Let’s say Bill Johnson has recently become a board member of Disney World or Bust, Inc., a fictional nonprofit that each year chooses a small number of children with disabilities and flies them to Orlando, Florida, to participate in the wondrous world of Disney. But a few months into his position as board member, Bill decides he wants to support his buddy’s endeavors of buying bicycles and giving them to the local children’s home in town. So he takes a portion of the federal grant Disney World or Bust received at the start of their fiscal year and allocates it to his friend’s bicycle endeavor. “Hey! We’re all helping kids out!” he thinks.
Little does Bill know that he has just violated his fiduciary responsibility to Disney World or Bust. In one fell swoop, he has dishonored the three duties with which every nonprofit board member is entrusted: duty of care, duty of loyalty, and duty of obedience. His misuse of the corporation’s funds is a break in his agreement to duty of care, the responsibility to ensure proper use of all the corporation’s assets—including money, people, facilities, etc.—and to oversee activities to ensure the nonprofit is and will remain effective and operational.
He has also failed to sustain his duty of loyalty by acting in a manner outside the corporation’s interests and serving his own desire to see his friend distribute more bicycles. Finally, Bill has violated his duty of obedience by using the federal monies granted to Disney World or Bust for an endeavor they were not intended for or allocated to, which violates the entity’s agreement with the federal government.
When it’s determined that a board member has violated his fiduciary responsibility, it could result in a lawsuit that puts at stake not only the nonprofit, but also the board member’s individual assets. To offset this risk, it’s important for nonprofits to have Directors and Officers Liability in place to provide coverage to defend such lawsuits and aid in the event of a settlement.
Even trustworthy board members can be blindsided by unfounded lawsuits, resulting in defense expenses and trauma for your organization. That’s why it’s essential to seek consultation and properly protect your entity from these liabilities.