At ACE’s Board orientation last month we took time to get back to first principles and talk about what board membership means at ACE.
As the “lawyer on the board” I suppose it was inevitable that I’d be asked to talk about “fiduciary duty.” A fiduciary duty is the “highest duty imposed by law;” it means that as a board member you are in a position of trust and must always place the interest and purpose of the organization before your own.
Somber stuff. And much more intimidating than necessary.
Board members do not need to lie awake at night worried that they might make a mistake and lose the house. They are not responsible for every loss or mishap if they act reasonably and in good faith.
You just need to do three things:
Stay in Your Lane: The Duty of Obedience
The duty of obedience means that Board members must obey applicable law, and the nonprofit’s governing documents. These are your organization’s rules of the road.
I am sorry to tell you that this means that you are in for an hour or so of dull reading, but you owe it to your organization. All nonprofits are organized under a state statute, receive tax-exempt status under IRS regulations, and have articles of incorporation and bylaws.
Why is this important? Tax-exempt nonprofits come in a variety of flavors; there are things they must do and things they cannot do if they want to remain tax-exempt.
For example, a nonprofit charitable organization’s revenue comes from donations, grants, and program revenue. Its funds must be spent to advance the organization’s mission, usually to provide a public service (e.g. library) or serve a disadvantaged group. (e.g. individuals with disabilities)
As another example, a nonprofit business membership organization’s revenue comes from dues and the organization’s program revenue. By law it must focus on advancing the business interests of its members. Chambers of Commerce are good examples of this type of organization, as are trade and professional associations (like ACE).
To get up to speed, I’d start with the articles and bylaws and read them once. It’s easier if you know what you are looking for.
Organization Type. This is your first lane marker: The articles and bylaws will tell you what kind of organization you represent. You should find it in the first paragraph of the bylaws.
Once you know your organization type, go to Google. The following searches will turn up a wealth of information: “charitable organization” “business league” “nonprofit membership organization” “mutual benefit corporation.” For bonus points over-achievers can include their state in a separate search, e.g. “Maine charitable organization.”
Somewhere at the top of the search results you will also find references to the section of the IRS code governing the organization’s tax-exempt status. A Google search on the section (e.g. 501(c)(3)) will give you many, many hits. One of the top 10 will tell you what you need to know about what your organization needs to do (or not do) to maintain its tax-exempt status.
Back to our examples. A charitable organization’s donors can deduct donations, a business organization’s donors cannot, but they can deduct business expenses paid to the organization, like dues or sponsorships. A business organization can lobby, a charitable organization cannot.
Organization Structure. The second lane marker: Bylaws describe the board, the officers, any standing committees, and meeting, election other voting requirements like quorums. In a membership organization I’d be particularly careful to pay attention to what issues require membership votes.
Your organization may have a policy or procedure manual of some kind, and if you are lucky it will be well-indexed. Whereas the bylaws tend to be skeletal, the manual provides detail on how the organization performs its day-to-day activities. Read it for general familiarity so that you know what it covers and where to look things up.
Pay Attention: The Duty of Care
The duty of care is all about financial and management oversight.
A well-run organization should provide you with the information you need to oversee its finances, and to determine whether management is doing its job. The information should include:
- A plan;
- A budget;
- Periodic financial reports, ideally in a standard accounting format; and
- Progress reports on the plan.
The documents’ complexity will depend on the size and complexity of your organization, but they are unimaginably important to financial oversight. Donors, members, grantors and beneficiaries look to you to spend the organization money wisely to serve its mission, including spending on management. An organization needs to document what it plans to do, how it plans to pay for it, and measure its spending against the plan.
If the organization does not regularly report this information to the board, your first duty as a board member may be to insist.
Not all organizations have staff, but if yours does you should understand the difference between oversight and micromanagement. Oversight means you approve the budget and its objectives, then measure progress. Implementation is left to management. Try not to be “one of those” board members.
Remember Whose Hat You Have on: The Duty of Loyalty
Membership on a board may be “good for business,” but the benefits are indirect: connections and a reputation for effectiveness and community dedication. When it comes to direct benefits, you must always, always put the organization’s interest before your own.
You cannot wear two hats if you want serve on a board. For the sake of the organization you must:
- Be prepared to give up business opportunities for yourself, your business and your family members;
- Be prepared to recuse yourself from discussions in which you have a personal stake;
- Be prepared not to use insider information, and particularly not in a way that might hurt the organization; and ultimately
- Be prepared to resign if you can’t resolve a conflict of interest. It’s time to take the organization’s hat off.
Remember that your authority has limits. No matter how laudable your intentions, you are not entitled to go rogue.
The organization is your client, not the other way around. Would you broker a deal without a client’s permission? Would you speak on a client’s behalf without guidance? Would you attach a client’s name to an initiative without checking?
There’s another aspect of the duty of loyalty that’s often missed: loyalty to your fellow volunteer board members and to the organization’s staff. Respect their time. Answer their calls and emails. Read their reports. Follow through.
And relax. You're doing a good thing.