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What Directors Need to Know About the Duty of Obedience

Author
Christopher Wilkes
Wilkes Law Firm
Attorney
Format
Blog
Perspective
Issue Areas
Leadership
Lawsuit Prevention
Corporate Governance
501(c)(3) Status
Tax Compliance
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May 16, 2022

Compared to the more common fiduciary duties of care and loyalty, the duty of obedience to mission is often forgotten. Unlike directors in the for-profit sector who seek to maximize profit for shareholders, non-profit directors must consider their organizational purposes and mission statements when making decisions. Non-profits share more in common with trusts than corporations in this regard. It can be easy to lose sight of mission or purpose when looking out for the bottom line. This can be a costly mistake. Many state charitable fundraising laws require donations to be applied to the cause for which they were solicited. These laws impose steep penalties on organizations that deviate from the requirements. For a tax-exempt 501(c)(3) organization, going too far afield from the purpose set forth in the IRS Form 1023 may require the organization to notify the IRS or risk jeopardizing the organization’s tax-exemption.  

Obedience to the mission includes both obedience to the corporate purpose, the purposes set forth in the IRS Form 1023, and the organization’s current mission statement. The corporate purpose is the purpose stated in the organization’s organizing document (often called the “articles of incorporation”). This same corporate purpose is also included in the bylaws. Similarly, in the IRS Form 1023, the organization states its intended exempt purpose, which should be consistent with the corporate purpose in the articles and the bylaws. The corporate purposes set forth in the organizing document and application for tax-exemption are rarely, if ever, changed. For strategic planning and marketing purposes, organizations also often adopt a mission statement, which provides a more specific vision to guide the organization in its programming and decision-making. The mission statement must fall within the corporate purpose. The organization can periodically change its mission statement and do so with little inconvenience, as the mission statement is not typically reported to government authorities.    

The first step to fulfilling the duty of obedience (and avoiding these negative outcomes of noncompliance) is familiarizing yourself with the organization’s mission and purpose. Below are a few simple steps directors can take to better familiarize themselves with their organization’s purpose statement and mission statement.

  1. Check your organization’s bylaws or articles of incorporation for a stated purpose. There should be a specific section in your corporate documents that states the organization’s purpose. Read and familiarize yourself with it. If you don’t have these documents, make sure to obtain a copy.  
  1. Read the stated purpose in your organization’s IRS 1023 application.  Not only do you have a legal duty of obedience to mission; your tax-exempt status depends on it. While most religious organizations shouldn’t have an issue staying within permitted tax-exempt activities (charitable, educational, religious, etc.), make sure you consult an attorney if you have any doubt about whether an activity advances the stated purpose of your tax-exempt entity application.
  1. Check your website’s mission statement. See if it is within the scope of the stated purpose of your organization’s organizing document, bylaws, and tax documents.  The public mission statement doesn’t have to match those documents verbatim, but keep in mind this is the publicly stated mission statement that donors will likely read.  
  1. Consider having an attorney review your mission statement and corporate purposes to see if it’s time to update, especially if it’s been a while since the documents were drafted, or if any of your activities have changed since then. When updating, try not to be too specific or vague. This will give your organization a clear framework to follow without limiting it unnecessarily. Below is an example of a large Catholic non-profit’s mission statement and purpose statement.

Catholic Charities USA Mission Statement: “The mission of Catholic Charities is to provide service to people in need, to advocate for justice in social structures, and to call the entire church and other people of good will to do the same.”

Catholic Charities USA Purpose Statement: “The purpose or purposes which the Corporation will hereafter pursue are: to provide a forum for discussing the application of Catholic thought in the general field of social welfare and to stimulate action, research and the publication of material in this field. The Corporation is organized exclusively for charitable, educational and scientific purposes, including, for such purposes, the making of distributions to organizations that qualify as exempt organizations under section 501(c)(3) of the Internal Revenue Code of 1986 (or the corresponding provision of any future United States Revenue Law).

Once you have familiarized yourself with the organization’s purpose and mission statement, be sure to reference and consider both the purpose statement and the mission statement as the organization evaluates key decisions. From recruitment and hiring to programming and expansion, every decision should further the mission of the organization in some way.  

Further reading:

Fiduciary Responsibility of Nonprofit Boards

The Fiduciary Duty of Obedience

Prudent Management of Institutional Funds Act