Three Fundamental Duties of Nonprofit Boards

July 25, 2023 |
2 minute read
|

It is essential that trustees of endowed portfolios hold themselves accountable to a set of standards in order to maintain sound governance practices. Fiduciary duty is an important part of the English common law tradition that has been incorporated into state law throughout the U.S..

What is Fiduciary Duty?

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 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: care, loyalty and responsibility1.

1. Duty of care

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. Duty of Loyalty

The duty of loyalty 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 and is excused from any related discussion—has become standard practice in the nonprofit sector.

3. Duty of responsibility

The duty of responsibility, also referred to as the duty of obedience, 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. The Uniform Prudent Management of Institutional Funds Act (UPMIFA), introduced in 2006 and now the law in nearly all states2 and the District of Columbia, provides guidance in the investment and spending of donor-restricted funds. UPMIFA’s governance language not only addresses the standard of prudence, which lies at the core of the law, but also guides fiduciaries by providing concise lists of issues that must be considered in investing, spending, and delegating authority to third-party agents with respect to donor-restricted funds. UPMIFA aids fiduciaries in understanding what they should do in order to reasonably assure themselves that they are in compliance with the law and with prudent standards of good governance.

Attention to Fiduciary Duties Has Raised the Bar for Board Service

The increasing attention that has been paid to these fiduciary duties by courts, regulators, lawmakers, stakeholders and the general public in the last decade has meant that board service has become more demanding. The type of person recruited for board membership, and the nature of the board commitment itself, have also changed. More engaged boards are the new norm: those who do not have the time or desire to play a full part can seek recognition and a measure of satisfaction on other, non-fiduciary, advisory boards that the organization may establish. For their part, trustees who have made the commitment to be fully engaged in and be supportive of the organization’s mission contribute effectively to the board’s deliberations and decisions and derive satisfaction from knowing that their contribution is not a casual one.

Beyond these fundamental governance duties, board members are increasingly being called upon to fulfill other important roles, such as being a public voice of advocacy. Closely linked to this is the task of bringing the full benefit of their personal and professional contacts to the fiduciary function. This is one important reason—though not the only one—that boards seek diversity of experience and talent in recruiting new members.

Interested in learning more about boards and good governance? Download our whitepaper Benchmarks for Boards – The Hallmarks of Good Governance.

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  1. The duty of responsibility is sometimes also referred to as the duty of obedience.
  2. Pennsylvania has its own law, which is similar in spirit.
George Suttles

Author

George Suttles

Executive Director

George Suttles

Author

Allison Kaspriske

Director

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.

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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.