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The Fiduciary Responsibility and Nonprofit Boards

October 28, 2019

AR-160409948A key ingredient of success for any nonprofit is solid board governance. And that requires a blend of intellect, reputation, resources, and access — and that board members faithfully exercise their fiduciary duties.

Board directors have three primary fiduciary responsibilities: duty of care, duty of loyalty, and duty of impartiality. For a nonprofit to operate successfully, it's critical that board members fully understand the nuances of all three.

Best practices for a nonprofit board

When individuals agree to sit on a nonprofit board, they often do so out of a passion for the organization or its cause and may not fully understand the liability or responsibility of oversight that comes with the role. Some best board practices for nonprofits include:

Create a diverse board. Cultivating a culture of openness and inquiry is important to the effectiveness of any board. A board that includes different perspectives naturally allows for a range of ideas and opinions and allows for exploration of different approaches, which in turn benefits the organization.

Plan for sustainability. Planning doesn't just include fundraising and accounting for future dollars. Planning for sustainability means developing and putting a leadership succession plan in place to ensure the future success of the organization. Creating term limits for board members may also be important for the long-term health of an organization. The timely and planned rotation of trustees or directors on and off the board helps prevent complacency and contributes to the influx of fresh ideas.

Strike the right balance. Every nonprofit hopes to forge a strong partnership between staff and the board. And that requires striking a healthy balance between the power and responsibilities of the executive director and those of the board. The executive director should be in regular communication with the board but should also be sure to impart only meaningful information. Too much meaningless information shared with a board creates noise and distracts everyone from the organization's mission and work. By the same token, the board must be respectful of an executive director's prerogatives and avoid micromanaging the functions of the staff and day-to-day activities of the organization.

Recruit fresh talent. Attracting and retaining talent is critical for any organization that wants to succeed. The board is responsible for creating the job description and responsibilities for the executive director and ensuring that competitive compensation and benefit structures are in place for staff.

Be open to feedback. Boards should regularly solicit feedback from an organization's constituents, donors, and stakeholders to ensure that the organization remains focused and on track. Such feedback can also provide insights that the organization may be able to use during its strategic planning exercises.

Focus on transparency. It is critical to share information about what the organization is doing — and why — with donors, stakeholders, and members of the public. And that involves requires regular, planned communication.

Onboard new board members. Be sure to provide an orientation for new board members to ensure they are up to speed prior to their first board meeting. Make sure the onboarding includes the setting of clear expectations for their service on the board, education with respect to their role and the relevant bylaws, and thorough documentation of the organization's mission, values, programs, and finances.

What is a fiduciary relationship?

A fiduciary has a duty imposed by law to act solely for the benefit of another as to matters that fall within the scope of the relationship. The fiduciary standard includes undivided loyalty, prudence, and good faith and requires that the fiduciary act in the best interests of those with whom s/he has that relationship (in the case of a nonprofit board member, to the organization on whose board s/he serves). While board members act as fiduciaries for the organizations they serve, when the board itself does not possess the skills and experience to properly carry out all its fiduciary duties (e.g., the management of the organization's investments), it has a fiduciary duty to find a partner with that particular expertise. That partner — say, an investment manager — then serves as a fiduciary for the organization and its board. From the perspective of an investment partner, being held to the fiduciary standard means it must provide to the board thoroughly researched and accurate information and recommendations — and, most importantly, prioritize a client's best interests above incentives, commissions, or its own firm’s bottom line.

The fiduciary's role on a nonprofit board

Investment advisors can serve as either a strategic partner or consultant to a board that is looking to carry out its fiduciary responsibility with respect to investment oversight of the organization. In the role of strategic partner, advisors can advance the sustainability of the organization by helping the board craft a suitable investment policy statement, taking appropriate risks in the investment portfolio, and continuously monitoring performance. Investment advisors also can partner with auditors on financial reporting and serve as a resource with respect to industry best practices (even if it means going above and beyond their primary responsibilities). For example, hosting an orientation session for new board members will help them come to their first board meeting with an understanding of how the organization's portfolio is structured and give them the information they need to make informed decisions.

Nonprofit board directors have a number of key responsibilities and one of the most important ones is adhering to the fiduciary standard. It's critical that information and education be provided so that those who are involved in a leadership role of a nonprofit understand their fiduciary obligation.

Headshot_nikki_newtonNikki Newton is president of private wealth management at UMB Bank.

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