Nonprofit Board Member Duties & Responsibilities

My Role

“[T]he activities and affairs of the corporation shall be conducted and all corporate powers shall be exercised by or under the direction of the board.  The board may delegate the management of the activities of the corporation to any person or persons, management company, or committee however composed, provided that the activities and affairs of the corporation shall be managed and all corporate powers shall be exercised under the ultimate direction of the board.”  (Cal. Corp. Code §5210)

Governance: Board members are collectively responsible for governance of the corporation; the board may not delegate its function to govern. As a board, we are responsible for protecting the public’s interest.  Our governance responsibilities include:

  • Determining, reviewing and revising, as necessary, our mission.
  • Determining, reviewing and revising strategies to further our mission (including resource allocation).
  • Authorizing major plans and commitments after adequate review and inquiry.
  • Ensuring compliance with applicable laws and contractual obligations.
  • Safeguarding our assets from misuse (not in furtherance of the mission), waste and loss.
  • Selecting, evaluating and replacing, as necessary, the CEO and CFO.
  • Reviewing and authorizing, as necessary, the salaries of the CEO and CFO.
  • Recruiting and electing, as necessary, qualified board members.
  • Evaluating our organization’s performance.

Support: Board members traditionally are individually responsible for supporting the organization’s success by contributing funds and/or additional services to the organization (including participation on committees) and acting as ambassadors of the organization to the community.

My Legal Duties

Duty of Care:  to perform my duties “with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.” (Cal. Corp. Code §5231)

Duty of Loyalty:  to perform my duties “in good faith, in a manner [I believe] to be in the best interests of the corporation.” (Cal. Corp. Code §5231)

A. Put the organization’s interests ahead of my own.

B. If our organization ever enters into a transaction with a board member in which such board member has a material financial interest (i.e., an “interested director”), we generally must ensure that the following conditions are met:

  1. The corporation entered into the transaction for its own benefit;
  2. The transaction was fair and reasonable as to the corporation at the time it entered into the transaction;
  3. Prior to consummating the transaction or any part of it, the board approved the transaction by a majority of the directors then in office (without counting the vote of the interested director) in good faith and with knowledge of all material facts concerning the transaction and the director’s interest in it; and
  4. Prior to approving the transaction, the board considered and in good faith determined after reasonable investigation under the circumstances that the corporation could not have obtained a more advantageous arrangement with reasonable effort. (Cal. Corp. Code §5233)

C. Alternatively, if it was not reasonably practicable to obtain approval of the full board prior to entering into a transaction with an interested director and it was not approved by the Attorney General, a committee or person authorized by the board must approve the transaction in a consistent manner, and the full board must later ratify the decision (without counting the vote of the interested director).

Board Member Essentials

I must have sufficient knowledge of the following to meet my legal duties:  The Organization’s Mission; Activities; Legal and Organizational Structure; Governance Structures, Policies & Procedures; Management Structure; Financial Picture; and the Legal Requirements Affecting Our Organization.

Key Legal Requirements Affecting Our Organization

A. Nonprofit Public Benefit Corporation Law (Cal. Corp. Code §§5110-6910), including laws regarding:  the organization and bylaws; directors and management; members; distributions; meetings and voting; amendment of articles; sale of assets; mergers; bankruptcy reorganizations and arrangements; required filings; records, reports and rights of inspection; service of process; dissolution; and crimes and penalties.

B. Charitable Trust Doctrine:  A gift accepted by a charitable corporation must only be used for the expressly declared charitable purposes of the corporation at the time of the acceptance, even if the corporation changes its purpose, transfers those assets or dissolves.  Such restriction is imposed notwithstanding the fact that the donor did not expressly place any restrictions on the gift.  The corporation’s expressly declared charitable purposes are evidenced by its articles and other formal written declarations, its agents’ oral and informal declarations, and its representations to tax authorities and the public; they may also be deduced from the corporation’s dominant activities.

C. Internal Revenue Code §501(c)(3):  In order to qualify as a §501(c)(3) organization, our organization must:

  • Be organized exclusively for one or more of the purposes listed in §501(c)(3) (e.g., religious, charitable, scientific, testing for public safety, literary, or educational, fostering amateur sports competition, prevention of cruelty to children or animals).  The Organization Test is satisfied if the organization’s governing documents meet certain requirements, including limiting the organization’s purpose and irrevocably dedicating its assets to one or more exempt purposes.
  • Be operated exclusively for one or more of the purposes listed in §501(c)(3).  Notwithstanding the unfortunate use of the word exclusively, the Operation Test is satisfied if the organization is operated primarily for such exempt purposes.  An “insubstantial part” of the organization’s activities may be devoted to non-exempt purposes, such as operating an unrelated business.
  • Ensure that no part of its net earnings inure to the benefit of any private shareholder or individual.  The private inurement doctrine generally prohibits an exempt organization from using its assets for the benefit of a person having a personal and private interest in the organization’s activities (i.e., an insider such as a director, officer or key employee).  An organization that engages in an inurement transaction (e.g., paying an unreasonable compensation to an insider) may face revocation of its exempt status.  In addition, or in the alternative, excise taxes (intermediate sanctions) may be imposed on “excess benefit transactions” between public charities and disqualified persons.  The excise taxes are imposed on the “disqualified person” who received the excess benefit and, under certain circumstances, on organizational managers (incl. directors and officers) who approved the transaction.  A disqualified person includes any person who, at any time during the 5-year period ending on the date of the excess benefit transaction, was in a position to exercise substantial influence over the affairs of the organization and certain related parties.
  • Not devote a substantial part of its activities to attempting to influence legislation (i.e., no substantial lobbying).  However, public charities may engage in a considerable amount of lobbying by making the IRC §501(h) election.
  • Not support or oppose candidates for public office (i.e., no electioneering).

Protections from Liability

A. Indemnification:  Corporation may provide in its bylaws for indemnification (and advances) with regard to “any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative” (note that a lawsuit is not a prerequisite) subject to Cal. Corp. Code §5238.

B. Insurance:  Corporation should consult with a qualified insurance agent or broker to determine its insurance needs, which may include General Liability, Employment Coverages, D&O, Umbrella Coverage.

C. Statutory Protections:  See Cal. Corp. Code §§5047.5, 5239; Cal. Code of Civ. Proc. §425.14; Federal Volunteer Protection Act.  Note the prerequisites and limitations with respect to each of the statutory protections.