You may be wondering what fiduciary responsibility is and how it applies to you. In this article, I will attempt to clarify what fiduciary responsibility means and the individuals it applies to within and outside your organization. In later articles, I will address how your organization can address its responsibility and increase awareness of its officers and board members to understand their role as a fiduciary, or trustee, for the organization.
What Does Fiduciary Responsibility Mean?
The word “fiduciary” comes from the Latin root “fiducia” meaning trust. A fiduciary is specifically “a person who has the power and obligation to act for another under circumstances that require total trust, good faith and honesty. “
Responsibility is applied to someone who is given direct authority over or is called upon to answer for an organization. So the term fiduciary responsibility is the act of being held responsible to guide and direct the actions of an organization as one in authority. These are the individuals who, in effect, will be called upon to give an account for the success or failures of the organization.
Who Are The Fiduciaries Of An Organization?
These are the individuals within an organization responsible for overseeing an organization and its performance. It does not matter whether the individuals are compensated for their position. The Board of Trustees, or Board of Directors, of an organization carries the responsibility to guide and direct an organization’s actions to ensure that it continues to meet its stated purpose as well as to make sure that it remains in good financial standing. The Board is responsible for hiring and maintaining high level management that understands the organization’s core business and is able to effectively lead a team of people to accomplish its mission and purpose day to day.
An organization’s Board must continue to maintain oversight of the organization and its operations in order to maintain the trust of its stakeholders. This cannot be done unless there are consistent periodic meetings of the Board in order to maintain a finger on the pulse of the organization, its operations and management. If you are a tax-exempt organization, the Board is also responsible for safeguarding the organization’s primary exempt purpose and ensuring its assets are not given away to the benefit of a private person or interest.
In addition to the Board of Directors, key management positions within the organization would also be considered to hold fiduciary responsibility. Typically, this is the “C Suite” within an organization, the Chief Executive Officer, the Chief Financial Officer, the Chief Operating Officer, and the Chief Information Officer, or Presidents and Vice Presidents. The titles are irrelevant in determining responsibility. If someone is being held accountable for action or inaction, typically it is the duty that holds weight. These are the key employees that keep the organization running and are responsible for the day to day management of the organization.
Who Is Our Fiduciary Responsibility To?
This can be a difficult concept to discern, especially in a tax exempt organization where there are no shareholders or owners. The organization, however, has multiple stakeholders in the organization as a whole. These are made up of both institutions and individuals that have an interest in your organization.
The first stakeholders are the means by which your organization attains an exemption from paying taxes, both federally and locally. Your Federal and State governments have an interest in the success or failure of the organization. They have granted tax free use of assets from which they will not make revenue. They also are the reporting agencies that check up on whether you are following the standards that allow your organization to remain tax exempt, both through the specific language in the Articles of Incorporation and Bylaws and through the required Conflict of Interest Policy, which I will address in the next article. If an organization violates any of the requirements in these documents, its managers are accountable to the federal and state governments, the IRS and state tax departments.
Secondly, there are banking institutions that grant loans to the organization in order for it to carry out its operations. Banks rely on the Board and management to continue to monitor the organization’s performance so that the organization continues to be able to meet its debt service agreement and repay its loans. Without this simple trust in organizational fiduciaries, banks would not be able to operate profitably, if at all. Our economy, in many senses, operates on a basis of trust that organizations and their managers will operate as going concerns and keep their doors open as long as practical. Likewise, bond holders are similar to banks in that they purchase bonds as an investment and rely upon the organization to continue to operate in a profitable manner in order to continue to meet the interest payments on their bonds.
Thirdly, the donors should also be considered a stakeholder, as they take an interest in the mission of the organization and provide much needed financial support. Their money could be donated to many different organizations, so if they are investing in yours, it is likely they have an interest in making the mission of the organization succeed. If you’re not convinced that they are substantial stakeholder, consider what happens to the contributions of an organization that has had any action taken against them for failure to properly use or manage the organization’s resources. The contributions plummet when donors do not have confidence that their donations will be well spent.
Hopefully, you now have more insight into what exactly fiduciary responsibility is and who it pertains to, both those considered fiduciaries, therefore held responsible, as well as those holding the fiduciaries responsible. In the next article, I will address Board Governance and tools that can equip a Board to address various circumstances and avoid situations that result in negligence.