When Nonprofit Boards Fail: The Domino Effect of Neglected Duties
The following scenario happens far too often. A renowned non-profit, celebrated for its impactful work, faces a sudden downfall. Donors withdraw support, key staff members resign, and the organization’s reputation suffers irreparable damage. The root cause often stems from the board of directors prioritizing personal gain over the organization’s mission, hastily made decisions, or even worse, organizational funds used for personal expenses. These are not isolated incidents and they represent a breach of the fundamental duties of loyalty, care, and obedience. The law places duties on the shoulders of every director, and when they aren’t followed, the consequences can be devastating for everyone involved.
Duty #1: Loyalty
The duty of loyalty ensures that board members act in the best interests of the organization, placing its needs above their personal or external interests. This means that board members must avoid conflicts of interest, refrain from self-dealing, and not use their position for personal gain. For example, a board member shouldn’t steer a lucrative contract towards their own business or use insider information to make personal investments. Such breaches of loyalty can erode trust, jeopardize the organization’s reputation, and lead to legal action.
Duty #2: Care
The duty of care mandates that board members exercise reasonable care and diligence in making decisions. The board members must be informed of the issues, attend meetings regularly, review relevant materials, and ask questions when necessary. A board member who blindly approves a significant investment without understanding its implications is not fulfilling their duty of care.
Duty #3: Obedience
The duty of obedience obliges board members to ensure that the organization complies with its governing documents, applicable laws, and its stated mission. This includes upholding the bylaws, adhering to tax-exempt status requirements, and making decisions that align with the organization’s purpose. A board that consistently ignores its own bylaws or engages in activities that are inconsistent with its mission is not only failing in its duty of obedience, but also risks losing its tax-exempt status, alienating donors, and failing to achieve its intended impact.
Is Foresight a New Duty?
Many highly regarded association consultants are discussing the possible duty of foresight. While looking to the future and embracing foresight is important to association success, it’s not a legal duty based on case law and precedent. The duty of loyalty encourages a board member to be forward thinking, as this duty requires that board members place the needs of the organization first. This includes engaging in foresight. However, foresight is a means to ensure and embrace the duty of loyalty. Therefore, it is not a separate legal duty.
The “Duty” to Discuss Duties
To ensure your board is aware of its responsibilities, its important that you conduct an orientation with your board annually, or at least when you have director turnover. Design your board orientation to give a high-level discussion about the duties of loyalty, care, and obedience and discuss why they are important.
Edward McMurray represents clients in Levin Ginsburg’s Corporate Law Practice and has extensive experience with advising associations and non-profit at all stages and of all sizes. Should you have any questions about your non-profit or association or wish to have Edd conduct a board orientation, please contact Edd through our website.
