Does your board understand the meaning of “fiduciary”?

“Fiduciary” is a term that gets thrown around a lot these days. But what does it really mean — and to whom should it apply? In general, fiduciary refers to the legal and ethical obligations of someone to act in the best interests of a beneficiary. You’ll often hear the word in the context of trustees and financial advisors. But fiduciary duty also applies to not-for-profit boards.

Your board members must prioritize what’s best for your organization, even if that conflicts with what might benefit them. If your board doesn’t already know its specific fiduciary duties, it’s up to you to ensure each member understands them.

Primary duties

Board members have three primary fiduciary duties, the first of which is care. Members must exercise reasonable care in overseeing your organization’s financial and operational activities. Although disengaged from day-to-day affairs, they should understand your nonprofit’s mission, programs and structure; make informed decisions; and consult others — including outside experts — when appropriate.

The second duty is loyalty. Board members must act solely in the best interests of your organization and its constituents, and not for personal gain. Obedience is the third duty. Board members need to act in accordance with your organization’s mission, charter and bylaws, as well as any applicable federal, state and local laws.

If any board member knowingly violates these duties, consider removing that person from your board. Board members can be held personally liable for financial harm your organization suffers. In extreme cases, director malfeasance could lead to IRS sanctions and the loss of your nonprofit’s tax-exempt status.

Conflicts of interest

One of the most challenging, but critical, components of fiduciary duty is the obligation to avoid conflicts of interest. In general, a conflict of interest exists when a nonprofit organization does business with a board member, an entity in which a board member has a financial interest or another company or organization for which a board member serves as a director or trustee.

Appearance of wrongdoing matters almost as much as reality. To avoid even the appearance of impropriety, your nonprofit should treat transactions as conflicts of interest if they involve a board member’s spouse or other family member. Also off-limits are transactions with entities in which a board member’s spouse or relative has a financial interest.

The key to dealing with conflicts of interest, whether real or perceived, is disclosure. Board members involved should disclose the relevant facts to the rest of the board and abstain from any discussion or vote on the issue unless the board determines they may participate.

Educating your board

Even if you’ve chosen honest, trustworthy and charitable individuals to serve on your board, you can’t expect them to automatically know their fiduciary duties. Provide all directors with a list of duties, and explain the concept of fiduciary in your new-member orientation. Contact us for help with governance issues.

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