Are Nonprofit Board Members Financially Responsible For The Financial Decisions They Make?
You are responsible for the organization’s financial decisions as a nonprofit board member. But what does that mean? Are you financially liable if something goes wrong?
The answer is maybe. It depends on the situation and your state laws.
So, what should you do to protect yourself? Continue reading to learn more about the personal liability of board members and how they can defend themselves.
Are Nonprofit Board Members Financially Responsible For The Organization's Actions?
Yes, nonprofit board members are financially responsible for the organization’s actions. This is because, under the law, board members have a fiduciary duty to act in the best interest of the organization and ensure that the organization’s assets are managed responsibly.
This means that board members oversee the organization’s budget, accounting and reporting, and investments. Board members must also ensure that the organization abides by all legal and ethical obligations, and any breach of these duties may result in legal action and financial penalties.
10 Ways a Nonprofit Board Member May Be Financially Held Liable
1. Board Members May Be Liable for Fraudulent Transaction
When a fraudulent transaction occurs, the financial implications for a nonprofit board member can be significant. If it is determined that the board member was aware of or participated in the fraudulent transaction, they can be held liable for any damages incurred by the nonprofit and its stakeholders.
This can include personal liability for monetary damages, legal fees, and any other costs associated with the fraudulent activity. If the board member is found to have acted in bad faith or with a lack of due diligence, they may be held personally responsible for any losses the nonprofit suffers.
There is also a risk of criminal charges being brought against the board member, depending on the severity and intent of the fraudulent transaction.
2. Board Members May Be Liable for Negligent Lending
Nonprofit board members can be liable for negligent lending if they have taken actions that have caused injury or damage to individuals, companies, or property. This could include approving a loan with an entity in which the board member had a substantial personal or financial interest or failing to exercise due diligence when reviewing a loan application or contract.
3. Board Members May Be Liable for Breach of Fiduciary Duties
If a board member of a nonprofit organization is found to be financially liable for a breach of fiduciary duties, it means that they are obligated to cover the costs associated with any damages or losses incurred by the nonprofit due to their failure to meet their legal, ethical, and moral responsibilities as a board member. This could include reimbursing donors or covering legal fees.
4. Board Members May Be Liable for Misappropriation of Funds
There are six items nonprofit corporation board members must adhere to related to funds being used by the organizations.
- Understand the standards of conduct for Board members: They are responsible for fulfilling their fiduciary duties, which include protecting the organization’s funds from misappropriation. This requires board members to adhere to specific standards of conduct and compliance with government regulations.
- Be aware of personal benefit: Board members must not show favoritism to any particular person or entity when it comes to utilizing the organization’s funds.
- Check for any improper financial activity: Board members need to pay special attention to any potential misuse of funds, such as paying an excessive amount for services, diverting funds to an unauthorized destination, or paying out unreasonable compensation.
- Know what your government agency requires: If the nonprofit organization is subject to government oversight, board members should be aware of any regulations or laws that must be followed to prevent the misappropriation of funds.
- Be vigilant: Board members must be vigilant and continuously monitor the organization’s financial activity to ensure the proper use of funds and mitigate any risks of misappropriation.
- Take action: If the board finds any evidence of misappropriation of funds, they should immediately rectify the situation and prevent further misuse.
5. Board Members May Be Liable for Self-Dealing
Self-dealing is when a board member, or someone related to them, has a personal interest in a transaction that benefits the organization. This could include a board member using the organization’s resources for their own personal benefit or having a financial or personal interest in a contract with the organization.
Board members can be held liable for self-dealing if it is determined that their actions were not in the organization’s best interest and that they knew, or should have known, that they were wrong.
6. Board Members May Be Liable for Violating Statutory Reporting Requirements
Nonprofit board members have specific statutory reporting requirements that must be followed to comply with relevant state and federal laws. These include filing all necessary tax returns on time, such as state and federal tax returns, as well as ensuring that all donations are spent in accordance with the donor’s wishes and that all organizational activities are compliant with applicable regulations.
Breaches of these reporting requirements can result in fines, personal liability, and other consequences, depending on the nature and severity of the violation.
7. Board Members May Be Liable for Violating Sunshine Laws
If nonprofit board member violates sunshine laws, they may face several financial risks. These include late fees, inability to accept tax-deductible donations, overpayment of staff, penalties for excessive lobbying or political activities, and poor bargains made on behalf of the organization.
8. Board Members May Be Liable for Violating Corporate Charters
If a board member of a nonprofit organization violates the terms of its corporate charter, they may be held financially liable for the damages that result. This can include financial losses, personal injury, or property damage caused by the organization due to the board member’s negligence or wrongful acts.
In some cases, a board member may be held personally liable for their breach of the corporate charter and may be required to pay restitution or fines to the organization and any affected parties. Additionally, the board member may be barred from serving on any other nonprofit boards in the future and may be subject to criminal charges for misconduct.
9. Board Members May Be Liable for Failure to Prevent Conflict of Interest
If a nonprofit board member fails to prevent a conflict of interest, they may be liable for any resulting losses or damages. This is because board members have a legal responsibility to act in the best interest of the nonprofit and its stakeholders, and any failure to identify, disclose, and address potential or actual conflicts of interest can have serious repercussions.
To avoid this liability, board members must diligently follow the annual board orientation, keep the board apprised of all significant developments, hold board members accountable for their commitments, and establish a process to report and address conflicts of interest.
10. Board Members May Be Liable for Negligence
The consequences for a nonprofit board member for negligence can be personal, criminal, or civil liability. Negligence is “the failure to exercise the degree of care that a reasonable person would have exercised in similar circumstances” and applies to anyone who takes on particular responsibilities, such as board members.
What are the Fiduciary Responsibilities of Nonprofit Board Members?
Board members are responsible for acting in the organization’s best interest.
Nonprofit board members are responsible for acting in the organization’s best interest. These include:
- Duty of Care: each board member is responsible for making decisions on behalf of the organization they are serving and exercising their best judgment in doing so;
- Duty of Loyalty: each board member must put the organization’s interests before their own personal and/or professional interests;
- Duty of Obedience: board members are legally responsible for ensuring the organization complies with all applicable federal, state, and local laws and adheres to its mission;
- Recruiting and appointing new board directors;
- Hiring and firing managers and other staff members;
- Monitoring financial reports and conducting an annual audit;
- Providing oversight and accountability for the organization;
- Serving as a guiding body and providing insights and actionable steps to navigate a path toward the nonprofit’s mission;
- Ensuring that the organization is appropriately stewarding the resources entrusted to it and following all legal and ethical standards;
- Assessing potential risks and developing solutions to minimize potential harm;
- Understanding their legal duties, fiduciary duties, and decision-making roles;
- Working within their stated mission;
- Spending funds according to the mission and ensuring that spending decisions are known to donors;
- Not accepting donations with conditions;
- Not allowing individuals with personal agendas to sit on the board; and
- Not using professional contacts in dealings with the nonprofit.
Board members have a duty of care to ensure the safety and welfare of the organization.
The duty of care of nonprofit board members is to make decisions for the organization they serve and exercise their best judgment. This means board members should be actively participating in board meetings and on committees and overseeing and monitoring the nonprofit’s activities.
Board members have a duty of loyalty to ensure that their interests do not conflict with the organization’s interests.
The duty of loyalty is a legal responsibility for nonprofit board members to place the organization’s interests ahead of theirs and make decisions in the organization’s best interest. This means publicly disclosing conflicts of interest and not using board service for personal or commercial gain.
Board members are responsible for being informed and staying current on all relevant information.
Board members must comprehensively understand the organization they represent and its operations, including current goals and objectives, policies, financials, legal matters, personnel issues, etc. Board members should be well-versed in their roles and responsibilities as representatives of their organization and be familiar with applicable laws or regulations.
Board members have a responsibility to make sound decisions
Before deciding, board members must consider all stakeholders’ interests and evaluate the potential risks and rewards. Board members must know their legal and ethical responsibilities and fiduciary duties to the organization they serve.
Board members are responsible for ensuring the organization’s activities are carried out effectively.
A nonprofit board member must have detailed knowledge of the organization’s programming and impact, who participates in those programs, and their outcomes and effects. They must periodically conduct a self-assessment to evaluate their performance and identify areas where the board may be more effective.
Board members are responsible for ensuring the organization’s resources are managed efficiently.
A nonprofit board member has a variety of responsibilities in managing resources prudently and efficiently. These include fundraising efforts, achieving 100% board giving, and monitoring financial activities. Board members should understand financial statements well and review and approve the organization’s budget.
They should also approve significant organizational decisions like programming or large expenditures. Board members should also stay engaged with key stakeholders to discuss goals, receive input, and share progress.
Board members are responsible for ensuring they do not misuse their position for their own personal gain.
Board members of nonprofit organizations are responsible for acting with integrity and always acting in the organization’s best interest rather than for personal gain. To ensure this, nonprofit boards should establish written policies outlining steps to follow should a conflict of interest arise, and the nonprofit director or board chair should review these policies regularly with all board members.
Board members are responsible for ensuring the organization remains accountable to its stakeholders.
Board members are responsible for ensuring that the organization remains accountable to stakeholders. This includes ensuring that the use of resources is kept within appropriate limits and that the company’s financial performance is satisfactory.
It also involves providing oversight to ensure that the organization meets its mission and goals and is aware of potential risks or liabilities. Board members must also be aware of their own personal assets and avoid conflicts of interest.
Many board members are volunteers who generously give their time, expertise, and resources to support the organization’s success. They should ensure the organization’s long-term sustainability by setting sound policies, monitoring progress, and providing guidance when necessary.
How to Deal with Potential Financial Risks as a Nonprofit Board Member?
1. Understand the financial risks of the nonprofit
Nonprofit organizations are important in providing essential social services that benefit communities and their members. Although board members are volunteers, there is still a risk of personal liability, which could affect their personal financial status due to their business decisions. This is why board members need to understand the financial risks associated with their position.
When developing and carrying out a financial plan, board members must know their obligation to act as stewards of the organization’s finances.
This includes learning to read and interpret financial statements, reviewing and approving the budget, and approving significant decisions like programming or large expenditures. Board members must also proactively communicate with stakeholders to discuss these goals, receive input, and share progress.
2. Investigate the insurance coverage of the organization
Investigating an organization’s insurance coverage is essential in protecting the business’s assets. It requires looking at all the types of insurance policies that may apply to the company, such as liability, property and casualty, health and disability, workers’ compensation, commercial auto, cyber and more.
A thorough investigation into the organization’s insurance coverage should include reviewing current policy information, researching available policies that may fit the organization’s needs and budget, and speaking with industry experts or nonprofit insurance brokers to ensure that all areas are covered adequately.
3. Review the governing documents to understand potential liabilities
Governing documents of a nonprofit can help a board member identify and address potential financial risks by providing clear guidelines for their duties and responsibilities. The governing documents, such as the bylaws, can provide insight into the expectations of board members, how the board should conduct itself, and how decisions should be made.
This can help board members anticipate potential financial risks to take proactive steps to mitigate them and protect the organization’s financial resources.
4. Ask questions and express concerns about potential liabilities during board meetings
At the beginning of each board meeting, the board should review and discuss the laws, regulations, and standards of conduct that govern board members. This is especially important for new and returning board members who need to understand the legal duties of the board and the expectations of all board members.
During the meeting, the board should provide regular updates on the nonprofit’s potential legal liabilities, including any threatened or ongoing claims and litigation. Board members should be encouraged to ask questions and express their concerns about potential liabilities.
The board should have a transparent process for identifying and addressing potential conflicts of interest. This includes disclosing any actual or potential conflicts of interest to the entire board and deciding whether to excuse the member from the discussion and/or vote about the conflict.
Board members should be held accountable for their commitments, such as attending meetings and submitting reports for their committees to ensure that the board manages risk effectively and is aware of potential liabilities.
5. Obtain the necessary training to understand the financial risks
It is essential to ensure all board members are oriented to their duties and responsibilities by providing annual orientations. Orientations should include information about the organization’s structure, governing documents, fiscal health, risk management, and employment matters.
6. Develop a mechanism for managing financial risks
As nonprofit insurance agents, we help nonprofits transfer financial risks to nonprofit insurance companies. As a nonprofit, you must address legal duties, govern documents, and implement additional risk management techniques.
7. Invest in risk management processes
Risk management involves identifying potential risks, assessing them, and then taking steps to reduce or eliminate them. This includes developing strategies to manage any potential hazards, such as implementing insurance policies, establishing emergency plans, and ensuring proper staff training.
Buying ergonomic computer chairs and keyboards for your employees is a risk management process to help reduce back injuries and carpal tunnel. These simple steps help keep your staff healthy and reduce workers’ compensation claims to keep insurance costs down.
8. Develop a formal gift acceptance policy
This policy should include procedures for verifying the source and legitimacy of gifts, determining the appropriate uses of gifts, ensuring that gifts are not used for any improper purpose, and tracking the benefit of all donations.
9. Establish a board member conflict of interest policy
Having a board member conflict of interest policy should outline potential scenarios where a board member might have a personal or financial interest in an event, decision, or outcome related to the organization. It should also provide guidance on how to handle these situations and what steps must be taken when there is a conflict of interest.
The policy should require transparency by mandating that all board members disclose any financial interests they may have in matters related to the organization. Additionally, it should include procedures for recusal from voting or discussion on certain topics if a conflict of interest exists.
10. Adopt meeting minutes, resolutions, and bylaws
Adopting meeting minutes, resolutions, and bylaws ensures that the nonprofit meetings and decisions are correctly documented. Meeting minutes provide an official record of what was discussed during a meeting, which can be used as a reference when making future decisions.
Resolutions outline an organization’s policy or goals, and bylaws are the legal rules governing an organization’s operations. Adopting these documents helps ensure that all organization members are informed about the current state of affairs and any changes that may be made in the future.
What Types of Liability Insurance Coverage Does a Nonprofit Need?
Nonprofit organizations need various liability insurance to protect their board and executive staff from personal liability in the event of a lawsuit. The most common type of insurance nonprofits need is General liability insurance and Directors’ and Officers’ Liability Insurance, aka D&O insurance.
Members of the board will typically insist on reviewing the directors and officers insurance coverages to ensure the nonprofit’s board is protected from their financial responsibilities. Board members must also obtain additional liability coverages to include:
- Workers’ Compensation Insurance for Nonprofits
- Bodily Injury coverage
- Commercial Business Auto Insurance
- Abuse and Molestation Insurance
- Employment Practices Liability Insurance
- Umbrella Insurance
- Earthquake Insurance
- Flood Insurance
- Employee Dishonesty Insurance Coverage
- Cyber Liability Insurance
Individual directors or officers must protect the nonprofit from board liability and all liabilities the not-for-profit organization faces.
What are the nonprofit board member’s legal responsibilities?
There are three primary legal responsibilities nonprofit board members have: Duty of Care, Duty of Loyalty, and Duty of Obedience.
What are the fiduciary duties of a nonprofit board of directors or trustees?
The primary fiduciary duty of a nonprofit board of directors is to act for the good of the organization they serve. This means they must operate with integrity and not pursue any personal gain from their position.
Are nonprofit board members liable for the debts of the nonprofit?
No, nonprofit board members are not generally held liable for the nonprofit’s debts as long as they act in good faith and exercise due care when making decisions while serving on the board.
However, they can be held personally liable for the nonprofit’s debts under certain circumstances, such as when they personally arrange and guarantee a bank loan on which the nonprofit defaults or personally and directly injure someone in the course of the nonprofit’s work.
An executive director who engages in unlawful behavior, such as stealing from the nonprofit’s coffers, can also be held individually responsible for any resulting debts.
Does a nonprofit board member have a duty of loyalty to the nonprofit?
Yes, a nonprofit board member does have a duty of loyalty to the nonprofit. This duty requires the individual to place the organization’s financial interests as the primary responsibility and not use their position for personal gain.
Why are board members of a nonprofit organization liable for their decisions?
Board members of nonprofit organizations can be held liable for their decisions if they have acted with negligence or in bad faith. This is because boards are expected to act with the same level of care and due diligence as any other business entity, and failure to do so can result in legal action from donors, members, or other stakeholders.
What is the Federal Volunteer Protection Act of 1997?
The Federal Volunteer Protection Act of 1997 is a United States law that protects volunteers from liability for their services when acting within the scope of their duties. This law helps to ensure volunteers are not held responsible for injuries or damages that may occur while performing their services.
It also provides immunity from civil lawsuits and criminal prosecution in some instances. The act applies to any volunteer providing services for a charitable organization, educational institution, health care entity, or government entity and has been adequately trained to fulfill their duties.
The act does not protect volunteers from intentional wrongdoings or gross negligence, so it is crucial to understand the scope of protection before beginning service as a volunteer.
Need Nonprofit Insurance Protection For Your Board Members
Nonprofit organizations must take extra steps to protect their board members from potential personal liability. Nonprofit insurance offered by Integrity Now Insurance Brokers is the best way to do this, as it protects board members in case of a lawsuit or other legal action taken against them.
As an independent insurance agency, we represent some of the top nonprofit insurance companies throughout the US. If you are an established nonprofit 501c3, we have an affordable nonprofit insurance program that includes all required church insurance coverage.
Our nonprofit insurance plans can also help cover legal costs if any disputes between board members or employees become injured while performing their duties. With nonprofit insurance in place, you can be sure that your board members will have the protection they need in case of an unexpected occurrence.
Contact one of our licensed nonprofit insurance agents today and request a directors and officers liability insurance quote.