement
regarding board members’ responsibilities and
authority
Board Policies and Procedures: more detailed
rules; cannot conflict with Articles of
Incorporation or Bylaws
Duty of Obedience
Document Destruction and Whistleblowers
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The Sarbanes-Oxley Act was enacted in 2002 in
response to major corporate scandals
Applies mostly to publicly-traded corporations
but two CRIMINAL sections also apply to
nonprofits:
 Nonprofits must not destroy documents to
thwart a federal government investigation
 Nonprofits must not retaliate against
“whistleblowers” who report possible illegal
activity to federal authorities
Be Careful! These two provisions carry criminal
penalties: fines and jail time.
Duty of Obedience
Great Federal Tax Benefits
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NAEYC and its Affiliates are recognized by the
IRS as Tax-Exempt under § 501(c)(3) of the
IRC as educational, charitable organizations
Federal tax law provides great tax benefits to
501(c)(3) corporations
No income tax on certain revenues, including
dues, conference fees, exhibit fees,
publication sales, corporate sponsorships
“Big Deal” - contributions are tax deductible to
donors as charitable contributions
Duty of Obedience
Maintain Tax-Exempt Status
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The Internal Revenue Code requires that tax-exempt
corporations comply with federal tax law to maintain
501(c)(3) tax-exempt status and avoid penalties.
Three Serious Risks:
excessive private benefit to insiders
political campaign activity
excessive lobbying
Excellent Resource: Compliance Guide for 501(c)(3)
Public Charities (go to www.irs.gov/eo and then click
“ABCs for Exempt Organizations”)
Duty of Obedience
Excessive Private Benefit to Insiders
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501(c)(3) corporations may not allow excessive
private benefit to insiders
Why not? 501(c)(3) corporations must serve a
public interest, not private interest
Do not pay above market rates or unreasonable
compensation to insiders; use comparability data
when setting executive director’s and key
employees’ salary
Duty of Obedience
Political Campaign Activity
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501(c)(3) corporations are absolutely prohibited
from participating in activities in favor of, or in
opposition to, any candidate for public office
(federal, state or local)
cannot contribute to political campaign funds
cannot make public statements of position
It is fine for you as an individual to engage in
political activity—just be sure it is clear that it is
not in your official capacity or that it could
appear that way.
Duty of Obedience
No excessive lobbying
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501(c)(3)s must not engage in excessive
lobbying
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a couple different tests (substantial part test,
expenditures test) detailed in the Life Cycle of a
Public Charity (www.irs.gov/eo)
Honest Leadership and Open Government Act of
2007 (amends Lobbying Disclosure Act)
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places certain restrictions on lobbying
quarterly reporting requirements
details in statute and regulations
Fiduciary Duties
in a Nutshell
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Attend meetings
Pay attention and ask questions
Review materials
Report irregularities
Refrain from acting in your own interest
Avoid conflicts of interest
Become familiar with governing documents
Mind the corporate and tax status
Always act in the best interests of the
corporation
Protections from Personal Liability
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Compliance with the fiduciary duties of
care, loyalty and obedience protects from
personal liability.
Protection from Personal Liability
Volunteer Protection Statutes
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Volunteers generally are not personally liable for
actions made in good faith while acting within the
scope of her volunteer responsibilities
Volunteers are still liable for willful, reckless or
criminal activity, fraud and gross negligence
As a practical matter, the common law sets a high bar
for those who would impose personal and individual
liability upon volunteers to nonprofit corporations.
Protection from Personal Liability
Indemnification
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Most states permit nonprofit corporations
to indemnify board members against
claims for all but gross negligence or
fraud.
Check your governing documents to see if
they contain an indemnification provision.
Will contain standard of conduct
Protection from Personal Liability
Insurance
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Purchase and Maintain D&O Insurance Coverage
Some insurance policies are tailored for
nonprofits and are preferred over standard
business policies
Protect the entity, board members, other
volunteers and staff for wrongful acts and
omissions
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sometimes called Association Professional Liability
Insurance
Ask about exclusions and coverage limits
Final Thoughts
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Make your best effort and use your best
judgment – perfection is not required
Board members generally are not
personally liable for actions unless they
act in bad faith, with gross negligence,
intentional misconduct or fraud