You've been invited to sit on the board of a Colorado nonprofit. You're honored and excited to participate. What do you need to know before you say "yes"!
What is the Role of a Director?
The board of directors' primary responsibility is to keep a nonprofit organization focused on its tax exempt purposes. The board accomplishes this by defining the organization's mission, establishing policies and plans to pursue that mission, hiring and supervising the Executive Director, fundraising and managing the organization's financial resources. Like a legislature, the board of directors votes on specific proposals and takes action by issuing a "board resolution" which directs the nonprofit on what it can or cannot do.
Before joining the board of any nonprofit, be sure you understand what its purposes are. Request and review a copy of the nonprofit's bylaws. Each and every action undertaken by the Board of Directors should promote the organization's stated nonprofit purposes. Donors depend on a diligent and independent board of directors to oversee the management and activity of the nonprofit and keep it honest.
Distinguishing Managers from Directors
A director should not be involved in the day-to-day operations and activities of the organization. Sometimes in smaller tax exempts, one or more individuals will serve as both managers and members of the board. This is acceptable as an interim arrangement, so long as individuals clearly document the capacity in which they are acting when they are performing tasks on behalf of the organization. However, the best practice is to create an independent board of directors as early as possible.
(Some confusion about roles is created by misleading job titles in the nonprofit sector. The top manager of a nonprofit is frequently called the "Executive Director". This does not refer to the manager's role, if any, on the Board of Directors. It is just another way of saying President or CEO.)
What Standards Apply to a Director's Actions
The standards of conduct for nonprofit directors include a duty of care and a duty of loyalty. These are codified in C.R.S. 7-128-401. In short, directors are required to carry out their duties (a) in good faith; (b) with the care an ordinarily prudent person in a like position would exercise under similar circumstances; and (c) In a manner the director or officer reasonably believes to be in the best interests of the nonprofit corporation. In making decisions, directors are entitled to rely on competent advisors such as attorneys, accountants or other experts.
This is the same standard applied to ordinary business corporations, however, the duty of loyalty in the nonprofit setting carries with it the additional responsibility not to betray the public's trust by diverting the nonprofit's activities to a director's private gain. A violation of the duty of loyalty would almost certainly involve some violation of the IRS rules regarding private benefit or private inurement resulting in the application of sanctions or possible revocation of the charity's tax exempt status. Another facet to the duty of loyalty is the obligation of a director to notify the other board members if he or she becomes aware of any transaction that would be beneficial to the organization and consistent with its purposes. The director can pursue this transaction for his or her own benefit only if the organization was duly notified and turned it down. This concept is called the corporate opportunity doctrine.
Director Liability
Broadly speaking, the business judgment rule is intended to shield board members from liability for actions taken in their role as director, provided they acted in compliance with the duty of care and duty of loyalty outlined above. Colorado law also permits a nonprofit to indemnify its directors, subject to certain exceptions. An assessment of the potential for personal liability as a result of serving on a board of directors should be made on a case by case basis, after examining the Articles and Bylaws of the nonprofit organization, its liability insurance policies, if any, and the nature of its activities.
Nonprofit directors are guardians of the public trust. They make it possible for tax exempt organizations to operate, by providing guidance and accountability. For more information about best practices in the governance of nonprofits, see the Colorado Nonprofit Association website.
