Board members act as stewards of public trust, acquiring knowledge and making sound decisions that ensure an organization’s assets and interests are well-managed. When individuals agree to serve as board members and become these stewards, they take on certain responsibilities that are both legally required and ethically necessary.
By fully understanding their fiduciary responsibilities, board members can successfully hold the organization and its leaders to the highest standards. However, a breach in fiduciary duty can create serious legal and financial consequences for a board member, and the organization itself. Here is an overview of fiduciary responsibilities and what individuals need to know when becoming board members.
What Is Fiduciary Responsibility?
Fiduciary responsibility refers to the duty of one party to act in the best interest of another party. For board members, this term means they must act for the good of the organization rather than themselves. Board members must be objective, trustworthy, and honest, while exercising sound decision-making to ensure the organization isn’t put at extreme risk. Fiduciary responsibility also encompasses the duty of board members to ensure the organization is fulfilling its mission by implementing measurable and relevant programs.
In the simplest terms, a fiduciary responsibility demands that a person does what is right, no matter the circumstances—holding to a high ethical standard that goes beyond what may be legally required. That being said, the responsibilities of fiduciaries are governed by federal and state laws, as well as common law.
Importance of Fiduciary Responsibilities
Fiduciary responsibilities are important because they establish a high standard of accountability for board members who are making important decisions on behalf of organizations. These duties help:
- Protect an organization’s assets from abuse of power
- Prevent conflicts of interest
- Provide greater transparency and accountability
- Promote integrity and a high level of professionalism from the organization’s leaders
- Help maintain stability and market confidence
And perhaps most importantly, fiduciary responsibilities are enforceable by law, and failure to fulfill these duties can lead to legal liability, including lawsuits, fines, and other penalties.
Types of Fiduciary Responsibilities
A board member’s fiduciary duties can be categorized into four separate duties:
Duty of Care
Board members must give the same attention and concern to their fiduciary responsibilities as any prudent and ordinary person would to their personal matters. They must actively attend and participate in meetings and the business of the organization at large, have the depth of knowledge to understand documents like financial statements and strategic reports, and know what questions to ask internal and external advisers.
Duty of Loyalty
Board members must act in the best interests of the organization and not profit at the expense of the organization. They should publicly disclose any conflicts of interest and refrain from self-dealing. Any member of governance who is potentially conflicted should recuse themselves and avoid any decision-making in which their objectivity may be compromised.
Duty of Obedience
Board members must ensure the organization follows all applicable laws and regulations, complies with all reporting requirements, and doesn’t engage in illegal or unauthorized activities. Members must also ensure the organization is carrying out its mission and fulfilling its purpose.
Duty of Confidentiality
Board members must keep certain types of information confidential. They must not use confidential or sensitive information they learn due to their position for personal gain.
Legal Support for Fulfilling Fiduciary Duties
Organizations should educate their current and prospective board members about these fiduciary responsibilities and legal ramifications. It’s critical to seek the support of your attorneys to ensure board members have the knowledge and expertise they need to faithfully execute their role and its duties.
Sherwood & Robert has decades of experience guiding organizations and board members on fiduciary responsibilities, as well as the associated laws and regulations. For more information about how we can advise your organization, contact us.
