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.
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.
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.
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.
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