According to nonprofit corporation law, a foundation director or trustee must meet certain standards of conduct and attend to his or her responsibilities to the organization—otherwise referred to as the duty of care, duty of loyalty, and duty of obedience. Many organizations circulate an explicit code of duties and responsibilities. On taking office, trustees review and sign the document; each year, they review the document and pledge orally to uphold its tenets.
Duty of Care
Foundation managers have the duty to care for the foundation’s interests. They must be diligent and prudent in the management of the organization, investment of its funds, and pursuit of its charitable mission. The duty of care does not require that trustees make the right decision in all cases, only that they make decisions in a fashion in which another prudent person would act. The duty of care includes awareness and participation.
The trustee must be familiar with:
- The foundation’s organizational documents (e.g., articles of incorporation, bylaws)
- Meeting minutes
- IRS documents and filings
- Nature and extent of asset holdings
- How funds are invested and administered
- The performance of these investments
Care also requires that trustees take an active role in the foundation’s activities. This participation includes attending meetings, reading reports, undertaking committee work, and representing the foundation in the community. Trustees are responsible even for those meetings they do not attend. Participation also extends to acknowledging areas in which the foundation and its work have not succeeded; being ignorant of a policy failure or violation is not a proper defense.
Duty of Loyalty
Trustees must serve the foundation’s best interests, not their own. This issue addresses, but is not limited to, breaches, such as:
- Conflicts of interest—Conflicts of interest arise when a manager has a personal or professional interest in a proposed transaction. The duty of loyalty requires that the trustee abstain from voting and not attempt to influence the vote of others.
- Self-dealing—Self-dealing addresses particular transactions between a foundation and its disqualified persons, such as a spouse, parent, or child of a foundation trustee.
- Misuse of assets—Such actions (or inactions) include participation in or knowledge of theft, embezzlement, excessive compensation or rent, and/or personal use of the assets, facilities, or services of the charitable organization.
- Usurping opportunity—A trustee must not use his or her position of trust to take advantage of an opportunity presented to the foundation.
Duty of Obedience
Trustees must follow the principles established in the organization’s bylaws and avoid any action that may jeopardize the organization’s tax exempt status. Duties of obedience include paying taxes and following the public disclosure rules.
(Adapted from the article “A Brief Overview of Fiduciary Duties for Foundation Board Members” by Ronald S. Webster of FizerBeck.)
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