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.
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:
- 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.
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.
Internal Revenue Service
1111 Constitution Avenue, NW,
Washington, DC 20224For Forms:
For Questions From Nonprofits:
National Center for Nonprofit Boards
2000 L Street NW, Suite 510-F
Washington, D.C. 20036-4907
Internet Nonprofit Resource Center