Board Fiduciary Duties

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This is part of "What Every Grantmaker Should Know & Frequently Asked Legal Questions."

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Becoming a foundation board member, whether for a community, private or corporate foundation, brings with it legal and ethical duties and responsibilities. Foundation board members and officers must fully understand their duties and always uphold the public trust in their role as stewards of the foundation. Here are things all grantmakers should know about board fiduciary duties.

Basic Fiduciary Duties

Foundations can be organized as either trusts or corporations, and the fiduciary standards applicable to trusts and corporations have developed somewhat separately under state law. Essentially, however, directors, trustees and officers of a foundation owe three fiduciary duties to the foundation:

  • Duty of Care, which requires the individual to discharge duties in good faith, in a manner one reasonably believes to be in the best interests of the organization, and with the care an ordinarily prudent person in a like position would exercise under similar circumstances. The individual must devote the time, attention and resources necessary to understand and prudently oversee the affairs of the foundation.
  • Duty of Loyalty, which requires the individual, 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.
  • Duty of Obedience, which requires the individual to obey all laws pertaining to foundations and act in furtherance of the foundation's charitable purposes.

Meeting Fiduciary Duties

The following steps can be taken to help ensure compliance with fiduciary duties:

Duty of Care

Active Participation: Board members should actively participate in the management of the organization, including attending board meetings, evaluating reports, reading minutes and reviewing, if applicable, the executive director's performance and compensation.

Committees: The board should ensure committees operate under the direction and control of the board. Board members are responsible for committees and should regularly receive committee reports and scrutinize their work.

Board Actions: Directors should understand that for purposes of determining whether a director met the duty of care, a board member who is present at a meeting when an action is approved is presumed to have agreed to the action unless (a) he or she objects to the meeting because it was not lawfully called or convened and does not participate in the meeting, (b) he or she votes against the action, or (c) he or she is prohibited from voting on the action due to a conflict of interest.

Minutes of Meetings: Written minutes should be taken at every board meeting. The minutes should accurately reflect board discussions as well as actions taken at meetings. Minutes should be distributed to board members and formally approved at a subsequent board meeting.

Books and Records: Board members should have access to, and general knowledge of, the organization's books and records (articles, bylaws, accounting records, tax returns, voting agreements, minutes, etc.).

Accurate Recordkeeping: Board members should not only be familiar with the content of the books and records, but also should make sure that the organization's records and accounts are accurate. This may require independent audits and/or the implementation of appropriate internal controls.

Trust Property: Board members should protect, preserve, invest and manage the foundation's property, and do so consistent with donor restrictions and legal requirements.

Investigations: Allegations of misconduct should be investigated and addressed.

Duty of Loyalty

Generally: Board members should avoid using their positions or the organization's assets in a way that would result in inappropriate financial gain for themselves or any member of their family.

Conflicts of Interest: Board members should ensure that conflicts of interest are appropriately addressed and the organization's conflicts of interest policy are followed (see Conflicts of Interest).

Loans: A director of a Minnesota nonprofit corporation should not permit loans to directors and officers unless the loan may reasonably be expected, in the judgment of the entire board, to benefit the foundation.

Duty of Obedience

State and Federal Statutes: Board members should be generally aware of state and federal statutes and laws relating to nonprofit corporations or trusts, tax-exempt status, charitable solicitations, sales and use taxes and employment matters and ensure the organization follows them.

Filing Requirements: The board must ensure that the organization complies with deadlines for tax and financial reporting, including filings with the Secretary of State, Attorney General and IRS.

Governing Documents: Board members should be familiar with their foundation's governing documents and should follow the provisions of those documents.

Outside Help: When appropriate, board members should obtain opinions of legal counsel, accountants, appraisers or other professionals.

Board Member Liability

In general, only a corporation's or trust's own assets are at risk for actions taken by or on behalf of the corporation or trust. Nevertheless, the act or failure to act by a board member or officer of a foundation may sometimes result in personal liability. Actions or omissions that constitute a breach of fiduciary duty or breach of a personal contractual obligation, or that cause physical injury or death, may cause personal liability. Actions or omissions that are considered reckless or criminal may also give rise to personal liability. Individual directors and officers may also be held personally liable for a foundation's failure to withhold and pay certain federal taxes.

Both federal law and Minnesota state law afford some protection against personal liability to individuals serving as unpaid officers and directors of charitable organizations, including foundations. 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. Federal law provides volunteers with somewhat duplicative immunity from both federal and state civil liability.

For More Information

See also Frequently Asked Legal Questions: Board Fiduciary Duties.