Duty of Loyalty: What Nonprofit Board Members Need to Know

Every nonprofit board member shoulders a profound responsibility—one that extends far beyond everyday decision-making. At the heart of this obligation lies the duty of loyalty: a legal and ethical standard requiring directors, officers, and key employees to put the organization’s mission ahead of personal interests. For 501(c)(3) organizations, honoring this duty is more than a best practice; it is essential for preserving tax-exempt status, protecting charitable assets, and sustaining public trust.

The stakes are high. A misstep can trigger IRS penalties, jeopardize the organization’s reputation, or even lead to personal liability for board members. Yet, the nuances of the duty of loyalty—how it differs from other fiduciary duties, how to identify conflicts of interest, and how to implement effective policies—are often misunderstood or overlooked.

This article breaks down what every nonprofit board member needs to know about the duty of loyalty. You’ll find plain-language explanations, a review of key legal requirements, guidance on handling conflicts, and practical examples drawn from real-world scenarios. Along the way, we’ll highlight best practices and resources to help your board navigate these responsibilities with confidence and transparency. Whether you’re a seasoned director or new to nonprofit governance, understanding the duty of loyalty is essential to safeguarding your organization—and your own role within it.

Defining Duty of Loyalty in a Nonprofit Context

Before diving into legal citations and policies, it helps to see the duty of loyalty as the moral compass guiding every board meeting and strategic decision. At its core, loyalty demands that nonprofit leaders always put the organization’s mission and charitable purpose ahead of personal or financial gain. This section lays out what that means in practice, who must follow this rule, and why it exists in the first place.

When a board member faces a choice—say, selecting a vendor or approving a grant—the duty of loyalty requires asking: “Is this decision serving the nonprofit, or am I benefiting more than the cause?” Keeping that question front and center is the first step toward preventing conflicts of interest, maintaining donor confidence, and protecting both the board and the organization from legal or reputational harm.

What Duty of Loyalty Means

In plain terms, the duty of loyalty is a board member’s pledge to act in the best interest of the nonprofit—period. Under standard fiduciary doctrine, loyalty prohibits:

Self-dealing: Board members can’t award contracts, leases, or loans to themselves, family members, or entities where they hold a stake.
Personal profit: No part of the nonprofit’s assets should enrich an individual director or officer.
Undisclosed benefits: Any potential gain—whether money, services, or favors—must be fully disclosed and approved (or disallowed) by the rest of the board.

By placing the nonprofit’s goals above any other consideration, directors help safeguard charitable assets and ensure decisions are backed by transparency and a shared commitment to public service.

Who It Applies To

The duty of loyalty isn’t limited to the board chair or executive director—it extends to anyone in a position to influence the organization’s financial or strategic choices:

Directors and officers: All voting members of the board and its officers.
Key employees: Staff whose roles involve major financial or policy decisions (often those earning above a certain IRS threshold).
Insiders: Defined by IRS rules as individuals with “substantial influence” over the organization, including family members of directors or top staff and certain compensated consultants.

Under IRS guidance, an insider might be someone who approves budgets, hires senior staff, or controls contracts. If their actions could benefit them (or their associates), the duty of loyalty requires full transparency and, in many cases, recusal.

Origins and Purpose

The duty of loyalty traces back to centuries-old principles of trust law and corporate governance. Courts recognized long ago that anyone managing assets held for a public purpose must refrain from self-interest. In the nonprofit arena, this duty:

Prevents self-dealing by board members and insiders.
Protects the charitable assets entrusted by donors and the public.
Reinforces public confidence in 501(c)(3) organizations by demonstrating that resources serve their mission, not personal agendas.

By embedding loyalty into both state nonprofit statutes and IRS regulations, lawmakers ensure that nonprofits remain true to their stated charitable purposes—and avoid the extremes of private enrichment that can trigger penalties or loss of tax-exempt status.

Legal Foundation of Duty of Loyalty for 501(c)(3) Organizations

Nonprofit boards don’t simply adopt the duty of loyalty; they’re bound by a framework of statutes, regulations, and judicial decisions that spell out exactly what loyalty means—and what happens when it’s breached. At the federal level, the Internal Revenue Code and IRS guidance set clear boundaries on self-dealing and private benefit. Meanwhile, state nonprofit corporation acts and decades of case law reinforce those federal rules, creating a dual layer of accountability for 501(c)(3) organizations.

Statutory Duties in State and Federal Law

Nearly every state has enacted a nonprofit corporation statute (often modeled on the Uniform Nonprofit Corporation Act) that requires directors and officers to discharge their duties, including loyalty, in good faith and “with the care an ordinarily prudent person” would use. Typical provisions:

A loyalty clause that prohibits transactions where a board member has a personal interest unless fully approved by disinterested directors.
A requirement to act in the nonprofit’s best interest, putting mission and charitable assets ahead of any private gain.

Beyond these statutes, courts have long recognized the “common law” fiduciary duties of care and loyalty. When a director votes on a contract that benefits them or a related party, a court can void the transaction or order the director to disgorge profits. State attorneys general also have the power to sue for breaches of fiduciary duty on behalf of charities and their donors.

IRS Rules on Private Inurement and Private Benefit

At the federal level, section 501(c)(3) of the Internal Revenue Code demands that a tax-exempt organization remain organized and operated “exclusively” for charitable purposes. Two closely related doctrines enforce this:

Private inurement: “No part of the net earnings of an organization may inure to the benefit of any private shareholder or individual.”
Private benefit: Even if a benefit to an insider isn’t direct inurement, an organization may not confer “undue benefit” on any person.

These rules aren’t just theory. The IRS publishes guidance on inurement and private benefit to help nonprofits identify transactions that cross the line—like leases at below-market rates, excessive compensation, or no-bid contracts. When the IRS detects inurement, it can revoke tax-exempt status altogether.

Intermediate Sanctions and Penalties

Revocation is the extreme penalty. For less egregious cases, the IRS relies on “intermediate sanctions” under IRC §4958. Here’s how they work:

If an insider (called a “disqualified person”) receives an “excess benefit” (anything above fair market value), the individual pays an excise tax of 25% of the excess benefit.
If the board does not correct the excess benefit within the correction period, an additional tax of 200% may be imposed.
In some cases, the nonprofit itself can face a 10% excise tax on the same excess benefit, capped at $20,000 per transaction.

Intermediate sanctions force boards to document how they set compensation and approved related‐party deals. Properly conducted comparability studies and board resolutions can shield both individuals and the organization from hefty penalties.

By understanding the interplay of state statutes, IRS rules on private inurement, and the mechanics of intermediate sanctions, nonprofit boards can craft policies and practices that honor the duty of loyalty—keeping charitable assets secure and tax-exempt status intact.

Key Components of the Duty of Loyalty

Ensuring loyalty to the organization means more than good intentions—it requires directors and insiders to adopt specific practices that guard against improper influence or personal gain. Here are the three pillars that every board member must master to fulfill the duty of loyalty.

Prioritizing Organizational Interests

At its essence, loyalty means putting the charity’s mission first. Board members should:

Steer clear of self-dealing. That means no awarding contracts, leases, or loans to yourself, your family, or any entity you control.
Insist on fair-market arrangements. Whether it’s setting rent for office space or hiring consultants, transactions must reflect what an independent third party would pay or receive.
Act in the nonprofit’s best interest—even if a personal opportunity could be more lucrative. A director who faces a decision about purchasing equipment from a company they own should step away rather than influence the outcome.

By consistently choosing what benefits the organization over personal gain, the board upholds public trust and keeps charitable resources dedicated to their intended purpose.

Disclosure Obligations

Full transparency is the backbone of loyalty. Directors and insiders must identify and disclose any situation where personal interests intersect with organizational decisions:

Initial disclosure: Upon joining the board, each member completes a conflict‐of‐interest statement that details personal, family, and business relationships relevant to the charity.
Ongoing updates: Any time a new potential conflict arises—such as a board member’s relative joining a vendor firm—the individual reports it immediately to the board chair or governance committee.
Detail matters: Disclosures should cover financial interests (e.g., ownership stakes, consulting fees), personal relationships, and any circumstance where a board member could benefit directly or indirectly.

Maintaining a written record of these disclosures, often via annual questionnaires or conflict-of-interest logs, provides a clear trail for auditors, regulators, and the board itself.

Recusal Requirements

Identifying a conflict is only half the battle; the next step is recusal. When a board member recognizes a material conflict of interest, best practices call for:

Stepping out: The conflicted director leaves the meeting room (or disables virtual access) for the entire discussion and vote on that matter.
Documenting the event: Minutes should note who recused, why they recused, and affirm that they did not influence the decision.
Relying on disinterested voices: After recusal, only directors without conflicts participate in debate and voting, securing the integrity of the outcome.

Clear recusal protocols protect the board from accusations of bias and strengthen confidence that every decision truly serves the nonprofit’s mission.

By embedding these core elements—prioritizing organizational interests, robust disclosures, and consistent recusals—into everyday governance, nonprofit boards demonstrate their unwavering loyalty and safeguard both their reputation and charitable assets.

Common Conflicts of Interest and How to Identify Them

Conflicts of interest can sneak into boardroom discussions in all shapes and sizes. By learning to spot potential red flags early on, your board can take swift steps to manage or eliminate those conflicts. Below are some of the most frequent scenarios where personal or organizational interests collide—and what to watch for when you’re reviewing proposals, contracts, and board nominations.

Financial Conflicts

Financial conflicts arise whenever a board member (or their close associate) stands to gain from a nonprofit transaction. Common examples include:

Vendor contracts: A director recommends hiring a company they—or a family member—own for consulting, catering, or printing services.
Real estate leases: The nonprofit rents office space from a board member’s property at below‐market rates, or purchases land without a competitive process.
Loans or guarantees: An insider borrows money from the charity, or commits the organization to back a personal loan.

Real-life scenario: Your nonprofit needs new office furniture. An enthusiastic director suggests purchasing from “Comfort Creations, LLC”—the same company they founded last year. Even if the price seems fair, this situation requires disclosure, a comparability study, and a full board vote by disinterested members before moving forward.

Personal Relationships

Close personal ties can create subtle—but serious—conflicts when friends or relatives enter the picture:

Family members on payroll: Hiring a spouse, sibling, or in-law in a key role without a transparent recruitment process.
Romantic relationships: A board member’s partner serves as a vendor or consultant, raising questions about impartiality.
Friendships: Long-time friends supply services or influential introductions in exchange for favorable contracts.

Watch for casual conversations that turn into formal agreements. If a board member’s partner pitches a fundraising event, pause to ask whether a competitive bid or recusal is necessary.

Corporate and Donor Relationships

Board members often bring valuable connections to the table—yet those ties can also create conflicts if not managed properly:

Corporate sponsorships: A director negotiates terms for their employer’s sponsorship or donation, potentially steering benefits back to their company.
Joint ventures with donors: Collaborative programs between your nonprofit and an enterprise where a board member holds executive power.
In-kind contributions: Material or service donations from a director’s business, especially if the charity then endorses or promotes that business.

Key questions to identify these conflicts: “Does this arrangement give an undue advantage to an entity I’m connected with?” and “Would an outside evaluator view this as impartial?” If the answer is unclear, it’s time to disclose, recuse, and let disinterested directors decide.

By systematically reviewing decisions through the lens of these three conflict categories, your board can uphold the duty of loyalty and maintain the public’s trust in your mission.

Implementing an Effective Conflict of Interest Policy

A written conflict-of-interest policy turns good intentions into firm guardrails. It sets clear rules for identifying, disclosing, and managing potential conflicts before they taint decision-making. When everyone on the board understands how conflicts are defined, when to report them, and what steps follow, you build a culture of transparency that aligns with your nonprofit’s duty of loyalty.

Essential Elements of the Policy

An effective policy should be concise yet comprehensive. At a minimum, it must include:

Definition of Conflict: A clear statement describing what constitutes a conflict of interest—financial interests, personal relationships, and any other scenario where a director’s objectivity could be compromised.
Disclosure Process: Step-by-step instructions on how and when board members inform the board of actual or potential conflicts.
Voting Prohibition: A rule that disqualified persons (those with a material interest) cannot participate in discussion or vote on the matter in question.
Management Procedures: Guidelines for how the board handles disclosed conflicts—whether through recusal, independent review, or other corrective actions.

By spelling out these elements, your board can move swiftly from identifying a conflict to resolving it, rather than scrambling when issues arise.

Annual Disclosure Procedures

Routine, predictable disclosure helps keep conflicts visible. Consider adopting an annual process that looks like this:

Questionnaire Distribution: Once every fiscal year, the board chair or governance committee sends a standardized conflict-of-interest form to all directors, officers, and key staff.
Completion Deadline: Set and communicate a firm deadline for returning the form—ideally well before the board’s first meeting of the year.
Review and Follow-Up: The governance committee reviews each submission, flags potential issues, and follows up with individuals whose answers require clarification.
Board Reporting: At the next full board meeting, report summary findings (without naming names) and confirm that all disclosures are on file.

This annual ritual ensures everyone’s circumstances are fresh in the board’s mind and reduces the risk of undisclosed conflicts lurking mid-year.

Enforcement and Review

A policy without enforcement is little more than a suggestion. To keep yours effective:

Document Disclosures in Minutes: For every disclosed conflict, record the nature of the interest, the steps taken (e.g., recusal), and how the board resolved or managed the situation.
Sanctions for Non-Compliance: Define consequences for failing to disclose—ranging from a formal reprimand to removal from the board if warranted.
Periodic Policy Review: Schedule a biennial or triennial review of the conflict policy itself. The governance committee should assess whether the definitions, processes, and sanctions are still fit for purpose and recommend updates as needed.

By treating your conflict policy as a living document, your organization can adapt to new challenges and maintain a robust loyalty framework.

National Council of Nonprofits Best Practices

The National Council of Nonprofits offers practical tips to strengthen your conflict-of-interest policy. Their guidance recommends:

Framing conflicts in accessible language so all stakeholders can recognize them.
Engaging independent directors or an external advisor when complex conflicts arise.
Incorporating real-world examples in training materials to illustrate policy application.

For a deep dive, explore the Council of Nonprofits conflict-of-interest guidance, which includes sample templates and tools to tailor a policy to your organization’s size and mission.

Duty of Loyalty vs. Duty of Care and Duty of Obedience

Fiduciary duties for nonprofit boards break down into three core responsibilities—care, loyalty, and obedience—each with its own focus and function. Understanding how these duties differ helps your board assign tasks, draft policies, and stay out of trouble when complex decisions arise. In this section, we’ll summarize all three duties and zero in on what makes the duty of loyalty unique.

Overview of the Three Fiduciary Duties

Duty of Care: This requires directors to make decisions as an “ordinarily prudent person” would—gathering relevant information, reviewing financials, consulting experts, and weighing risks before voting. It’s about process and diligence.
Duty of Loyalty: Under this duty, board members must put the nonprofit’s interests first, avoiding self-dealing or any situation where personal benefit conflicts with the charity’s mission.
Duty of Obedience: Directors must ensure the organization adheres to its bylaws, donor restrictions, and all applicable laws and IRS rules. It’s about compliance and honoring the charity’s stated purpose.

Difference Between Duty of Loyalty and Duty of Care

At first glance, care and loyalty may look similar—they both demand good-faith service—but they answer different questions. Duty of care asks, “Did I make this decision based on sound information and honest deliberation?” Duty of loyalty asks, “Am I placing the nonprofit’s interests ahead of my own?” For example, a director could perform a thorough vendor evaluation (satisfying care) yet still violate loyalty by choosing a firm owned by a close friend without full disclosure. Effective governance means doing both: conducting careful analysis and ensuring every choice serves the charitable mission, not personal ties.

Difference Between Duty of Loyalty and Duty of Obedience

Loyalty and obedience guard against misusing charitable assets, but they operate in different spheres. Loyalty focuses on conflicts of interest—keeping personal gain out of nonprofit decisions. Obedience focuses on compliance—making sure the organization follows its founding documents, state and federal laws, and donor-imposed conditions. A typical loyalty breach might involve awarding a contract to a board member’s relative; an obedience violation could mean using restricted grant funds for an unrelated program. Addressing loyalty issues usually involves disclosure, recusal, or policy changes, whereas obedience lapses call for tightening compliance procedures and updating governance documents.

Consequences of Breaching Duty of Loyalty

When a board member puts personal gain ahead of the nonprofit’s mission, the fallout can extend well beyond a bruised ego. Violating the duty of loyalty exposes individuals and organizations to legal action, hefty financial sanctions, and lasting reputational harm. In this section, we’ll walk through the main risks and consequences that follow a loyalty breach, so your board can see exactly what’s on the line—and why prevention matters.

Legal Ramifications

Courts and regulators take fiduciary breaches seriously. State attorneys general have the power to sue on behalf of the charity and its donors, seeking to undo self-dealing transactions or remove offending directors. Common legal outcomes include:

Injunctions and voided deals: A court can declare a conflicted contract null and void, forcing the nonprofit to unwind the transaction and return any improperly diverted assets.
Director removal: Under state nonprofit statutes, a judge may order the removal of a director or officer who repeatedly disregards loyalty obligations, safeguarding the charity from further harm.
Derivative lawsuits: Individual donors or members might bring suit if they believe the board has misused charitable assets, potentially leading to court-mandated restitution or fines.

Beyond litigation, even the threat of a lawsuit drains time and resources—and it can paralyze a board that needs to focus on mission-driven work.

Financial Penalties

Financial penalties for loyalty violations come in two main forms: IRS excise taxes and risk of tax-exempt status loss. If an insider transaction produces an “excess benefit,” intermediate sanctions under IRC §4958 kick in:

Disqualified person tax: The individual who receives the excess benefit pays an excise tax equal to 25% of the improperly gained amount—and if it’s not corrected within the IRS correction period, an additional 200% tax can apply.
Organization tax: The nonprofit itself may face a 10% excise tax on the same transaction, capped at $20,000.
Restitution requirements: Beyond excise taxes, the board may be ordered to disgorge profits or repay the charity, restoring assets to their proper charitable use.

In the worst case, persistent breaches of loyalty can trigger an IRS audit, and if private inurement is deemed pervasive, the organization risks revocation of its 501(c)(3) status—jeopardizing future donations and grants.

Reputational Damage

Legal and financial penalties hit hard, but reputational fallout can last even longer. Donors, grantmakers, and volunteers expect nonprofits to operate with integrity. Once a loyalty breach becomes public:

Donation decline: Lapsed trust often leads supporters to withdraw funding or steer clear of the charity’s programs altogether.
Negative media attention: Stories of insider enrichment make for compelling headlines, tarnishing not just the board but the frontline staff and mission.
Volunteer and staff churn: Talented employees and volunteers may jump ship if they fear ethical lapses or leadership instability.
Board recruitment challenges: Attracting qualified, mission-focused directors becomes infinitely harder when your organization is known for governance failures.

In short, breaches of loyalty don’t just cost dollars—they corrode the goodwill and community support that every nonprofit depends on.

By understanding the legal, financial, and reputational stakes of a loyalty violation, boards can appreciate why solid conflict-of-interest policies and a culture of transparency are nonnegotiable. The best defense against these consequences is a proactive one: clear rules, regular training, and unwavering commitment to the nonprofit’s mission.

Best Practices for Upholding Duty of Loyalty

Upholding the duty of loyalty is an ongoing commitment, not a one-time exercise. Boards that bake these best practices into their regular governance routines create a culture of transparency, minimize risk, and demonstrate to donors, regulators, and volunteers that every decision is mission-focused. The following strategies offer a practical roadmap for keeping loyalty at the forefront of board service.

Board Training and Education

Begin with a strong foundation: comprehensive training for new and returning board members. An effective program includes:

A clear overview of fiduciary duties, with a special focus on loyalty and conflict-of-interest scenarios.
Scenario-based workshops or tabletop exercises that allow directors to role-play real-world dilemmas—selecting vendors, handling family-member hires, or evaluating sponsorships.
Annual refreshers led by in-house counsel, an outside governance expert, or a trusted advisor to review changes in state law, IRS guidance on inurement, and recent best-practice updates.

Regular education ensures that every director—and key employee—understands how the duty of loyalty translates into daily decisions. It also reinforces the board’s shared responsibility and keeps conversations about conflicts present throughout the year.

Regular Policy Audits and Updates

A conflict-of-interest policy is only as good as its last review. To keep yours sharp:

Schedule formal audits at least every two years. Have your governance committee—or an external consultant—compare the policy against industry benchmarks and state statutes.
Incorporate lessons learned from past disclosures, recusal events, or near misses. If a questionable transaction slipped through, use that case to refine definitions, disclosure thresholds, or enforcement procedures.
Update the policy promptly when laws change—whether it’s a new state nonprofit statute or IRS tweaks to the private inurement rules.
Share revisions with the full board and require a brief sign-off, so everyone reaffirms their commitment to the updated standards.

These regular check-ups prevent your policy from growing stale, and they signal that the board takes loyalty seriously enough to keep governance documents current.

Transparent Decision-Making Processes

Transparency is the ultimate proof of loyalty in action. Boards should embed clear, traceable steps into every decision:

Circulate written meeting materials well before the board packet deadline, flagging any items with potential conflicts.
During meetings, document disclosures, recusals, and voting outcomes in the minutes—naming who recused and why, and confirming that disinterested directors handled the vote.
Where appropriate, publish your conflict-of-interest policy and a high-level summary of board governance practices on your website or in your annual report. This level of openness not only reassures external stakeholders but also encourages directors to err on the side of full disclosure.

By combining well-timed training, systematic policy reviews, and open, documented processes, nonprofit boards build a resilient framework that consistently honors the duty of loyalty. In doing so, they keep their focus where it belongs—on advancing the mission and stewarding the charitable assets entrusted to them.

Real-World Examples of Duty of Loyalty in Action

Theory and policy come to life when we see how organizations handle—or mishandle—loyalty in the boardroom. The two case studies below illustrate starkly different outcomes: one in which a nonprofit suffered severe penalties for private inurement, and another where timely disclosure and recusal preserved both mission and reputation.

Case Study: Private Inurement Violation

A regional arts nonprofit leased its gallery and event space from a board member who owned the building. Although the rent charged was well below fair‐market value, the board never conducted a competitive bidding process or documented a comparability study. When an anonymous tip led to an IRS audit, the agency found clear private inurement: the board member had received excess benefit through discounted rent.

Consequences were swift. The IRS imposed intermediate sanctions under IRC §4958: a 25% excise tax on the “disqualified person,” an additional 200% penalty when the excess benefit wasn’t corrected, and a 10% tax on the nonprofit itself (capped at $20,000). The state attorney general filed suit to void the lease, arguing the board violated its duty of loyalty. The organization also lost two major grants and faced a five-figure legal bill to unwind the transaction and reimburse the charity.

Case Study: Effective Conflict Management

By contrast, a health services nonprofit faced a potential conflict when its board chair’s consulting firm was tapped for a technology upgrade. The chair promptly disclosed the relationship during the board meeting, recused herself from all discussions, and provided a detailed summary of competing bids. A special committee of independent directors evaluated the proposals, selected the most cost‐effective vendor, and documented every step in the minutes.

This transparent process satisfied auditors, regulators, and donors alike. The nonprofit not only avoided any loyalty breach but also strengthened trust among stakeholders—demonstrating that conflicts, when handled correctly, can be managed without disrupting operations or harming reputations.

Lessons Learned

Perform fair‐market assessments: Always obtain multiple bids or appraisals before approving related‐party transactions.
Disclose early and fully: A formal, timely disclosure gives the board time to evaluate potential conflicts.
Recuse decisively: When in doubt, step away from discussions and votes—then document the recusal in the minutes.
Rely on disinterested directors: Empower a committee of independent board members or an outside adviser to review contested decisions.
Keep detailed records: Comprehensive documentation—from comparability analyses to conflict questionnaires—protects both individuals and the organization if questions arise.

These real‐world examples drive home the importance of embedding loyalty practices into everyday governance. Following these guidelines helps nonprofits avoid costly missteps and maintain the public’s confidence in their mission.

Maintaining Transparency and Board Accountability

Transparency and accountability aren’t one-time checkboxes—they’re ongoing commitments that uphold your nonprofit’s integrity and keep stakeholders confident in your mission. By establishing clear recordkeeping practices, timely regulatory reporting, and open communication, boards can demonstrate that every decision is both aboveboard and mission-focused. Below we outline practical steps for documenting conflicts, meeting IRS and state requirements, and building trust with donors, volunteers, and the community.

Documenting Disclosures and Recusals

Accurate records create a trail that proves your board’s loyalty in action. Maintain a central repository—whether digital or physical—for all conflict-of-interest disclosures and recusal notices. Key practices include:

• Storing signed conflict-of-interest questionnaires and any follow-up correspondence in a secure folder accessible to the governance committee.
• Noting every disclosure and recusal in meeting minutes, specifying who stepped out, why, and how the remaining board members handled the decision.
• Keeping comparability studies, external reviews, or independent valuations tied to related-party transactions alongside the minutes.

Retain these documents for at least seven years—both to satisfy state record-retention requirements and to provide evidence in the event of an audit or inquiry. Consistent documentation underscores that your board treats loyalty not as an afterthought but as a core governance principle.

Reporting to IRS and State Authorities

Beyond internal records, nonprofits must disclose governance practices to regulators. The IRS requires that every Form 990 include:

• A statement confirming whether your organization has a written conflict-of-interest policy and how it’s enforced (Part VI, Question 10).
• A summary of significant changes to that policy, typically reported in Schedule O alongside narrative descriptions of board oversight.

If your state’s attorney general or charity regulator mandates annual filings, be sure to attach or reference your conflict policy and any material board actions taken under it. Failing to report these measures can raise red flags, trigger inquiries, or—even worse—invitation for more in-depth audits. Proactive, accurate reporting shows both regulators and the public that your nonprofit is governed with rigor and transparency.

Engaging Stakeholders

Transparency extends beyond paperwork. Engaging donors, members, and volunteers in your governance fosters confidence and invites constructive feedback. Consider:

• Publishing a high-level overview of your conflict-of-interest policy on your website or in your annual report—including the fact that disclosures are regularly updated and reviewed.
• Holding town-hall meetings or webinars to explain how the board manages conflicts, why recusal matters, and how these practices protect the organization’s mission.
• Highlighting governance achievements—such as successful audits or policy updates—in newsletters, social media posts, and donor communications.

When external stakeholders see that your board willingly opens its processes to scrutiny, they’re more likely to deepen their support—both financially and with their own expertise. In the end, maintaining transparency and board accountability isn’t just about avoiding trouble; it’s about forging lasting partnerships grounded in trust.

Additional Resources for Nonprofit Board Members

When it comes to upholding the duty of loyalty—and all other fiduciary responsibilities—reliable reference materials and practical tools make all the difference. Below is a curated selection of government publications, industry-leading toolkits, and ready-to-use templates to help your board stay informed, compliant, and mission-driven.

Government and Legal Resources

IRS guidance on inurement and private benefit
Model Nonprofit Corporation Act available from the Uniform Law Commission
State attorneys general charity guides (for example, California’s Guide for Charities)

Industry Associations and Toolkits

BoardSource: Best‐practice articles, research reports, and webinars on board governance and fiduciary duties
National Council of Nonprofits: Free guides on conflict-of-interest policies and board development
Stand for Your Mission: Advocacy training and discussion guides for nonprofit leaders

Policy Templates and Checklists

Sample conflict-of-interest policy from the National Council of Nonprofits (see their conflict-of-interest guidance page)
BoardSource’s Board Self-Assessment Tool to evaluate governance practices
Bridgespan’s Board Member Job Description Template for onboarding new directors

Final Thoughts on Strengthening Your Board’s Duty of Loyalty

Upholding the duty of loyalty is a continuous commitment, not a one-and-done checklist item. Boards that build a culture of transparency, ask tough questions, and stick to clear policies will not only avoid legal and financial pitfalls but also reinforce donor confidence and staff morale. Remember: every policy update, annual disclosure, and documented recusal is a small victory in protecting your nonprofit’s mission and reputation.

Strong governance relies on regular self-reflection. Schedule periodic reviews of your conflict-of-interest policy, revisit real-world scenarios in board training sessions, and encourage directors to speak up when a decision feels too close to personal interests. By weaving loyalty principles into meeting agendas and board communications, you make ethical decision-making a natural part of your nonprofit’s DNA.

Accountability and transparency go hand in hand. Keep your stakeholders informed—publish summaries of your key governance practices, highlight how conflicts were managed, and share lessons learned from past challenges. This level of openness not only satisfies IRS and state reporting requirements but also invites the community to see your board as reliable stewards of charitable assets.

At Summit Consulting Group, we understand how complex fiduciary duties can be. Whether you’re looking to streamline compliance or share the burden of administrative tasks, our retirement plan administration and fiduciary services are designed to support boards in maintaining the highest standards of governance. Partner with us to ensure your board remains focused, informed, and unwaveringly loyal to your organization’s mission.