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As a nonprofit director, you are responsible for more than attending meetings and approving programs. Your fiduciary duties require informed oversight of the organization’s money, people, mission, and legal obligations. When a personal or affiliated interest could influence a decision, disclose it promptly, follow the organization’s conflict process, and do not take part in the conflicted discussion or vote.
This guide explains the duties of care, loyalty, and obedience; shows how to handle conflicts step by step; and identifies the documents and questions to review during orientation. State nonprofit law can add requirements, so confirm the rules in the state where your organization is incorporated and operates with qualified nonprofit counsel.
The three fiduciary duties every director must understand
Fiduciary duties are the legal and ethical standards that govern how you exercise board authority. They apply even when you are unpaid, serve part time, or joined because of a personal connection to the mission. The board acts collectively, but each director has an individual responsibility to prepare, participate, ask questions, and protect the organization’s charitable purposes.
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Duty of care: be attentive, informed, and prudent
The duty of care requires the level of attention and prudence a reasonable person would use in a similar role. You do not need to be an accountant, lawyer, or investment professional, but you must read the materials provided, attend meetings when possible, and seek explanations when something is unclear.
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In practice, care includes oversight of:
- Budgets, cash flow, financial statements, reserves, and restricted funds.
- Internal controls, authorization limits, segregation of duties, and fraud-prevention procedures.
- Major risks such as cybersecurity, insurance coverage, safety, employment, privacy, and regulatory compliance.
- Executive compensation, performance evaluation, succession planning, and other high-impact personnel decisions.
- Audits, reviews, tax filings, charitable-solicitation filings, and reports required by the organization’s state.
BoardSource describes directors as legally responsible for protecting organizational assets under the duty of care. Delegating work to staff or a committee does not eliminate your oversight obligation. You may rely in good faith on qualified staff or advisers, but you should recognize warning signs, request the underlying information, and document the basis for significant decisions.
Duty of loyalty: put the mission before personal interests
The duty of loyalty requires you to act in the nonprofit’s interests rather than using board authority for yourself, your family, your employer, or another organization with which you are affiliated. Loyalty includes candid disclosure of actual, potential, and perceived conflicts and avoiding participation when your impartiality is compromised.
A conflict does not require wrongdoing. A director can have a conflict even when the proposed transaction is fair and even when the director intends to act honestly. The governance question is whether a personal or affiliated interest could influence—or reasonably appear to influence—the organization’s decision.
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The duty of obedience requires the board to follow applicable law, the articles of incorporation, bylaws, board-adopted policies, grant restrictions, and the charitable purposes the organization promised to pursue. Directors should be able to explain how major initiatives and expenditures advance that purpose.
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Obedience also means respecting limits on authority. A board should not redirect restricted donations, dissolve a program contrary to donor or grant terms, or approve an action that the bylaws reserve to members or another body. If the organization’s practices and governing documents appear inconsistent, ask counsel and the appropriate state regulator for guidance before acting.
What counts as a conflict of interest?
The Internal Revenue Service defines the issue this way: “A conflict of interest occurs where individuals’ obligation to further the organization’s charitable purposes is at odds with their own financial interests.” The financial interest can be direct or indirect and can involve a family member, employer, business partner, investment, or another organization.
Common examples
- The board is considering a contract with a company owned by a director or the director’s spouse.
- A director participates in setting their own compensation, bonus, consulting fee, or reimbursement terms.
- A nonprofit plans to lease space from a business in which a director has an ownership interest.
- A director uses confidential information or board influence to obtain a private benefit.
- The organization is choosing a vendor, grantee, lender, or investment manager connected to a director’s employer or close relative.
- A director serves on the board of another organization competing for the same grant or contract.
Some conflicts are financial; others involve divided loyalty or access to information. A disclosed interest may be manageable, but an undisclosed interest can undermine trust, invalidate a process under state law, or create tax and reporting problems.
Conflict, appearance, and ordinary board expertise
Not every connection is a prohibited transaction. A director’s professional knowledge can help the board evaluate a proposal, and a community relationship may be relevant without creating a financial interest. The key questions are whether the director or an affiliate could benefit, whether the relationship affects independent judgment, and what the organization’s policy and state law require.
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How to handle a conflict step by step
Use the organization’s policy and bylaws as the operating rules. If they are silent or unclear, pause the decision and obtain advice rather than improvising.
- Review the governing documents. Read the conflict-of-interest policy, bylaws, articles of incorporation, committee charters, and the applicable nonprofit statute. Check whether the policy defines family relationships, financial interests, related entities, and annual disclosure obligations.
- Disclose the connection promptly. Tell the board chair, secretary, or designated compliance contact as soon as the issue appears. State the relevant person, entity, relationship, financial interest, and decision involved. Do not wait for the annual questionnaire if the facts arise midyear.
- Record the disclosure. Ensure the disclosure and the board’s handling of it are reflected accurately in meeting minutes or the organization’s conflict register. The record should identify the interested director, the nature of the interest, who was present, and the action taken.
- Leave the impartiality decision to disinterested directors. Follow the policy’s process for determining whether a conflict exists. The interested director can provide factual information when requested, but should not control the determination.
- Recuse yourself from deliberation and voting. Leave the meeting or virtual discussion when required, and do not lobby other directors before or during the decision. An abstention alone may not satisfy a policy that requires physical or electronic departure from the discussion.
- Use independent review and comparability evidence. Disinterested directors should evaluate alternatives, market terms, bids, compensation surveys, or other reliable comparability information. For executive compensation and related-party contracts, retain the evidence showing why the terms are reasonable.
- Document the decision and vote. Minutes should show the disclosure, recusals, alternatives considered, comparability materials, names of disinterested decision-makers, and the final vote. Do not record confidential detail that is unnecessary, but preserve enough information to demonstrate a fair process.
- Monitor changes and renew disclosures. Revisit the issue if ownership, employment, compensation, or family circumstances change. Complete the annual disclosure questionnaire even if you reported no new conflict during the year.
Does a nonprofit need a conflict-of-interest policy?
The IRS encourages a written conflict-of-interest policy as a protective governance process. The Form 1023 instructions state that adopting a policy is not itself required to obtain federal tax-exempt status. That distinction matters: a policy may not be a standalone tax-exemption requirement, but it gives directors a consistent method for identifying and managing risks.
The National Council of Nonprofits recommends that a policy require disclosure and prohibit an interested board member from voting. Form 990 asks whether the organization has a conflict-of-interest policy and whether it monitors conflicts, so the board should be able to describe how its policy operates rather than merely keep a document in a file. BoardSource recommends annual statements, prompt disclosure, and recusal from discussion and voting.
Core provisions to look for
- A definition of actual, potential, and apparent conflicts.
- Examples covering directors, officers, key employees, family members, and affiliated entities.
- A disclosure deadline and an annual questionnaire.
- A neutral process for deciding whether a disclosed interest is a conflict.
- Rules requiring the interested person to leave deliberations and abstain from voting.
- Independent review, competitive bids, compensation comparability, or other fairness evidence.
- Minute and conflict-register requirements, including how recusals are recorded.
- Procedures for violations, corrections, and escalation to the board or counsel.
How state law changes your responsibilities
Federal tax guidance is only one layer of the rules. The state in which the nonprofit is incorporated may prescribe policy language, annual disclosures, approval procedures, standards for related-party transactions, restrictions on loans to directors, or special rules for charitable assets. A nonprofit that solicits donations, employs people, or holds property in other states may also face filing and conduct requirements there.
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Before approving a transaction involving a director, officer, key employee, or related entity, identify the organization’s state of incorporation and the states where it conducts regulated activity. Ask qualified nonprofit counsel to confirm the current statute, thresholds, notice requirements, and approval standard. Do not assume that a federal tax rule or a policy copied from another organization satisfies your state’s law.
Questions to ask during your board orientation
Request the following materials and ask who owns each process:
- The current conflict-of-interest policy, annual disclosure form, conflict register, bylaws, articles of incorporation, and committee charters.
- The method for collecting, reviewing, updating, and storing disclosures during the year.
- The person or committee that decides whether a disclosed interest is a conflict and how an appeal or disagreement is handled.
- The required steps for recusal, abstention, leaving a meeting, and documenting the minutes.
- The financial package you will receive, including budgets, cash-flow reports, balance sheets, income statements, restricted-fund reports, and significant variances.
- The Form 990 preparation and board-review process, audit or financial-review results, management letters, and internal-control policies.
- The state filing calendar, charitable-solicitation registrations, whistleblower policy, document-retention schedule, and records-access rules.
- The process for reporting suspected misconduct outside the normal chain of command.
Ask for a short explanation of any report you cannot interpret. A director who lacks financial expertise can still satisfy the duty of care by asking focused questions and documenting follow-up.
Comparing two board policies or practices
When reviewing a proposed policy or deciding whether current practice is adequate, compare the same six features. A policy that defines conflicts well but has no reliable recusal or documentation process is incomplete.
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| Comparison point | What to verify |
|---|---|
| Disclosure timing and scope | Whether disclosures are annual and prompt, and whether they cover family, employment, investments, and affiliated organizations. |
| Conflict determination | Who decides that an interest is a conflict and whether the interested person is excluded from that decision. |
| Recusal | Whether the conflicted person leaves deliberation and abstains from voting, not merely records an abstention. |
| Documentation | Whether minutes or a conflict register capture the interest, attendance, recusal, evidence reviewed, and vote. |
| Independent review | Whether disinterested directors consider alternatives and retain bids, market data, or compensation comparability evidence. |
| State-law alignment | Whether the policy has been checked against the current law of the organization’s state and any states where it operates. |
Practical scenarios for a new director
A vendor owned by your sibling
Disclose the relationship before the vendor is discussed. Provide factual information only if requested, then leave the discussion and vote. The remaining directors should compare the proposal with alternatives, record the process, and approve it only if the terms serve the nonprofit’s interests and comply with law.
Your own compensation or consulting agreement
Do not negotiate, recommend, approve, or vote on your compensation. Disclose the arrangement, provide information needed to establish fair market terms, and allow disinterested directors to select comparability evidence and make the decision. Preserve the rationale in the minutes.
An investment that could benefit you
Disclose the ownership or other financial interest before the investment is evaluated. Recuse yourself under the policy. The board should assess risk, fees, liquidity, mission alignment, and alternatives without relying on your advocacy.
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Records that demonstrate responsible governance
Good records protect the organization and help future directors understand why a decision was made. Keep signed annual disclosures, updated questionnaires, meeting minutes, recusals, comparability materials, bids, compensation data, approvals, and follow-up actions according to the document-retention policy. Minutes should be factual rather than argumentative: identify the issue, the process, the independent participants, and the decision.
Never alter minutes to conceal a conflict. If an omission is discovered, ask the secretary or chair to correct the record through the organization’s formal amendment process, with the correction approved at a later meeting.
A first-90-days checklist
- Read the articles, bylaws, conflict policy, committee charters, and latest annual disclosures.
- Complete your own disclosure form and report changes immediately.
- Review the latest budget, financial statements, Form 990, audit or review report, and management letter.
- Learn who receives whistleblower reports and how retaliation is prohibited.
- Confirm the meeting calendar, materials deadline, quorum rules, and voting procedures.
- Ask counsel or the board chair which state laws govern related-party transactions and charitable solicitation.
- Attend a finance or audit committee meeting if permitted so you can see how controls and reports are reviewed.
- Keep a private list of affiliations and family or employer relationships that could intersect with future board decisions.
When to seek professional advice
Escalate promptly when a transaction involves a director, officer, key employee, substantial donor, family member, or affiliated entity; when the policy conflicts with the bylaws; when a state filing may be late; or when records suggest a control failure or misuse of assets. Qualified nonprofit counsel can interpret the current state statute, structure an approval process, and advise on corrective action. A director should not rely on a generic online form for a fact-specific legal conclusion.
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