One of the most misunderstood legal principles in nonprofit governance is the origin and meaning of "fiduciary duties" and their application to the officers and directors of churches and other nonprofit organizations.
Officers and directors of churches—most commonly understood to be church board members or members of church finance committees with decision-making power—must bring intentional care and oversight to the financial affairs of their churches. Whether in the for-profit or nonprofit world, there are examples of corporations or organizations that ran aground because their officers and directors either neglected to learn the financial workings of their organizations or looked the other way—or even worse, led or aided malfeasant activities. The costs of these transgressions are substantial to the organizations, but also can prove legally and financially damaging to the individual officers and directors.
That's why it's critical for churches to educate and update new and veteran board and finance committee members regularly on the fiduciary duties they must fulfill in their roles. Any deficiencies in their work can lead to significant legal and financial troubles.
This article will provide much-needed clarification by defining fiduciary duties and explaining their application and relevance to church leaders. Particular emphasis is placed on the origin and nature of fiduciary duties, the fiduciary duties of "due care," the "prudent investor" rule, loyalty, and obedience, best practices recommended for the nonprofit sector, and the implications of federal tax laws addressing any mishandling of fiduciary duties.