News & Updates

Non-Profit Risk Insights: Liabilities for the Board of Directors

By Foster Park Brokers Inc. - Posted on Wednesday, March 9, 2016

Nonprofit organizations provide essential social services that benefit communities and their members. These organizations cannot survive without a solid volunteer Board of Directors assigned to elect officers, adopt policies and make major financial decisions for the organization. Although the members of the board are volunteers, there is a certain amount of risk involved in holding one of these positions. Specifically, even when acting in good faith, board members are subject to personal liability, which may affect their personal financial status because of their business decisions.

Therefore, it is imperative that your organization and Board of Directors understand the risks involved as volunteers, their responsibilities as board members and the ways in which they can protect themselves from personal liability.

Risks and Responsibilities

To combat the chance of affecting the personal liability of board members, nonprofit organizations should assess the risks involved with holding these positions. Your organization should first develop a volunteer risk management committee to identify all risks and pose solutions to minimize potential harm. In addition, you need to ensure that the board members understand their governance responsibilities. Your nonprofit should educate its board on their legal duties, fiduciary duties and decision-making roles. Furthermore, the risk committee should ensure the following:

  • The organization is working within its stated mission
  • Funds are spent according to the mission, and spending decisions are known to donors
  • The organization does not accept donations with conditions
  • Individuals with personal agendas are not allowed to sit on the board
  • Board members are not using professional contacts in dealings with the nonprofit

Once the risks are assessed and the Board of Directors is aware of those risks, they must also understand the responsibilities associated with the positions they hold.

Board members should uphold the following duties:

  1. Duty of Care: The individual should act in the way that a reasonable person would in a similar position and under similar circumstances. Acting under good faith is an essential part of the functions of the board.
  2. Duty of Loyalty: The individual should place the organization’s financial interests as the primary responsibility. As a board member, one should not use his or her position for personal gain, financially or otherwise. In addition, individuals should remain honest about business ventures that pose a conflict of interest when acting as a representative of the organization.
  3. Duty of Obedience: The individual should try to further the mission of the nonprofit by supporting board decisions and implementing policies as they are outlined.

In addition to these responsibilities, board members must also ensure that the nonprofit follows all tax requirements, complies with anti-trust laws, abides by civil rights laws and manages funds effectively.