New Mexico Guide for Board Members of
Charitable Organizations
Dear Board Member:
Thank you for serving as a board member of a charitable organization. The generosity
of New Mexicans funds crucial programs provided by arts and cultural organizations,
churches, environmental groups, schools, hospitals, and other social service agencies.
Our quality of life is dependent upon the many volunteer directors who are willing
to give their time and talents to govern these charitable organizations.
Although charitable organizations vary greatly in size, structure, and mission,
there are a number of key principles that apply to board service for all charities.
This guide is provided by the Attorney General's Office to assist board members
in understanding and performing these important duties. But this is only a guide
and cannot suggest the exact manner in which board members must act in all situations.
Specific legal questions can only be answered with the assistance of a competent
attorney working on behalf of the organization. Nevertheless, I believe this guide
will give you the big picture view of what your legal duties are as a board member
of a charitable organization.
Active participation in charitable causes, both as a donor and as a board member,
is critical to improving the quality of life for all New Mexicans. On behalf of
the public, I appreciate your dedicated service.
Gary K. King
NM Attorney General
DIRECTOR OR TRUSTEE
THEY ARE NOT HONORARY TITLES
Charitable organizations recruit board members for a variety of reasons. Some individuals
are talented fundraisers and are sought to help raise money. Others bring credibility,
prestige or expertise to an organization. Whatever the motivation of the individual
or the charity, joining a board of trustees is a decision not to be taken lightly.
The principal role of the board of directors is to act as the steward of the charitable
assets. The charitable assets are a "public trust" placed in their "private
hands" to be used only for the charity's approved mission. The charity may
not be operated for private benefit. The board of directors is legally responsible
for the management of the affairs of the charity. Stewardship requires active participation.
People who do not have the time to regularly participate should not agree to be
on a board.
One of the most important functions of the board is to keep the resources and efforts
focused on the charity's mission. This requires the board to have an adequate understanding
of the organization's programs, people and resources available to achieve the organization's
goals. As a starting point, every board member should be familiar with the organization's
articles of incorporation, its bylaws, its IRS Form 990 and its financial statements.
BOARD OF DIRECTORS AND EXECUTIVE DIRECTOR
DEFINED DUTIES AND COMPENSATION
The board of directors is not expected to manage the day-to-day activities of the
charity. For those duties the board should hire an executive director. However,
it is the board's responsibility to oversee the executive director's work to see
that the charity is fulfilling its mission. The board has a duty to review and assess
the executive director's performance. If it becomes necessary, the board has the
authority and the responsibility to fire the executive director.
The board of directors sets the executive director's compensation. Every board member
needs to know what the executive director is paid and must participate in the final
decision to set the level of compensation. The compensation needs to be reasonable
for the services rendered and compare favorably to executives in organizations in
a similar situation. The board should remember that the executive director's compensation,
as well as that of other key executive officers, may be important to donors and
the general public. The compensation information must be reported on the IRS Form
990, which is accessible to the general public.
The board of directors for an all-volunteer organization takes on the added responsibilities
of the day-to-day activities of the charity.
THE STANDARD OF CARE
The New Mexico Charitable Solicitations Act defines the standard of care at NMSA
1978 § 57-22-10 as:
“All officers, directors, managers, trustees, professional fundraisers, professional
fundraising counsel or other persons having access to the money of a charitable
organization intended for use for charitable purposes shall be held to the standard
of care defined for fiduciary trustees under common law.”
THE LEGAL DUTIES
Trustees and directors of a charitable organization, whether or not the organization
is formally incorporated as a nonprofit corporation, have specific legal duties
to the organization. The primary duties are:
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The duty of care;
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The duty of loyalty;
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The duty to manage accounts; and
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The duty of compliance.
THE DUTY OF CARE
The duty of care requires active participation in the charity's affairs by attending
board meetings and meetings of committees on which the trustee or director serves.
Each board member must stay informed to determine if the board's policies are being
followed and to understand how the charity is functioning.
Boards may establish committees having the authority of the board and may rely on
information, opinions, or reports of these committees as the basis for a formal
board action. However, the committees remain subject to the direction and control
of the board. As a result, individual board members are responsible for the work
of the committees.
The duty of care must be discharged diligently and in good faith. Board members
must act with knowledge and after deliberation, and should carefully establish policy
and regularly oversee its implementation and administration by a competent staff.
Unfortunately, some board members simply don't do their jobs. Board members who
are regularly absent from meetings, are inactive, or who fail to conduct adequate
research prior to making decisions, have breached their duty of care. Neither the
individual board member nor the charity benefits from this kind of "service."
Board members must conduct themselves with the level of care, skill, and diligence
exercised by "prudent persons" in the handling of their own affairs. Generally,
a board member who knows the facts, analyzes the probable result of an action, exercises
sound judgment, and keeps reasonable records, acts prudently and fulfills this important
duty of care.
The following are specific actions board members should take to ensure that their
duty of care is being fulfilled:
Minutes of Meetings
Written minutes need to be taken at every board meeting and every committee meeting.
The minutes should accurately reflect the actions taken at the meeting. The minutes
should be approved at a regular meeting of the board and maintained as a record
of the board's actions.
Board Actions
A director who is present at a meeting when an action is approved by the entire
board is presumed to have agreed to the action unless the director objects to the
meeting because it was not lawfully called or convened and doesn't participate in
the meeting, or unless the director votes against the action or is prohibited from
voting on the action because of a conflict of interest.
Books and Records
A director needs to have general knowledge of the books and records of the organization
and its general operation. The organization's articles of incorporation, bylaws,
accounting records, voting agreements, minutes, and list of voting members must
be made available to members and directors who wish to inspect them for a proper
purpose.
Accurate Record Keeping
A director needs to be familiar with the content of the books and records to ensure
that the organization's records and accounts are accurate. This may mean the director
must take steps to require regular audits by an independent certified public accountant.
Charitable organizations with total revenue of $500,000 or more are required to
be audited by an independent certified public accountant. At the very least, the
director needs to be aware of what the financial records disclose and take appropriate
action to make sure there are proper internal controls.
THE DUTY OF LOYALTY
The duty of complete and undivided loyalty requires that the interest of the charity
and, as a consequence, the interest of the public, take precedence over the board
member's personal interests. A trustee must, loyally and without self-interest,
further the charitable objectives of the organization by acting fairly and in the
best interest of the charity.
Trustees may breach the duty of loyalty when they engage, directly or indirectly,
in transactions between themselves as trustees and themselves as individuals or
with family members or businesses in which they hold an interest. Board members
should not engage in any transaction that is adverse to the charity, engage in any
competing enterprise to the detriment of the charity, divert an organizational opportunity
for personal gain, or derive any kind of secret profit or other advantage in dealing
with or on behalf of the charity. Caution should be exercised in entering into any
business relationship between the organization and a board member, and should be
avoided entirely unless the board determines that the transaction is clearly in
the charity's best interest.
The following are specific actions board members should take to ensure that their
duty of loyalty is being fulfilled:
Always put the interest of the charity first;
Establish a written conflict of interest policy, which should include procedures
for written disclosures from board members concerning any business dealings with
the charity;
Disclose his or her financial interest whenever the charity proposes to enter into
a business relationship with the board member, a member of his or her family, or
a business in which the board member holds an interest. The board member should
not vote on the transaction or participate in any debate on the merits of the transaction;
Refrain from diverting a business opportunity available to the charity for his or
her own gain; and
If at all possible, avoid transactions involving potential conflicts of interest
and self-dealing situations.
THE DUTY TO MANAGE ACCOUNTS
Board members are responsible for assuring the financial accountability of the charity.
Procedures need to be established to keep the organization fiscally sound and ensure
that it operates in a fiscally responsible manner. Care must be taken to use any
restricted funds properly. Trustees need to oversee the executive director and determine
that the charity's purposes are fulfilled without waste. Preparation of a budget
is important to provide clear directions for spending and translating program and
management goals of the board into financial projections.
The organization needs to be able to demonstrate the wise use of its funds. Accurate
records of all income, expenditures, transactions and activities must be maintained.
Accurate minutes of board meetings should be taken in order to demonstrate board
approval of certain expenditures and investments and to show that informed decisions
were made with regard to these transactions. The following are specific actions
that board members should take to ensure that their duty to manage accounts is being
fulfilled:
Keep accurate records of income, investments, expenditures and transactions, and
accurate minutes of board meetings;
Develop annual budgets that provide clear direction for spending at all levels of
activities. The budget should be a blueprint of the board's program plans;
Establish appropriate internal accounting systems, including a system of checks
and balances. No one person should retain total control over finances;
Prudently invest and reinvest assets;
Assist the organization in acquiring resources for its programs. Develop fundraising
goals and policies. Make certain that fundraising appeals are presented honestly
and fairly, and monitor the performance of fundraising professionals; and
Shop around for the best values in goods and services through comparisons and informed
bidding processes. This process should also be applied to contracts entered into
with fundraising professionals.
THE DUTY OF COMPLIANCE
Board members have a duty to be faithful to the organization's purposes and comply
with the charity's governing documents. They are also under a duty to be familiar
with the laws that apply to the charity and to comply with those state and federal
laws that relate to the charity and its business operations.
The following are specific actions board members should take to ensure that their
duty of compliance is being fulfilled:
Familiarize themselves with and follow the provisions of the charity's articles
of incorporation, constitution, by-laws, or other governing documents;
Familiarize themselves with state and federal laws relating to nonprofit entities,
fundraising, and tax related issues; and
Comply with state and federal registration and reporting requirements, which may
include filings with the New Mexico Attorney
General, the New Mexico Public Regulation Commission, the
New Mexico Taxation and Revenue Department, and the Internal Revenue Service.
IS IT WORTH IT? YES.
A board member who feels that his or her position as trustee is merely honorary
is in for a surprise. When you agree to serve on a charity's board, you accept stewardship
responsibility for the funds donors have contributed. Donors are placing their trust
in you, the public who benefits from the charity's services is depending on you,
and regulators are watching you.
These responsibilities need not frighten off any prospective board member. Board
members need only be active and involved, use sound judgment, responsibly, and in
fairness to the charity, and always have the charity's best interests foremost in
all actions. For board members who take their responsibilities seriously, the rewards
of voluntary service are immeasurable.
SUGGESTED RESOURCES
Internal Revenue Service
1111 Constitution Avenue, NW,
Room 6411
Washington, DC 20224
For Forms:
800-829-3676
For Questions From Nonprofits:
877-829-5500
www.irs.gov/bus_info/eo/index.html
National Center for Nonprofit Boards
www.ncnb.org
2000 L Street NW, Suite 510-F
Washington, D.C. 20036-4907
(202) 452-6262
Internet Nonprofit Resource Center
www.nonprofits.org