Being an Impactful Nonprofit Board Member

December 13, 2021

For many, the winter holidays kindle a desire to give thanks – and to give back through support for charitable organizations. Beyond making a financial gift, one of the most impactful ways you can assist your favorite nonprofit is to serve on its board of directors.

Board members play a significant role in providing guidance to nonprofits. They shape the organization’s culture, strategic focus, effectiveness, and financial sustainability. Board members also fulfill another crucial duty: to serve as a fiduciary for the organization.

Through the work that Mercer Advisors does with our clients who serve on the boards of many foundations and endowments, we’ve seen common questions arise about what the fiduciary role entails. In this article, we define the key elements of fiduciary duty and offer some best practices for board members to follow.

Defining fiduciary duty

A fiduciary is someone who has a legal and ethical relationship—built on trust—with one or more parties. Whether an organization is for-profit or nonprofit, a board member must abide by the same fiduciary duties.

In the context of a nonprofit board, the broader definition of fiduciary duty includes providing financial oversight and protecting the organization’s assets and reputation. Board members must make decisions that are in the best interest of the organization without subjecting it to excess risk.

The building blocks of fiduciary duty include:

Duty of care

Board members must be attentive. This involves monitoring the organization’s activities, ensuring its mission continues to advance, and guarding the organization’s financial resources. While not every board member can be a financial wizard, everyone in this role should ask questions and understand basic terminology. Moreover, they must be able to judge the soundness of financial statements and to recognize potential red flags, such as an unexpected increase in compensation or other expenses. A dashboard of key financial metrics is an excellent way to standardize this reporting and track trends over time.

Specific to the organization’s investments, board members need to show the same degree of skill and attention as any prudent investor would in a similar situation. Investment decisions are not judged on actual results, but rather on the soundness of the decision-making process. Most states have adopted standards such as the Uniform Prudent Management of Institutional Funds Act, which allows a board to delegate the management of an organization’s endowment to an outside investment professional who in turn has a fiduciary duty to the nonprofit organization. This can provide an extra layer of fiduciary protection for the board. The members of the board’s finance committee should collaborate closely with the investment professional to develop an investment policy statement, record notes of their investment decisions, and provide clear performance reporting that includes the risk-adjusted performance over time.

Duty of obedience

Board members are expected to obey the organization’s by-laws, comply with state and federal laws, and be faithful to the organization’s mission. There is an implicit public trust in a nonprofit’s ability to manage donated funds as part of fulfilling its mission. This duty includes working to ensure that such funds are only used for charitable purposes, thus helping protect the organization from legal jeopardy.

Duty of loyalty

Loyalty refers to putting the organization’s need first. Conflicts of interest can lead to IRS penalties for both the board member and any staff member who knew of or approved any transaction that could be construed to be a conflict. In and of itself, a conflict may not be a breach of one’s duty of loyalty, provided that the conflict is disclosed and approved in advance by the board chair. Every board should enact a policy related to the disclosure and management of conflicts along with a robust whistleblower process.

Ethical conduct pillars

Above and beyond their codified fiduciary duties, a board member should exhibit ethical conduct in all matters concerning the nonprofit. The Nolan Committee Report on Standards in Public Life, commissioned by the British government and written in 1995 by one of the country’s most senior judges, can provide a sound framework for any nonprofit’s board.

The seven “Nolan Principles” are:

  • Selflessness. Board members should make decisions in terms of public interest. They should not do so to gain financial or other material benefits for themselves, their families, or friends.
  • Integrity. Board members should not place themselves under any financial or other obligation to outside individuals or organizations that might influence them in the performance of their official duties.
  • Objectivity. In carrying out business, including making appointments, awarding contracts, or recommending individuals for rewards and benefits, board members should make choices based only on merit.
  • Accountability. Board members are accountable to the public for their decisions and actions and must submit themselves to whatever scrutiny is appropriate to their office.
  • Openness. Board members should be as open as possible about all the decisions and actions they make. They should give reasons for their decisions and restrict information only when the wider public interest clearly demands it.
  • Honesty. Board members have a duty to declare any private interest relating to their public duties and to take steps to resolve any conflicts arising in a way that protects the public interest.
  • Leadership. Board members should promote and support these principles by leadership and example.

Positive impact grows from volunteer engagement

While the fiduciary duty associated with board service requires hard work and diligence, it pays off in advancing the nonprofit’s core purpose. As a fiduciary, you can drive greater positive impact behind the mission, vision, programs, and services of an organization whose work you admire. To further assist foundations and endowments, Mercer Advisors hosts an annual conference to discuss issues such as board member responsibilities. Our most recent one was this past September. If you or a friend are interested in attending such an event in the future, please reach out to your advisor.

For additional guidance on donating more effectively to your favorite organizations — watch our webinar on Charitable Contribution Strategies to Build Your Philanthropic Roadmap or read about Aligning Charitable Giving, Estate, and Tax Planning.

Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an investment advisor with the SEC. The firm only transacts business in states where it is properly registered or is excluded or exempted from registration requirements.

All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the content provided comes from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate but is not guaranteed or warranted by Mercer Advisors. This material has been provided for educational purposes only.

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