Fiduciary Responsibility: A Board’s Purpose and Roles

September 27, 2016 |
2 minute read
|

Excellent boards are made, not born. Achieving excellence in board governance requires success in four crucial areas: capable leadership, a sound organizational structure, attention to fiduciary duties and a culture that binds the board members to each other in a cohesive unit.

Today, boards are being held to even-higher standards. ”Getting by,” “muddling through” and “preserving the status quo” are no longer adequate. Earning a seat on a board is no longer simply achieved by a financial contribution or as an honorary reward, nor can a trustee’s oversight role be viewed as one of passive observation. While mediocre performance may enable an organization to survive, it will not thrive. How well a board functions determines, in large measure, the fortunes of the institution it governs.

What makes a board “excellent?”

One answer lies in the crucial difference between governance and management. The role of a board is one of strategy, not tactics. Its primary responsibilities are to:

  • establish and clearly articulate the mission of the organization,
  • hire a strong management team to run the organization in accordance with policies and objectives that further that mission, and
  • monitor progress toward the mission’s fulfillment.

Many confuse the responsibilities of management with that of the board. The execution of ongoing operations and the development and implementation of institutional programs are the responsibility of management and staff, not the board. On an ongoing basis, the board’s role is one of oversight, in which it reviews and assesses management’s success in carrying out its job.

Even though the board does not manage daily operations, it does not simply preside. The board actively supervises management and staff. It sets standards that are clear and objective, makes sure the team understands their position and ensures that the actual running of the organization is well supervised by senior staff members.

The classic definition of a fiduciary is one who acts in a position of trust or confidence on behalf of another. Fiduciaries are expected to handle the affairs of others with at least the same care and prudence that they apply to their own affairs.

From a nonprofit board’s point of view, fiduciary responsibility is traditionally expressed in terms of three fundamental duties:

  1. The duty of care requires that trustees not treat their role casually, but instead attend meetings, take reasonable steps to become well acquainted with all of the information and pertinent facts under the board’s purview and bring their best judgment to bear in the board’s deliberations and decisions.
  2. The duty of loyalty (sometimes called “obedience”) requires that trustees place the interests of the organization above their own. Where conflicts of interest do occur – whether with trustees’ own interests or with the interests of another organization with which they are involved – policies must be in place to ensure that the conflict is disclosed and neutralized. The practice of recusal, in which the conflicted trustee takes no part in the decision – to the extent of leaving the room while the matter that is the subject of the conflict is discussed and voted upon – has become standard practice in the nonprofit sector.
  3. The duty of responsibility requires that trustees maintain the organization’s adherence to the purposes described in its charter and by-laws, following its policies in a disciplined and consistent manner in addition to complying with relevant laws and regulations.

At endowed nonprofits, these three duties come into play most prominently in relation to the policies and practices that govern the investment and spending of the organization’s perpetual funds. Responsibility for these matters is frequently delegated to an investment committee, subject to oversight by the full board.

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