The Current State of Nonprofit Director Liability

The nonprofit world is in a state of transition. The glut of organizations establishing themselves as nonprofit charitable entities has forced funders and the communities being served to reassess how these groups benefit society and just what privileges they should be afforded. Board of Director scandals, both nationally and locally, have littered newspapers over the past decade, threatening to undermine the trust and goodwill necessary for the nonprofit sector to operate successfully. Yet, there remains a strong belief that the function these organizations perform is valid and extremely important to the business and moral fabric of the nation. In the United States, three traditions and concepts, the Judea-Christian “tzedaka,” the Greek notion of philanthropy, and the notion of fiduciary responsibility, or “trustworthiness,” are strongly ingrained in the legal treatment afforded charitable organizations. A number of external variables are causing nonprofit organizations to defend and redefine their role and purpose. These variables include competition from secular organizations operating as for-profits; mandates from funding agencies to merge, consolidate, or form consortiums to compete for limited resources; changing community expectations; and the ever-increasing demand on board members to be knowledgeable and accountable for their actions are but a few such variables.This article examines the role and responsibilities of nonprofit directors in the nonprofit arena. It first reviews the current state of the law and standard of accountability among board members while acknowledging the need for more serious oversight by the agencies empowered to monitor these organizations. Although this article emphasizes the need for director accountability, it also examines the protections from liability that are afforded board members and considers whether these safeguards are sufficient to attract able persons. If directors, who are typically busy individuals acting in a volunteer capacity, are discouraged from serving on nonprofit boards because of a fear of growing exposure to liability, the nonprofit world will suffer and the community at large will encounter huge gaps in services once provided by organizations gone extinct because of a lack of commitment to serve on their boards