Nonprofit organizations operate under a unique set of legal and ethical expectations. At the core of these expectations are the fiduciary duties that nonprofit directors must uphold. All states require directors of nonprofit corporations to exercise the duty of care and the duty of loyalty.
However, depending on the state, some directors may be subject to a duty of obedience and others may be subject to a duty of good faith. While these duties share some commonalities, they differ in focus and application. Here’s why some states emphasize one over the other and what it means for nonprofit governance.
What Is the Duty of Obedience?
The duty of obedience is a fiduciary responsibility unique to the nonprofit sector. It requires directors to ensure the organization operates in alignment with its mission and complies with its governing documents (such as articles of incorporation and bylaws) and applicable laws.
The key focus of the duty of obedience is maintaining fidelity to the organization’s charitable purpose and ensuring that resources are used exclusively to advance its mission.
States that explicitly recognize the duty of obedience underscore the importance of nonprofits remaining true to their mission. Directors in these states may face heightened scrutiny to ensure that every action and decision aligns with the organization’s stated goals and legal obligations.
What Is the Duty of Good Faith?
The duty of good faith is a broader fiduciary responsibility recognized in both nonprofit and for-profit governance. This duty requires directors to act honestly, remain loyal to the organization, and make decisions they reasonably believe to be in the organization’s best interests.
The duty of good faith stems from the business judgment rule, which protects directors from liability as long as they act in an informed manner, without conflicts of interest, and with honest intentions. This standard allows for greater flexibility in decision-making, recognizing that directors often need to adapt to changing circumstances.
Why Do States Differ?
Legal Frameworks
States adopt different approaches to nonprofit governance based on their legal traditions and statutory frameworks. For instance, states that follow the Model Nonprofit Corporation Act (MNCA) explicitly include the duty of obedience, alongside the duties of care and loyalty. Other states rely on more generalized corporate governance laws that emphasize good faith and loyalty without delineating obedience as a separate duty.
Judicial Interpretation
In some states, courts have explicitly recognized the duty of obedience as distinct from the duties of care and loyalty. This reflects the unique mission-driven nature of nonprofits, which distinguishes them from for-profit entities. In contrast, other states interpret the duty of obedience as a subset of the broader duties of care or good faith, considering it unnecessary to codify it separately.
Policy Priorities
States that emphasize the duty of obedience often prioritize stricter accountability for nonprofit directors. This ensures that charitable organizations maintain public trust by adhering closely to their stated mission.
On the other hand, states focusing on the duty of good faith may prioritize flexibility, allowing directors to make judgment calls that balance mission fidelity with operational pragmatism.
Practical Implications for Nonprofit Directors
Understanding these distinctions is crucial for nonprofit directors to navigate their legal responsibilities effectively:
- In states with a duty of obedience: Directors must exercise heightened diligence to ensure that every decision aligns strictly with the organization’s mission and governing documents. Failure to do so could lead to legal or regulatory repercussions.
- In states emphasizing good faith: Directors enjoy more leeway in decision-making, as long as their actions are honest, well-intentioned, and reasonably believed to benefit the organization.
Conclusion
Whether your state enforces a duty of obedience or a duty of good faith, the ultimate goal remains the same: to ensure that nonprofit organizations are well-governed, mission-driven, and operate in the best interests of their communities. By understanding these fiduciary responsibilities, nonprofit directors can better fulfill their roles and safeguard their organizations’ missions and reputations.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on federal tax and fundraising regulations nationwide. Ellis also advises donors concerning major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form.