Know duty of loyalty requirements — and how to meet them
The legal duties of a nonprofit board of directors generally fall under three basic categories: care, loyalty and obedience. Here, we take a look at duty of loyalty.
What is the scope of duty of loyalty?
Duty of loyalty describes the board's obligation to operate in the best interest of the organization, free of conflict. Board members aren't allowed to personally benefit from an agreement or opportunity with the organization. Instead, duty of loyalty requires independent decision making.
For example, board members can't use their affiliation with a nonprofit to acquire some personal benefit. Even the appearance of a conflict of interest can cause problems. Again, duty of loyalty is a way of putting the nonprofit's needs first, especially in financial matters.
Duty of loyalty also requires nonprofit leaders to act in good faith with the organization, putting their loyalty to the nonprofit ahead of any desire for personal benefit.
What are some ways to support duty of loyalty?
A straightforward conflict of interest policy is key to fulfilling duty of loyalty. Your organization may adopt a boilerplate policy or create a policy of your own. Either way, the conflict of interest policy should clearly outline duty of loyalty for board members — and give auditors a basis for assessment if there's any appearance of conflict.
The National Council of Nonprofits suggests adopting a "culture of candor" policy, where board members are encouraged to disclose any potential conflicts and then record those conflicts in board meeting minutes. Moving forward, board members should recuse themselves from any votes on activities that could pose a potential conflict.
You might also administer an annual questionnaire to collect information about known or potential conflicts of interest, as well as regularly educate board members about conflicts of interest. For example, you might set aside one board meeting a year to detail hypothetical conflicts of interest and discuss possible resolutions.
This article draws on the expertise of Grace Davies, a Minneapolis-based attorney with special interest in product liability, medical malpractice and employment discrimination.