Nonprofit Law Jargon Buster – Directors and Officers

Nonprofit Governance MistakesTo folks who are new to nonprofit governance, grasping the difference between directors and officers of a nonprofit corporation can be confusing. This post attempts to explain the differences.

Directors. A nonprofit organization’s board of directors (the “Board”) is responsible for the legal and financial management of the organization. Individuals are the directors that comprise the Board.  Unless the nonprofit has voting members, the Board, as a body, has ultimate authority over the nonprofit. Essentially, the Board’s role is to establish the mission, goals, policies, and strategic direction of the nonprofit. Decisions like approving the budget, setting governance policies, working to ensure sufficient resources, and determining the strategy to achieve the mission, are all Board responsibilities. The Board is not conceived to carry on the day-to-day operations of the nonprofit. Instead the Board delegates authority to its officers so the nonprofit is capable of operating on a day-to-day basis.   For example, the Treasurer is typically authorized to open a bank account. The President or CEO is typically authorized to sign contracts on behalf of the organization up to a specified dollar amount. If the Board does not appoint one or more officers and delegate authority to them, then every corporate action would require a Board vote.

OfficersOfficers are individuals elected or appointed by the Board to carry out the day-to-day business of the nonprofit within their delegated scope of authority. The scope of an officer’s authority should be defined by the bylaws of the nonprofit (the “Bylaws”) or clearly stated in the Board’s meeting minutes or resolutions. For example, the Board may elect or appoint a President to be the principal executive officer of the nonprofit charged with generally supervising and controlling the business and affairs of the nonprofit; potentially including things like signing contracts and hiring and firing employees. Once the Board delegates authority to an officer, that officer is able to act on behalf of the nonprofit within the scope of the delegated authority.

Three of the most common elected or appointed nonprofit officer positions are: (a) a president, (b) a treasurer, and (c) a secretary. The Bylaws will state whether an officer has to be a member of the Board.  Often, larger nonprofit organizations will elect or appoint staff members to serve as the secretary and/or treasurer so volunteer directors are not responsible for maintaining corporate records and managing the finances.

Finally, once the nonprofit grows, the Board may decide to employ executives such as a chief executive [Chief Executive Officer or Executive Director], a Chief Financial Officer (“CFO”), and/or a Chief Operating Officer (“COO”).  The chief executive, CFO and COO are also commonly referred to as officers of the organization.

Wearing Two HatsThings become confusing when directors are appointed as officers, creating “two hats” for one person. While wearing the officer “hat”, an officer may act on behalf of the nonprofit, so long as that specific authority has been delegated to that officer position (such as signing contracts or hiring employees). On the other hand, when putting the director “hat” back on, the officer/director would be responsible for things like ensuring the nonprofit is pursuing its mission and is compliant with its tax-exempt status.

You may be seeing a potential conflict of interest issue right about now: if one individual is both the director and the treasurer, how does the Board oversee the treasurer, when the treasurer serves on the Board? The answer is, as the governing body of the nonprofit, the Board oversees the actions of the officers. So, as treasurer, the director/treasurer’s actions will be scrutinized by the other directors.  The treasurer may have been delegated the authority to do what is necessary to prepare the budget. Then as director, the treasurer/director along with the remainder of the Board, will vote to adopt the budget. Again, the treasurer/director are switching between officer and director “hats” having different roles – one governs, the other executes.

Appointed vs Employed OfficersAnother area of confusion is when the nonprofit’s employees are appointed as executive officers. In this situation, the Board has delegated the authority for the day-to-day operations of the nonprofit to employees (executive officers).  The executive officers will perform such functions set forth in a job description approved by the Board.  However, the Board may still have officers of the Board that should fulfill the duties of such position as set forth in the Bylaws or meeting minutes. For example, the nonprofit may employ a CFO to manage the day-today finances of the organization and still have a treasurer who helps prepare the budget and provides the financial report to the Board at its meeting.

In the EndCollectively, the directors comprise a nonprofit’s board of directors.  The Board has the ultimate authority to manage the nonprofit. The Board may delegate certain authority to officers to manage the day-to-day activities of the nonprofit.  The Board supervises the actions of the officers and holds them accountable for carrying out their delegated duties. The authority of each officer should be clearly defined in your nonprofit’s bylaws, board meeting minutes, or approved job description. Officers are commonly, but not necessarily, directors of the Board. Ultimately, it is important for Boards to understand the roles of directors and officers and to properly educate individuals fulfilling each role.

This article was co-authored by Yvonne Moss, an Arizona Attorney with Carter Law Group, P.C. and Mackenzie Woods, a third-year law student at ASU.

2 Responses to Nonprofit Law Jargon Buster – Directors and Officers

  1. I would like an explanation regarding two non-profit questions:

    1) Are the officers and board of directors term limits stated in a NPO’s by-laws?
    2) If an election is held for an officer’s position, what happens in the event of a tie?
    Please advise. Thank you.
    Mark Inouye, President, Lokahi Canoe Club (808) 382-8815

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