PERSPECTIVE: Fiduciary Duty - A Pledge Board Members Need to Uphold

by Lisa Wills The whole of an organization is only as strong as the composition of its board.

Many individuals become nonprofit board members because of their passion for the entity’s mission.  Once the organization determines the member is a fit, it’s assumed that the pledge to honor and uphold the fiduciary duties will naturally follow.

The benefits of sitting on a board are innumerable.  However, board members who use their position for surreptitious gains and lose sight of their responsibility to uphold the organization’s best interests, or are not fully paying attention, may wind up in one of these scenarios.

Recently, a jury verdict against the board of directors of Lemington Home for the Aged, a nonprofit nursing home, was upheld by the U.S Circuit Court of Appeals.  The directors were found personally liable for breach of their duty of care for failure to remove the CFO of the nursing home after learning of his mismanagement of the entity.

New York Attorney General Eric Schneiderman has called for an investigation of the board members of The Cooper Union for the Advancement of Science and Art over alleged mismanagement of the higher education institution’s endowment and physical assets.  Their actions caused the school to charge undergraduates tuition for the first time in its history.

The lack of transparency by Sweet Briar College’s board of trustees led to legal action after the board failed to communicate to its constituents the accuracy of their financial situation, yet in turn, voted to abruptly close the institution.  After a long legal battle, a settlement was reached in June 2015 to keep the institution open, with several conditions, one being the resignation of the entire board of trustees.

These are just a few of the national headlines that exhort us to question how serious some nonprofit board members take their fiduciary responsibilities. These responsibilities are known as the duties of care, loyalty and obedience.

Board members are expected to exercise reasonable care when making decisions on behalf of the entity in which they serve.  In instances where they do not exercise such care, board members may be held personally liable.

Increased scrutiny over the activities and decisions of nonprofit boards may result in members and prospective members evaluating if their involvement is worth the risk.  There are some key practices that board members need to uphold as assurance that they are exercising fiduciary responsibilities:

• Know the entity – Read and understand the articles of incorporation and bylaws, and ensure that documents are updated and amended as appropriate. Be aware of pending and threatened legal claims against the entity.
• Be informed of strategic initiatives – Read the organization-wide long-term, strategic plan. Understand the financial and economic challenges facing the entity and the industry, as a whole.
• Stay informed of financial activities – Understand significant components of the annual budget, encourage regular reporting of financial information, review the annual audit report and management recommendations with the external auditors.
• Understand conflict of interest policy – Be aware of potential conflicts of personal and professional conflicts of interest between the board member, a family member or an employee and the nonprofit entity. Disclose conflicts of interest and abstain from board votes where appropriate.
• Understand the nonprofit entity’s indemnification policies – Ensure that the entity’s policies provide for indemnification of its board members, and that there is a directors’ and officers’ liability policy in place to cover claims arising from board service.
• Prepare for and attend board meetings – Review board minutes and financial statements in advance of meetings, which will allow you to be an active participant and ask questions and understand the issues.  Don’t be afraid to roll up your sleeves.
• Always use good judgement - Remember that the fiduciary responsibility requires board members to make decisions that are both prudent and informed.

Board members receive great satisfaction from their involvement and should feel that, in exercising due care, they have acted in the best interest of the nonprofit in furthering the mission and making a difference.

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Lisa Wills is an audit director with Whittlesey & Hadley, P.C.  She specializes in audits of nonprofit organizations.

PERSPECTIVE commentaries by contributing writers from across the state appear each Sunday on Connecticut by the Numbers.