The first time I served on a nonprofit board, I experienced a steep and unexpected learning curve. For most of my career, when I heard the term “nonprofit” I thought of a place where profits did not matter and standards were lower.
What I learned instead is that while nonprofit governance is different from for-profit, it should be no less rigorous. The information that follows is what I would have wanted to know to get the most out of my service from the start.
Step 1: What is Your Mission?
The first thing to remember is that service on a nonprofit board is about the mission of the organization. When questions arise as to how the nonprofit should be managed, or how money should be spent, it is the mission that guides the board.
Read the articles of incorporation for your nonprofit. This is where you will find your nonprofit’s mission.
Step 2: What is a Nonprofit?
While this may seem obvious, it was not obvious to me. What defines a nonprofit organization is that it does not distribute profits, choosing instead to retain profits to achieve its mission.
In the United States, charitable organizations are one type of nonprofit, which is exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code. Most exempt organizations are nonprofit corporations, which are organized and operated under the laws of the state, like for-profit organizations.
Unlike for-profit corporations, however, the relevant law for nonprofits is largely federal rather than state law. The corporate law of nonprofits is in the federal tax code, which contains provisions concerning nonprofit corporate governance.
Make yourself aware of the resources available for nonprofits and charities on the Internal Revenue Service website (link below).
Read the excellent IRS Governance Check Sheet used by exempt organization revenue agents in the examination of public charities (link below). The questions on this check sheet will familiarize you with the IRS’s view of best practices in nonprofit governance.
Go to the Internet and search on “your state’s name charitable organization”. The search results should lead you to a state government website where you can find helpful resources and familiarize yourself with the local statutes regarding nonprofits.
Step 3: What is a Fiduciary?
All nonprofit board members or officers are fiduciaries. A fiduciary duty is a legal duty to act solely in the interest of another. It is the strictest duty of care recognized by the US legal system.
Fiduciary duty is made up of three duties, which are loyalty, care, and obedience.
Duty of Loyalty
Loyalty means acting in the interest of another, which in this case is a nonprofit organization. Fiduciaries must not seek to derive private gain from the business transactions of a nonprofit. In the event that there is a conflict of interest between the best interests of the charity and your own interests, comply with state law to resolve the conflict.
When considering the duty of loyalty, ask yourself, “What choices would I make, especially in regard to financial decisions, if the nonprofit which I serve were a poor widow or child?”
Duty of Care
Directors and principles of an organization exercise the duty of care when they make prudent business decisions. This means making certain that your nonprofit operates in a fiscally sound manner. Items of particular interest include the annual budget, executive compensation, required filings, and the integrity of fund raising methods.
While we may allow ourselves some leeway in managing our own affairs, as a board member of a nonprofit we must hold ourselves to the highest standard of care.
When considering the duty of care, ask yourself, “Would the decisions I am making be considered prudent by an objective third party, like an IRS revenue agent?”
Duty of Obedience
It seems the least often referenced duty of a fiduciary is the duty of obedience. Obedience means that officers and directors remain faithful to and pursue the goals of the organization. It also means that acts outside the scope of authority set forth in the articles of incorporation and the bylaws, cannot be ratified by the board.
Officers and directors who ignore the articles of incorporation and the bylaws of their nonprofit, do so at their own peril. For example, D&O insurance and corporate indemnification will not save directors who act outside the scope of their authority.
Read the bylaws of your nonprofit. This is where you will find the rules for the governance of your nonprofit.
When considering the duty of obedience, ask yourself, “Have I followed the rules as they are written in the articles of incorporation and the bylaws of my nonprofit organization?”
Rules of Order
While not explicitly stated as a part of fiduciary duty, you will be required to follow a parliamentary authority in the governance of your nonprofit.
In the United States, you are most likely to operate under Robert's Rules of Order Newly Revised.
Learn the parliamentary authority under which your nonprofit operates. This is where you will find the rules of order for your nonprofit’s board meetings.
Nonprofit organizations provide vital support for our communities, including health and human services, education, environmental protection, and culture. I hope that you will find the information outlined here helpful in getting the most out of your nonprofit service.
For the IRS links referenced above, please see:
Internal Revenue Service web page for charitable organizations
IRS Governance Check Sheet
For further reading, you might also enjoy The Ultimate Board Member's Book, Newly Revised Edition: A 1-Hour Guide to Understanding and Fulfilling Your Role and Responsibilities.