For many people, being named to a Board of Directors is considered an honor or reward. And, there are many reasons people decide to serve on a Board. But it’s important to remember that Board membership carries with it legal responsibilities. An understanding of nonprofit law affecting Officers and Directors is essential to any Board Member. Why do these laws exist? Who enforces them? What are Board Members’ duties?
The strength and vitality of Minnesota is, in part, a function of the way nonprofits enrich communities in the Twin Cities and greater Minnesota. State and Federal laws are in place to:
Make sure that all charitable organizations fulfill their promises to clients and donors
Ensure donated funds are properly managed
Watch out for efficient delivery of the charitable missions.
The first watch dog for nonprofits is the community. Several state and federal agencies also supervise nonprofits. These include:
The State Attorney General’s Office
The State Gaming Control Board
The Federal Internal Revenue Service (IRS)
The Minnesota Department of Revenue
The State / Federal Departments of Labor
In Minnesota, for example, the legal responsibility comes through statute: The Minnesota Nonprofit Corporation Act (Minn. Stat. Chapter 317A.251 and 317A.255). There are 4 primary responsibilities:
Abiding by Fiduciary Duties. A fiduciary duty is the highest standard of care. In a nonprofit context, Directors and Officers owe a fiduciary duty to the nonprofit organization. The fiduciary is expected to be extremely loyal and must not put his/her personal interests before the entity. The fiduciary must not profit from his/her fiduciary position. In Minnesota, the three fiduciary duties are: A.) the Duty of Care, B.) the Duty of Loyalty, and C.) the Duty of Obedience. For more detailed information, read Minnesota Attorney General’s Office, “Fiduciary Duties of Directors of Charitable Organizations: A Guide for Board Members from the Office of Minnesota Attorney General.”
Proper Care of Trust Property. Directors and Officers are responsible to donors, grant-makers, and the community, and must protect/preserve/invest/manage the organization’s assets without violating State or Federal nonprofit laws. For example, several state laws govern the management of charitable assets: Minn. Stat. §§ 501B.33 through 501B.45; Minn. Stat. §§ 309.73 through 309.77.
Resources and Sustainability. Ultimately, Directors and Officers are responsible for raising funds but also the other resources needed to keep the charitable organization sustainable and operational.
Diligence and Investigations. Directors are required to remain diligent and to investigate theft or mismanagement by another Director, or by an Officer, employee, or volunteer. Since many Directors are not involved in daily operations, it is very important for the Board to make sure internal controls are set up to prevent theft and mismanagement. Diligence and investigation may require reporting the wrongdoing to the police or State Attorney General’s Office. An attorney should be consulted in those situations.
The legal responsibilities are real for nonprofit Directors and Officers. With the right knowledge and preparation, Boards will be prepared to carry out these duties responsibly. Proactive work is like any type of prevention: An ounce is worth a pound of cure!