Responsibilities of Directors of Nonprofit Corporations

Colorado Real Estate Journal, December 1, 2004

Nonprofit corporations play key roles in commercial real estate in Colorado. Most trade associations and charities, and almost all homeowners' associations, are structured as nonprofit corporations, run by boards of directors. Business leaders are often called upon by associations to serve on boards because of their area of expertise, connections, fund raising talents, or organizational skills.

The primary legal distinction between a for-profit corporation and a nonprofit corporation is that a "regular" corporation has stockholders and a nonprofit does not. A nonprofit corporation may or may not have members, but it doesn't issue stock or pay dividends. This creates a fundamental difference in how the performance of board members is evaluated. The success of a for-profit board is to a great degree measurable in monetary terms. For a nonprofit, the purposes stated in its mission statement or articles of incorporation are the reason it exists, and they create the standard of care and conduct for its directors. For example, the board of a homeowners' association must see to it that the maintenance obligations and community governance objectives set forth in the declaration of covenants for the community, as well as its bylaws and rules, are faithfully and effectively carried out. The board is accountable for achieving, or failing to achieve, the purposes set forth in its governing documents.

The responsibilities of a nonprofit board include the following:

Legal and Fiduciary Duties. The board is responsible for operating the corporation in accordance with its governing documents and the requirements of state and federal law. This includes filing annual reports, filing tax returns, and holding meetings of the board and members as prescribed in the bylaws. When deciding how to allocate the corporation's financial and human resources and directing its activities, directors must be mindful of the mission of the organization as set forth in its governing documents or as adopted by the board as part of its strategic planning.

In its decision-making, the board has a fiduciary duty to the members of the association. A fiduciary is one who is bound by equity and good conscience to act in good faith and with due regard to the interests of another. For directors of a homeowners' association who were appointed by the developer, this duty is explicitly stated in C.R.S. §38-33.3-303(2)(a), which says that such officers and members of the executive board of the association "are required to exercise the care required of fiduciaries of the unit owners." However, there is ample common law to the effect that all directors of all nonprofit boards are in a fiduciary relationship with the members of the association.

Duty of Care. The duty of care describes the level of competence that is expected of a board member. It is the care that an ordinarily prudent person would exercise in a like position under similar circumstances. Exercise of the duty of care would include regular attendance at board meetings, carefully reviewing committee reports and board reports, properly analyzing and criticizing information presented, particularly financial information, carrying out any operational duties that are assigned to the board member, and actively and independently participating in the decisions that are made. A board member is required to act in good faith and to exercise his or her independent, informed judgment on behalf of the corporation.

Oversight. The board has the authority and responsibility of supervising any staff members (executive director, management agent, book keeper, etc.) and has the authority to hire and fire staff. The board must provide proper financial oversight, whether it is managing membership dues, assessments, or charitable contributions. The composition of the board should give due regard to the various skill sets that are required to carry out the functions of the association.

Duty of Loyalty. Board members have a duty to give undivided allegiance to the organization. In making decisions affecting the organization, board members must put the interests of the corporation ahead of self-interest. At times this might involve recusing themselves from particular decisions. Any conflicts of interest must be disclosed, an appropriate measures must be taken to prevent the conflict of interest from adversely affecting the integrity of the decision-making process. A board member can never use information obtained as a board member for personal gain, and must keep confidential all information that is not of public record.

Duty of Obedience. Board members are not permitted to act in any manner that is inconsistent with the mission of the organization. This is particularly true of a charitable organization, where donors have entrusted funds to the board's faithful and prudent management and stewardship. In agreeing to serve on a board, a person impliedly agrees to submit to, and foster, the stated purpose and duties of the association. This includes protecting the organization's resources, reputation, and capacity to act.

Representing Constituencies and Viewpoints. Boards provide an opportunity for the diverse viewpoints and communities that an association serves to be heard and to participate in decision-making. Minority rights should be expressed and considered; however, when the board votes on a decision, each board member is expected to vote in a manner consistent with the best interests of the nonprofit corporation.