New Mexico Guide To Board Members of
Nonprofit Charitable Organizations
Dear Board Member:
Thank you for serving as a board member of a nonprofit
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 King
Attorney General
DIRECTOR OR TRUSTEE:
THEY'RE 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 Section 57-22-10 NMSA 1978 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:
- The duty of care;
- The duty of loyalty;
- The duty to manage accounts; and
- 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 rude awakening. 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