What Are the Fiduciary Duties for a Not-for-Profit Board of Directors?

EXECUTIVE SUMMARY: Understanding the concept ‘fiduciary’ and understanding what it means in terms of duties are both necessary for Not-for-Profit boards. Fiduciary duties involve protecting the interests of the organisers and those who get the benefit of the Not-for-Profit. Here are the basic rules to keep in mind.

UK, Ireland, Northern Ireland Not-for-Profit Boards Must Get the Fiduciary Concept Straight

UK Not-for-Profit boards of directors must have a thorough grasp of what ‘fiduciary duties’ means. The concept itself is very complex in British law – and substantially the same in Ireland and Northern Ireland – so much so that in 2014, the UK Law Commission set out to produce a report on the subject. Its findings, with regard to boards of directors, were the following:

“Status-based fiduciary relationships are those that are recognised, by their very nature, as inherently fiduciary.  They represent the settled categories of fiduciary relationship. They include the relationships between: trustee and beneficiary;  principal and agent;  mortgagee and mortgagor; solicitor and client;  company directors and the company;  partners and co-partners;  and civil servants and the Crown,” the report concluded.

Clearly, this includes Not-for-Profit trustees (directors) in their relationship to the organisation they serve. The nature of that relationship is the following:

“For a person to be a fiduciary he must first and foremost have bound himself in some way to protect and/or to advance the interests of another. This is perhaps the most obvious of the characteristics of the fiduciary office for Equity will only oblige a person to act in what he believes to be another’s interests if he himself has assumed a position which requires him to act for or on behalf of that other in some particular matter,” the report explains.

What Are the Duties? Not-for-Profit Boards Must Decide

Granted, these are difficult concepts, but one can understand them. The question is: What are the duties that Not-for-Profit boards must take on as a function of the fiduciary relationship?

Here the law is less helpful, because, as the report notes, fiduciary duties can differ from one context to another. A mortgagor does not have the same fiduciary duties as a solicitor, even though the concept is the same for both.

For the trustee (director) at a Not-for-Profit organisation, fulfilling the organisation’s mission as set out by its bylaws is perhaps the overriding fiduciary duty, owed both to the organisers and to those to whom the Not-for-Profit provides service, as the note by a UK legal commentator points out.

“A trustee’s (director’s) specific fiduciary duties towards the beneficiaries include:

• to always act in accordance with the charter;
• not to make a profit from their position;
• not to place themselves in a position where their own interest will conflict with their fiduciary duties;
• not to act to their own advantage or the benefit of a third person without the beneficiary’s informed consent;
• to properly manage organisation assets, funds and property.”

Not-for-Profit Trustees (Directors) Must Act in Good Faith

A trustee (director) must act with utmost good faith. What does this mean?

“This requires a high degree of integrity and trust. The essence of a trustee’s fiduciary duties is that the trustee must always promote the beneficiary’s interests in accordance with the charter. Therefore, the trustee is required to do all in its power to comply with its obligations in a lawful manner, and to act in good faith in accordance with the interests of the organisers and those who benefit from its services,” the commentator continues.

Not-for-Profit Directors Must Not Take Profit

Not-for-Profit trustees (directors) must not profit from their position of authority in any way, the OECD points out in a recent report. The rule extends to any funds which, even if unrelated to the original fiduciary position, result from an opportunity presented through their fiduciary position.

When trustees do business of their own, they should consider whether it could be in any way related to the business of the organisation. If they are not sure, or if there is any doubt, they should inform the other board members of their activities, and expressly request permission to engage in them. It is clear that the essence of the rule is that trustees are prohibited from abusing their position for personal gain in any way.

Conflicts of interest

A corollary of the obligation to avoid taking profit is that which prohibits conflict of interest. This means that the interests of the trustee (director) should at no time come into conflict with those of the organisation – should this happen, the trustee must report the issue to the other board members. For example, if a trustee is in a business which might somehow earn financial gain from the work of the Not-for-Profit, they are legally obligated to disclose it and discuss it with the board.

Breach of duty

If the trustee’s performance of fiduciary duties falls below the required standard, this can constitute a breach of fiduciary duty. If a breach is proved in court, an order could be made for any financial benefit gained by the fiduciary to be returned to the beneficiary on the basis that it would be unconscionable to allow them to retain the benefit.

BoardEffect Supports Governance at Not-for-Profit Organisations

BoardEffect is collaborative software that makes collaboration at the board level easy and secure – we serve over 200,000 users worldwide, providing competitive pricing and exceptional value.

It allows not-for-profit boards of directors in sectors from developing nations funding to healthcare to work together wherever they are, and with whatever device they are using – it is user-friendly, so no extensive training is required.

The BoardEffect platform has been developed to be clear, intuitive and elegant. This is particularly important, as the high-profile audience who use BoardEffect usually have other jobs and commitments. Ease of use has become our “true north” – ensuring that our system can be used successfully by those with any level of technology experience and comfort. We back this up with 24/7/365 training and support for all users.

Communication among trustees is safe, and sensitive data stored on the portal is protected by the highest grade of encryption. They can securely access board books and other documents and collaborate with other users electronically. Collaboration can include discussions, surveys, electronic voting and more. The platform has unlimited storage that can be configured for each group to work privately.

BoardEffect ensures the highest level of security through a five-part security program. We encrypt data in transit through Transport Layer Security (TLS) and at rest (AES-256), have secure SSAE 16 audited SOC1 and SOC2 data centres with fail-overs, mirroring, third-party penetration testing and 99.99% facility uptime. We also have disaster recovery and business continuity plans, specialised compliance modules for healthcare, intrusion detection systems and much more.