I just finished reading a great new legal blog by California nonprofit attorney Gene Takagi called “12 Considerations Before You Join that Nonprofit Board…”. If you’re about to join a nonprofit board, Takagi’s short article would be a worthwhile read.
The first thing that Takagi asks his reader to carefully consider is “Do you know and understand your legal responsibilities and expectations as a board member?” He does link to his own article, which provides a general overview of nonprofit board legal responsibilities. However, nonprofit law (and hence legal responsibilities) is state specific. Here in North Carolina, our nonprofit organizations are governed by North Carolina General Statutes Chapter 55A aka the “North Carolina Nonprofit Corporation Act.”
If you are a new (or old) nonprofit board member in North Carolina, your legal responsibilities are found within this Act. Specifically, as a board member serving a North Carolina nonprofit, you should become aware of your fiduciary duties.
In North Carolina, there are three fiduciary duties that North Carolina nonprofit board members should adhere to: (1) The Duty of Care; (2) The Duty of Loyalty; and (3) The Duty of Obedience.
The Duty of Care
The duty of care requires nonprofit board members to discharge their fiduciary duties with “the care an ordinarily prudent person in a like position would exercise under similar circumstances.” In regular English, this duty means a NC board member needs to:
• Attend Board Meetings on a regular basis (you would be surprised how many board members fail this basic duty!)
• Become informed before board meetings. Insist on receiving written reports and seek professional advice prior to important corporate actions.
• Exercise independent judgement, i.e. just don’t be a ‘rubber stamp’ to approve a resolution for corporate action “just because”
• Become familiar with the nonprofit (other board members and key staff), its mission, its legal documents (such as articles of incorporation, bylaws, tax exempt letter, charitable solicitation license(s)), and its activities and programs
• Become familiar with the laws and regulatory compliance issues that relate to the nonprofit organization you serve (ex. If your nonprofit provides Head Start services, become more familiar with the Head Start Act and the Head Start Performance Standards)
The above activities sound like common sense, but one would be surprised to the extent how many nonprofit board members just do not know enough to effectively perform their duty of care. In North Carolina, if a board member is exercising good faith judgment (doing the above), the board member will generally fall under the protection of “The Business Judgment Rule.” Under this rule, even if a nonprofit’s action turns out to be unwise or unsuccessful, if the board member was exercising this good faith judgment, he or she will be protected from liability to the nonprofit if something goes wrong.
The Duty of Loyalty
In North Carolina, the duty of loyalty means that a nonprofit board member must always act in the best interest of the nonprofit. In a nutshell, the duty of loyalty means that the board member should try to avoid ‘conflicts of interests’ and support actions that are in the best interest of the nonprofit and not the board member’s own personal gain. Here are some situations where a board member’s duty of loyalty could arise:
• Avoid self-dealing as a board member. If the nonprofit you serve enters into any transaction that you (personally) have an interest, the nonprofit’s interest come first (hence, the duty to be loyal to the nonprofit). Further, in North Carolina, you (as a board member) are deemed to have an interest in a transaction if the other party to the transaction is related to you or if the other party is a business that you have a financial interest. In most nonprofits, these ‘interested’ transactions are not prohibited, but you need to have an established conflict of interest policy and follow it.
• Don’t usurp a corporate opportunity from the nonprofit you serve for your own gain. For example, if you know that your nonprofit is looking to acquire a particular property, you shouldn’t go and buy the property first and then try to sell it back to the nonprofit that you’re supposed to be loyal.
• Always keep nonprofit information that is valuable to the nonprofit confidential! For example, if your nonprofit provides Head Start services and it learns it will have to re-compete for its grant, don’t tell your mother who is Executive Director of a local early childhood nonprofit so her organization can start to prepare a competing application.
The best way to ensure your nonprofit (and its board members) is prepared to deal with situations that bring up duty of loyalty issues is to develop and adopt a strong conflict of interest policy, which all board members are familiar with (and sign off on an annual basis).
The Duty of Obedience
In North Carolina, the duty of obedience means the board of directors must stay faithful to the nonprofit’s purposes as stated in its articles of incorporation or its adopted bylaws. Additionally, nonprofits must obey and follow any specific instructions related to outside funding, whether it be from a federal grant or a gift or bequest from a private donor.
Perhaps you were chosen to join a nonprofit board because you represent a sub-group. For example, community action agencies, which receive Community Services Block Grant (CSBG) funding must establish a tri-partite board, which requires membership from the low-income community representatives. While you are representing a public housing tenant association and must bring the issues of your sub-group to the attention of the board, your duty of obedience remains to advance the nonprofit’s mission and not the interests of the sub-group that elected you.
One good way to ensure that your nonprofit (and its board members) is prepared to deal with situations that bring up duty of loyalty issues is to develop an internal code of ethics for board members is adopted and reviewed by each board member regularly.
Joining a nonprofit board of directors is one of the best forms of volunteer service available to citizens in modern America. However, in North Carolina (and every other state for that matter), specific legal and fiduciary duties attach with this privilege of service. Consulting with an attorney who specializes in nonprofit law, including nonprofit corporate governance can help your nonprofit ensure its board of directors is in full compliance with the fiduciary duties required by NCGS Chapter 55A.