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.

Click here to view more content about governance.

 

Stay connected with the Insights Blog

Popular Blog Posts


Market Commentary | Insights Blog

Chart of the Month | The Surprising Relationship Between Money Supply and Inflation

The potential for rising inflation is becoming a top concern for many investors and consumers. Many believe that inflation is already here as evidenced by price increases in commodities, homes,...
Perspectives | Insights Blog

The Case for Using the Higher Education Price Index® (HEPI) to Define Inflation for Colleges

When calculating return targets for an endowment portfolio, a conventional piece of the equation is often the Consumer Price Index (CPI). CPI plus 5% is the common short-hand formula for institutions...
Investment Strategy | Insights Blog

What is an OCIO?

Outsourced investment management, once primarily a solution for small institutions with limited resources, is now used by a broad range of long-term investors. When properly implemented, outsourcing...

Disclaimer

Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

All rights to the trademarks, copyrights, logos and other intellectual property listed herein belong to their respective owners and the use of such logos hereof does not imply an affiliation with, or endorsement by, the owners of such trademarks, copyrights, logos and other intellectual property.

To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.