In its broadest sense, a fiduciary duty is an obligation owed by a person in a leadership or management role within an organization to the organization itself and its members. A director or officer who breaches their fiduciary duties can face personal liability to the organization and others for damages caused by the breach. Although the term often comes up in the context of for-profit businesses, it also applies in the nonprofit and religious sectors. Fiduciary obligations arise regardless of whether an individual is paid for their board service.
Fiduciary obligations apply to directors of unincorporated associations as well as incorporated churches. Directors of California religious nonprofit corporations have obligations defined under Section 9241 of the California Corporations Code. Under the statute, a director’s fiduciary obligation is to perform his or her duties in accord with these distinct requirements:
- A director must act in the best interest of the organization. Directors must make decisions based on the best interest of the organization and ensure that the nonprofit’s activities are advancing its mission. This duty includes the disclosure of any conflicts of interest that may impact impartial decision-making.
- A director must act with such care, including reasonable inquiry, as is appropriate under the circumstances. Directors often get into trouble by failing to pay enough attention and do what’s needed to gather necessary facts before making decisions. Bear in mind that a decision may involve significant risk for the church even though it doesn’t involve a financial component. For example, directors should conduct thorough background checks when making hiring decisions lest a candidate’s criminal history not come to light before it is too late.
- A director must act in good faith. In the context of religious organizations, “good faith” specifically includes acting within the scope of what the director believes to be the religious purposes of the corporation and the tenets of the religion itself. A director is entitled to rely upon the advice of experts, church managers, and religious advisors. Examples of bad faith include failing to disclose a personal interest in a transaction (such as a third-party service contract) or making an unauthorized disclosure of confidential information.
- A director has a duty of obedience to ensure the organization is following its own bylaws, obeys applicable laws and regulations, and adheres to its purpose.
Breaching any of these fiduciary duties can lead to litigation, exposing the organization’s officers and directors to personal liability. However, officers and directors are not liable if they acted reasonably and in good faith. In addition, an organization’s governing documents may further indemnify directors from personal liability.
The Church Law Center of California advises religious and secular nonprofits on governance and risk management matters. To find out how we can assist your organization, call us today at (949) 689-0437 or reach out to us through our contact page.