Fiduciary Duty: What Every Nonprofit Board Must Know

“Fiduciary” gets used a lot in nonprofit conversations, but it isn’t just jargon. It’s the legal and ethical obligation of board members to act in the best interests of the organization and its beneficiaries. When boards embrace fiduciary duty, they protect mission integrity, donor trust, and long‑term impact.

The Three Core Duties

1. Duty of Care

Directors must make informed, prudent decisions. That means preparing for meetings, understanding the mission and programs, and overseeing finances and operations with reasonable diligence.

• Review board packets, financials (budget vs. actuals), and program reports in advance.
• Ask clarifying questions; request data or expert input when needed (audit, legal, investment).
• Monitor trends (cash runway, fundraising ROI, program outcomes) and follow up on risks.

Avoid: rubber-stamp approvals, ignoring red flags, or relying on outdated information.

2. Duty of Loyalty

Directors must act solely in the organization’s interests, not personal, professional, or familial ones. When a conflict exists, transparency and recusal are non-negotiable.

• Disclose relationships that could influence judgment.
• Keep sensitive information confidential (donor data, personnel, strategy).
• Recuse yourself from discussions/votes where you have a stake.

Avoid: self-dealing, using your position for private benefit, or informal side agreements.

3. Duty of Obedience

Directors ensure the organization follows its mission, bylaws, and applicable laws/regulations (e.g., IRS filings, charitable solicitation rules, employment laws, and your state’s nonprofit statutes).

• Align major decisions with mission and governing documents.
• Review Form 990 and audit findings; track compliance deadlines.
• Document decisions, deliberations, recusals, and votes in accurate minutes.

Avoid: mission drift, bypassing policies, or neglecting required filings.

Conflicts of Interest: Handle With Care

A conflict exists when the nonprofit does business with a director, an entity where a director has a financial interest, or an organization the director serves. Appearance matters almost as much as reality, include spouses/relatives and their interests in your policy.

How to manage conflicts properly

1. Annual disclosure: Collect written statements from directors and key staff.
2. Real-time disclosure: When a conflict arises, share all relevant facts immediately.
3. Recusal: The interested director leaves the discussion and does not vote.
4. Independent review: Seek competitive bids or valuations; disinterested directors assess fairness.
5. Minutes: Record disclosures, recusals, comparisons, and determinations.

Example: If a director’s marketing firm bids on a campaign, obtain at least three competitive quotes, has the director fully recused themselves, and document why the chosen vendor is fair and in the nonprofit’s best interest.

What If Duties Are Breached?

Knowingly violating fiduciary duties can lead to personal liability, penalties, and in extreme cases loss of tax‑exempt status. Follow your bylaws and applicable law to remove a director when necessary and consult counsel.

Maintain appropriate Directors & Officers (D\&O) insurance and clear indemnification provisions; they support good governance but don’t replace it.

Everyday Governance Habits That Work

• Financial oversight: Quarterly dashboards; GAAP-compliant accounting; independent audits/reviews when appropriate; internal controls (segregation of duties, approval thresholds).
• Risk & compliance: Annual Form 990 review; charitable registration renewals; whistleblower, document retention, and conflict-of-interest policies—reviewed annually.
• Strategy & impact: KPIs for programs and fundraising; regular mission-alignment checks; scenario planning for funding shifts.
• Board effectiveness: Focused agendas; consent agendas for routine items; skills matrix; annual board self-assessment.
• Documentation: Accurate minutes, especially around conflicts and major decisions.

Onboarding & Ongoing Education

Even seasoned directors need clarity. Provide a concise orientation that covers and refresh annually with quick briefings and updated disclosures.

• The three fiduciary duties (care, loyalty, obedience)
• Key policies (conflict of interest, whistleblower, document retention)
• Board calendar with scheduled reviews (financials, risk/compliance, strategy)
• Expectations for preparation, attendance, and confidentiality

Quick Self-Check (5 Questions)

1. Do directors receive materials at least a week before meetings and come prepared?
2. Are conflicts disclosed annually and in real time, with documented recusal?
3. Does the board review Form 990, audits, and key risk/compliance items each year?
4. Can we clearly show mission alignment for major decisions?
5. Do we engage independent experts when needed and act on their recommendations?

Final Word

Fiduciary duty isn’t a box to check; it’s a mindset that protects your mission and credibility. When boards practice care, loyalty, and obedience, and back them up with sound policies and documentation, your nonprofit is set up to earn trust and deliver impact.

Note: This article is general information, not legal advice. Consult qualified counsel for guidance specific to your jurisdiction and bylaws.