Serving on a nonprofit board is an honor—but it comes with serious responsibilities. The legal and ethical expectations for directors and officers remain rooted in core fiduciary principles, and enforcement and scrutiny continue to be strong. Here’s what every board member should keep in mind:
Key Fiduciary Duties
- Duty of Care
Act with the same care an ordinarily prudent person would exercise under similar circumstances. This means active participation, informed decision-making, and reasonable reliance on experts. - Duty of Loyalty
Avoid conflicts of interest and champion the organization’s best interests. Adopt and enforce a robust conflict-of-interest policy with annual disclosures. - Duty of Obedience
Adhere to governing documents and comply with all applicable laws, including tax regulations and charitable solicitation rules.
Matters Requiring Board Action
- Opening bank accounts and approving loans
- Hiring or firing the CEO and key executives
- Approving compensation packages
- Amending bylaws or articles of incorporation
- Purchasing or selling real estate
- Approving self-dealing transactions
Areas of Potential Liability
- Breach of fiduciary duties
- Employment-related claims (discrimination, harassment)
- Failure to pay payroll taxes
- Private inurement or private benefit violations
Risk Management
- Directors & Officers (D&O) Insurance: Ensure coverage includes defense costs and wrongful acts. Review exclusions carefully.
- Indemnification: Understand statutory protections and limitations—breaches of duty, fraud, and bad faith are never covered.
- Compliance Culture: Maintain strong policies on whistleblowing, document retention, and gift acceptance.
Avoiding IRS Penalties
Intermediate sanctions under IRC §4958 remain a major risk for excess benefit transactions. Establish a rebuttable presumption of reasonableness for compensation by using comparability data and documenting decisions.
Learn more at our upcoming Nonprofit Seminar, “Fiduciary Duties & Liability of Nonprofit Directors and Officers.” By: Jessica Villar, Esq.
