Tom Hyatt is a partner in the Washington. D.C. law firm of Dentons US LLP and an authority on nonprofit governance. This blog is excerpted from a presentation he made recently at the Commonfund Investment Stewardship Academy at the Yale School of Management.
In the increasingly complex world of nonprofit governance, and with the range of legal compliance issues confronting boards today, it’s easy to lose sight of the fundamentals that ensure good governance. Keeping them top of mind is one of the best ways to ensure that your board performs up to its full potential … and avoids potential pitfalls.
One way of defining governance is to describe it as the process by which directors lead, serve, decide and communicate, and by which they set strategic priorities and strategic direction. One of the most important documents for good governance is the bylaws of the organization, and that’s because they’re all about the processes of communication and decision-making. At the end of the day, boards have a fiduciary duty to make decisions, so they should want to make them in a way that’s fair and affords due process and that provides the opportunity to meaningfully participate for every director.
If you are on the board of a nonprofit, you have a unique responsibility in that you are a fiduciary. With regard to financial matters, some people have the title of fiduciary. In this context, this means that one is a fiduciary relative to the organization. What precisely is a fiduciary director? Simply put, it’s someone who has a special responsibility under the law with respect to the oversight, management and distribution of assets that are entrusted to their care.
We are familiar with the three fiduciary duties — those of care, loyalty and obedience. Let’s review them briefly. The duty of care is the duty to act in good faith, and with that degree of care and skill that an ordinarily prudent person would exercise under similar circumstances. That’s pretty straightforward, but what does the duty of care really mean? I always say that first and foremost it’s the duty to show up. It’s the duty to come to meetings, to get on the conference call, to read the materials. There’s a telltale sound in boardrooms: that crackling sound you hear when a board binder is opened for the very first time. Try not to be that director. Read ahead.
The duty of loyalty is again the duty to act in good faith. It’s also the duty to put the interest of the organization you serve ahead of your personal and private interests when you’re carrying out your function as a director. What’s the primary manifestation of the duty of loyalty in a boardroom, i.e., where do you see it in terms of a policy? Answer: conflict of interest. Failure to fulfill this duty has been the culprit behind a public black eye for many a nonprofit.
Finally, the duty of obedience, or the duty to ensure that you are obedient to the organization’s mission and to the law. We’re familiar with a notion of mission creep: Sometimes you’ll see an organization with a long history or the great blessing of having considerable resources that starts to shift into activities that are not really a part of their core mission. Evaluating whether you’re remaining true to your mission is a worthwhile exercise. Missing the boat on this one can lead to litigation; if, for example, you’re a library and decide to fund a performing arts center, it can raise questions about your use of your assets.
Understanding and keeping these responsibilities in mind as you execute your role as a board member will ensure that your contributions are furthering the mission of the institution.
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