Frequently Asked Legal Questions
Board Fiduciary Duties
Q1
What are the basic fiduciary duties of a foundation board member?
Foundations can be organized either as trusts or corporations, and the fiduciary standards for governing members of trusts and corporations have developed somewhat separately under state law. Essentially, however, a board member of a foundation owes two fiduciary duties to the foundation: a duty of loyalty and a duty of care. A third duty is sometimes mentioned, the duty of obedience.
The Duty of Loyalty requires the board member, when making a decision or acting on behalf of the foundation, to set aside personal or conflicting interests and act solely in the best interest of the foundation. The Duty of Care requires a board member to devote the time, attention and resources necessary to understand and prudently oversee the affairs of the foundation. The Duty of Obedience requires the board member to obey all laws pertaining to the foundation and act in furtherance of the foundation's charitable purposes.
Q2
How is a conflict of interest defined for a foundation's board?
A conflict of interest arises when a board member has a personal or other interest in a transaction that conflicts, or may conflict, with the best interests or opportunities of the foundation, and thus poses a challenge to the board member's duty of loyalty to the foundation. Essentially, a conflict of interest arises when the board member has a competing interest in a transaction with the foundation either individually, through another organization, or through a member of the director's family or other personal relationship.
Q3
Should a foundation have a written conflicts of interest policy for its board?
It is generally recommended (including by the IRS) that foundation governing boards have a written conflicts of interest policy so that all board members are sensitive to their fiduciary obligations to the foundation and have standardized procedures in place to disclose and handle conflicts of interest as they arise. A written conflicts of interest policy demonstrates good organizational fiduciary practice and can provide legal protection both to the foundation and individual board members. State law requirements provide a good starting place for a written conflicts of interest policy.
The Minnesota Attorney General has published a recommended conflict of interest policy for nonprofit corporations that can be viewed and downloaded at www.ag.state.mn.us.
The Internal Revenue Service has published a sample conflicts of interest policy for charitable organizations including foundations, as part of the Instructions to Form 1023. It can be viewed and downloaded at www.irs.gov/formspubs.
Foundations should consider whether any modifications are appropriate for their particular circumstances before adopting either of these policies.
Q4
In what circumstances might a foundation board member or officer be subject to personal liability for actions taken in connection with the foundation?
Any action or failure to act that is determined to be outside the scope of the board member's or officer's official responsibilities and capacity may create personal liability for the board member or officer. Actions or omissions that constitute a breach of fiduciary duty, a breach of a contractual obligation, or cause physical injury or death may create claims of personal liability. Actions or omissions that are considered negligent, reckless or criminal also are likely to raise issues of personal liability. Individual directors and officers may also be held personally liable for a foundation's failure to withhold and pay federal taxes.
Q5
What special protections against personal liability are available for a foundation's volunteer board members and officers?
Both federal and Minnesota state law afford some protection against personal liability to individuals serving as officers and directors of charitable organizations, including foundations, on a volunteer or unpaid basis. Under Minnesota law, such a person generally is not liable under civil law for acts taken in good faith, within the scope of the person's responsibilities, and which do not constitute willful or reckless misconduct, subject to certain exceptions. Federal law provides volunteers with somewhat duplicative immunity from both federal and state civil liability.
For More Information
See also What Every Grantmaker Should Know: Board Fiduciary Duties.
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PLEASE NOTE:
None of the material in this publication should be construed as offering legal advice. Seeking legal counsel is recommended before acting on any matter described in this publication.
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