The Importance of Fiduciary Responsibility in Non-Profit Organizations

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Non-profit organizations occupy a unique place in modern society. Those these organizations are private entities, they do not have a for-profit base. This sample business essay explores how fiduciary responsibilities are inherently more important in order to prevent fraud and corruption.

Fiduciary responsibility of non-profit organizations

Fiduciary responsibilities are an important aspect of a business because of the need for public trust in the board members and the actions of the organization itself. While fiduciary responsibilities are important for private businesses, it is also vitally important for non-profit because any type of organization may fail because of issues relating to fraud, risky decision making, and greed.

Working toward the common goal of a company and providing positive representation is the responsibility of every employee; from the entry-level position all the way up the employee hierarchy, but fiduciary responsibility is in the hands of the top decision makers, the board members.

Members of the board of a non-profit are generally expected to “stay objective, unselfish, responsible, honest, trustworthy, and efficient” (“Fiduciary Responsibilities of Board Members”).

Examples of inadequate fiduciary restraints are commonplace. Many non-profits choose to run fake entities to scam people while some legitimate organizations are taken advantage of by executives looking for a kick-back. For example, federal investigators recently filed suit against four cancer charities for failing to abide by their fiduciary responsibilities and using donations to pad executive's pockets.

Reducing corruption among board members

This means that board members need to examine their motivations and decisions transparently and ensure that their actions will be positive for the non-profit. For example, if a member of the board decides to contract with a company that gives him or her a gift, this may be caused to question the member’s decision because of motivations unrelated to the non-profit itself.

The board member should be focused solely on the positive and negative impacts on the organization and should use a checks and balances system to help ensure that the right decisions are being made. Board members are not immune to temptation and prejudices and, therefore, a list of questions may help members check their own motivations. Bridgespan.org adapted a list from Andrew Lang’s The Financial Responsibilities of Nonprofit Boards that provides questions in a personal checks and balances system.

The questions relate to:

• Decision’s adherence to the strategic plan including financial goals
• Appropriateness of the expenses
• System to avoid errors and abuse
• Whether decision meets the guidelines of the funders

Setting policies to reduce fiduciary abuse

The federal government and banking industry have regulations in place to reduce non-profit scams and unwilling financial disasters. For example, non-profits are required to submit receipts for all purchases, report donations to the government, and allow banks to audit their records. But, these safeguards don't always work and hardly cover all contingencies. Thus, organizations must create a checks and balance system to regulate executives.

This first step in the checks and balances system can help conscientious board members from falling into decisions that are negative for the non-profit. However, the questions also help board members realize the need for precautions and management of other individuals who function within the organization. To ensure that other members of the organization are avoiding risky decisions regarding the non-profit, it is also necessary to provide policies and structures that protect against fraud at an external level.

For example, outlining job descriptions and setting parameters for spending and credit card use (“Fiduciary Responsibilities of Board Members”) can prevent a problem from happening in the first place. Set policies keep the boundaries clear and avoiding issues is much less expensive and safer for the non-profit than addressing the problems as they happen.

For example, if a board member knows that all of his or her purchases will be recorded and reviewed her or she is less likely to take advantage of their spending power. While the checks and balances system works well for conscientious members, having a clear and structured system can help motivate employees to be better record keepers and utilize funds more efficiently. This keeps the organization open and transparent and works to keep the non-profit in good standing.

Summary and Conclusion

Non-profit organizations function best when the board members are aware of the pitfalls that have damaged organizations in the past and how to avoid the problems within their own non-profit. Fiduciary responsibilities function to avoid of fraud and risky decision making because of personal interest or motivations that are not congruent with the goals of the organization as a whole. All businesses work toward a certain level of transparency and honesty to ensure the success of the company, this is also true for non-profits who can benefit from the same fiduciary strategies.

References

Fiduciary Responsibilities of Board Members. (n.d.). Collaborating and consulting with nonprofit leaders, foundations and philanthropy. Retrieved September 27, 2013, from http://www.bridgespan.org/Publications-and-Tools/Nonprofit-Boards/Nonprofit-Boards-101/Fiduciary-Responsibilities-Board-Members.aspx#.UkXFq9JjuSp