What Directors Need to Know About the Duty of Care

By Frank DeVito

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If you work with a faith-based nonprofit, serve on a board of directors, or are thinking of joining a board, you have likely heard that directors have fiduciary duties. These duties (typically the duties of care, loyalty, and obedience) bind directors to uphold certain standards of conduct in their service to the nonprofit organization. The duties typically come from state law: while each state’s law may vary a bit, directors on the board of any nonprofit in the United States will be bound to some version of these fiduciary duties.

This resource will introduce you to the duty of care. To learn more about the duty of obedience, check out Napa Legal’s resource here.  

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What is the Duty of Care?

At the most basic level, the duty of care simply means exercising reasonable care and judgment when making a decision on behalf of the organization.¹ What does “reasonable” mean? Generally, the standard for the duty of care is to ask “what would a reasonably prudent person do in this situation?”  

Directors are expected to exercise the care that a reasonably prudent person would exercise. Note that this means a reasonably prudent person in general, not a reasonably prudent professional in a specific field. So a director will not be expected to understand legal requirements with the care of a reasonable attorney or tax obligations with the care of a reasonable accountant.

While a director will generally only be held to the standard of a reasonably prudent person, professionals with special expertise may be held to a higher standard of care. For example, there is caselaw to suggest that directors who are lawyers will be held to a higher standard of care than non-lawyer directors when addressing legal matters.²

Beyond the general requirement of not being careless, fulfilling the duty of care means paying attention to the internal governance and operations of the nonprofit organization, as well as all laws that apply to the organization. To fulfill this requirement, board members should be diligent in monitoring the organization’s activities and decisions. Examples of how directors should act to fulfill the duty of care include:

• Attending board meetings and reading the minutes from previous meetings;

• Asking questions about issues and decisions brought before the board;

• Reading and understanding the organization’s initial organizing document, its bylaws, and its policies;  

• Understanding the nonprofit’s legal and corporate obligations and checking whether the organization is in compliance with those obligations; and  

• Overseeing the organization’s revenue and expenses to ensure that money is being acquired and spent properly.

Even if a director is not a subject-matter expert, certain obligations may require additional education and training. For example, if you are asked to approve a financial report (especially if you serve on the finance committee or the audit committee), you need to know how to read a financial report. If you are reviewing and approving a document but do not know how to interpret the facts and figures, you are not fully able to exercise your duty of care.  

If there is ever a question or decision you must address as a director that goes beyond your level of competence, you should speak up and the board should consider additional training or consultation with experts to ensure each director is capable of exercising reasonable care in his duties.

Most states have a statute clarifying when directors of nonprofits are protected when they rely on expert opinions. In some states, the law explicitly allows directors to rely on information given by “counsel, public accountants, or other persons as to matters that the director reasonably believes to be within the person's professional or expert competence.”³ Some states also clarify that directors of faith-based nonprofits can rely on information given by religious authorities in matters concerning religious questions.⁴ In other states, reliance is limited to experts that are actually retained by the organization.⁵ To find out the laws in your organization’s state of incorporation, check out Napa Legal’s Multi-State Compliance Matrix.

While the duty of care is a general fiduciary duty to exercise reasonable care and judgment when acting as a director, there are many specific instances where the duty comes into play. The following list of questions is not exhaustive, but is a good starting point for directors to self-assess and look for areas of improvement in the way they exercise the duty of care:

• Do I regularly attend all required board meetings and committee meetings?  

• If I miss a meeting, do I talk to the organization’s leadership and review the meeting minutes to ensure I understand what happened at the missed meeting?

• Do I review the organization’s financial statements and annual Form 990 so that I understand the organization’s financial health and know where it is receiving and spending its money?

• Do I review the minutes from previous meetings and make sure they are accurate before voting to approve them?

• Am I familiar with the organization’s bylaws to make sure I am confident that the organization is acting in accordance with its own internal rules when making decisions?

• Am I aware of all the organization’s legal filing requirements (from the filing of the annual Form 990 with the IRS to state charitable solicitation registrations)? Am I checking to ensure that the organization is maintaining compliance with these requirements?

• Do I make sure I understand an issue and read all relevant documents before participating in a vote? If I do not understand something or have a question, do I speak up before a vote is taken?

• If the board is dealing with a complex technical issue, do I voice my lack of understanding and recommend seeking the advice of an expert before the board takes action?

• Am I confident that I have sufficient knowledge to act as a reasonably prudent person in all areas of service on the board? If not, have I shared this with the board and suggested ways that board members could receive additional training or education to remedy the situation?  

To answer more of your questions you may have when considering joining a nonprofit’s board and what board membership requires of you, view parts one, two, and three of Napa Legal’s Board of Directors Toolkit.

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¹ “What Are the Legal Duties of Nonprofit Board Members?” BoardSource, https://boardsource.org/resources/legal-duties-nonprofit-board-members/

² See Ethics Opinion 382: Lawyer-Directors Represening Entity-Clients, DC Bar, https://www.dcbar.org/for-lawyers/legal-ethics/ethics-opinions-210-present/ethics-opinion-382.

³ Sec. Alaska Stat. § 10.06.450.

⁴ See Ariz. Rev. Stat. § 10-3830.

⁵ See Ala. Code § 10A-2A-8.30.