CHARITABLE LAW SEcTION

GUIDE FOR
FOUNDATION
BOARD MEmbERS
TYPEs OF FOUNDATIONs
Foundations may exist in various forms, but
most commonly they are organized either as
a nonprofit corporation or as a testamentary
or inter vivos trust. A nonprofit corporation is
created by filing articles of incorporation with the
Ohio Secretary of State. A trust is formally created
when a donor, through a trust agreement or via
the donor’s will, gives legal title to property to
one or more trustees to hold and manage for the
benefit of another — in the case of a charitable
trust, for the charitable beneficiaries.
Whether a foundation is organized in corporate
or trust form, and whether its managers
are referred to as directors or trustees, Ohio
foundation board members are required to fulfill
specific duties. Although you may consider the
foundation with which you are associated a
private entity, it is important to remember you
are administering charitable assets for the benefit
of the public. Further, public benefits have been
bestowed on the foundation and its donors, in the
form of tax exempt status for the foundation and
charitable tax deductions for its donors.
Foundations rely heavily on volunteers to govern
them and enable them to fulfill their charitable
mission. The foundation has every right to expect
its volunteers to serve in a serious and
thoughtful fashion. Foundation board members
have a concomitant right to expect ready access to
information and resources to ensure that they can
fulfill their legal and ethical duties.
Whether you are considering joining a
foundation’s board or are already serving on
one, you have probably not received any formal
training for the job. Unlike most other jobs, it is
often assumed that either no training is required
or that everyone knows what is expected of them.
To the contrary, there is a shared responsibility
of the volunteer, the volunteer’s peers on the
board and any foundation staff to request and
provide the training necessary for board members
to more fully understand and carry out their
responsibilities. This booklet provides foundation
board members with a basic understanding of
their responsibilities. In addition to this booklet,
Ohio Grantmakers Forum (OGF) offers training
and resources for foundation boards. Please check
the OGF Web site — www.ohiograntmakers.org
— frequently for upcoming programs.
OHIO GRANTMAKERs FORUM
GUIDINg PRINcIPLEs FOR MEMBERs
Ohio Grantmakers Forum adopted the following
statements in November 2004, to which all
OGF members must commit as a condition of
membership.
1. Adhere to the highest standards of ethical
behavior in all foundation activities.
2. Operate with an active governing board
that sets and regularly reviews all
organizational policies, including those
related to governance, conflict of interest,
grantmaking and finance (including
audit).
3. Have basic information readily available
regarding programs, funding priorities
and application requirements.
4. Maintain constructive relationships with
applicants, grantees, donors and the
public based on mutual respect, candor
and confidentiality.
5. Strive to include the perspectives,
opinions and experiences of the broadest
possible cross-section of people to
inform the organization’s grantmaking
and contributions, governance and staff
structure and business practices.
6. Support continuous learning by trustees,
staff and grantees.
7. Honor donor intent through thoughtful
deliberation in the context of changing
social conditions.
8. Fulfill all fiduciary and legal
responsibilities.
LEgAL DUTIEs
Under common law and the provisions of the
Ohio Charitable Trust Act, the Attorney General
is empowered to investigate charitable trusts to
determine whether property held for charitable
purposes is being properly administered in
accordance with fiduciary principles. The
Attorney General may bring an action to enforce
the performance or restrain the abuse of a
charitable trust.
In Ohio law, a charitable trust is defined as any
fiduciary relationship with respect to property
arising under the law of this state or of another
jurisdiction as a result of a manifestation of
intention to create it, and subjecting the person
by whom the property is held to fiduciary duties
to deal with property within this state for any
charitable, religious or educational purpose. This
broad definition includes nearly every person
or entity that holds funds for some charitable
purpose, whether formally organized as a trust
or some other type of entity, such as a nonprofit
corporation, association or foundation. A
foundation recognized as a 501(c)(3) organization
is a charitable trust under Ohio law.
Individuals who have the authority to conduct
the affairs of the foundation (directors, trustees
or officers) are charged with certain fiduciary
duties under statutory and common law. These
fiduciary duties recognize and reinforce that, in
taking actions for the foundation, these directors
are not acting on their own behalf, but on behalf
of the charitable trust, that is, the foundation and
its charitable beneficiaries. The legal duties of
foundation board members are separated into
four categories:
• The duty of care.
• The duty of loyalty.
• The duty to maintain accounts.
• The duty of compliance.
THE DUTY OF CARE
The duty of care requires that a foundation
director participate actively in the foundation’s
affairs, be familiar with its finances and active
in its governance. In fulfilling the duty of care,
directors must act in good faith, with the degree
of diligence, care and skill that a prudent person
would use in similar positions and under similar
circumstances. For those foundations that are
organized in trust form, trustees are required to
conduct themselves with the level of care, skill
and diligence exercised by ordinarily prudent
persons in the handling of their own affairs. For
foundations that are organized in corporate form,
the legal standard of care is set forth in Revised
Code Section 1702.30(B), as follows:
A director shall perform the duties of a
director, including the duties as a member
of any committee of the directors upon
which the director may serve, in good
faith, in a manner the director reasonably
believes to be in or not opposed to the
best interests of the corporation, and with
the care that an ordinarily prudent person
in a like position would use under similar
circumstances.
In order to fulfill their duty of care, a director
should attend all board meetings and meetings
of committees on which she serves. The director
should participate actively in the discussions
and decision-making process at those meetings.
A director needs to prepare for each meeting
by carefully reading and understanding reports
and other materials distributed for the meetings,
and by asking any questions that the reports
raise. If a board member does not understand a
particular report, he should ask for clarification
or explanation until he is comfortable that he
fully understands its content.
Often times directors — especially those without
accounting or bookkeeping training — have a
fear of financial reports, perceiving the columns
and pages of numbers as indecipherable. New
directors may feel embarrassed if they do not
completely understand a financial report. Rather
than asking questions, the director may simply
accept the statements of the treasurer or financial
officer with respect to the report. It is extremely
important that directors take the necessary steps
to understand the financial documents. This
does not mean directors must obtain accounting
degrees. However, they can seek training and
information, looking to foundation staff, peers
or Ohio Grantmakers Forum for opportunities to
build their financial literacy skills.
Directors are also responsible for establishing
organization policies with respect to the
governance of the foundation, management of
its finances and grantmaking activities. Boards
should provide clear direction on the process
for approving substantial obligations, such as
compensation arrangements and professional fees.
However, compliance with the duty of care is not
achieved by merely establishing policies. Directors
should regularly review the foundation’s policies
and activities to determine whether established
policies are being followed, whether the policies
remain relevant in the current environment and
whether policies need to be revised.
 SUggEsTED POLIcIEs AND PROcEssEs
• Conflict of interest policy.
• Financial controls.
• Background checks for staff.
• Process for approval of compensation.
• Process for hiring professionals.
• Process for approval of major
expenditures.
• Document retention policy.
• Spending, investment and asset
allocation policies.
• Eligibility for service — criteria and
terms for board members.
• “Whistleblower” protection policy.

Directors should be involved in selecting the

foundation’s key staff members, including the
executive director and chief financial officer. The
board should make sure that candidates have
the education and skills necessary and desirable
for the position. The board should also regularly
review and evaluate the performance of these
key staff to insure that they are performing at
the expected level and their activities further the
foundation’s charitable mission.
Another aspect of exercising care relates to
potential liability for misdeeds of the board and
staff. It is important to recognize the possibility
that a grantmaking foundation and its board
members can be sued. The Ohio Attorney General
may bring an action to enforce the performance
of a charitable trust or restrain the abuse of such
a charitable trust, including action for damage
caused to the foundation by board members’
failures to fulfill their fiduciary responsibilities.
Individual board members may themselves bring
suits for alleged misdeeds of their fellow board
members. Accordingly, it is advisable that boards
recognize the potential for such actions and
evaluate means to address that possibility. The
first line of defense is always prudent oversight
of the foundation’s activities. However, the board
may also discuss the necessity or desirability of
indemnification language in the foundation’s
bylaws or code of regulations, and appropriate
limits and exclusions in any indemnification
policy. The board should also discuss whether or
not they should purchase directors and officers
insurance, again considering appropriate limits of
liability and exclusions for certain behavior, such
as fraud or illegal activity.
Foundation directors should establish policies
and processes to insure that the conduct of board
meetings provides for meaningful discussion
on issues of importance without overburdening
the individual directors’ schedules. Use of a
consent agenda — where routine matters such
as committee reports are voted on in an omnibus
motion — is one practice that may be utilized
so that board meetings are devoted to critical
issues. Preparation for board meetings is vital to
minimizing the time needed for the presentation
of reports and issues and making the best use of
available time for thoughtful discussion.
Recent changes to Ohio’s nonprofit corporation
law, Chapter 1702 of the Revised Code, allow the
use of authorized communications equipment,
including telephone and electronic means of
communication, to give notice of meetings and to
conduct meetings, when specifically authorized
by the corporation’s articles, regulations or
bylaws. Authorized use of telephone and
electronic means of holding board meetings may
be especially helpful to conduct a meeting in
emergency situations when some board members
would otherwise be unable to attend in person.
However, conducting meetings in this manner
often invites other distractions and may actually
hinder discussion. Face-to-face meetings with all
board members physically present usually insure
a more complete and useful exchange of ideas,
discussion and resolution of issues.
The duty of care also requires that directors plan
for the continuity and renewal of the board itself.
Policies and procedures should be implemented
to establish appropriate terms for board members
that allow for fresh ideas while maintaining
links to the foundation’s roots. Although the
needs of each foundation differ, a system of
staggered terms and term limits helps to bring
new trustees, while ensuring that experienced
board members are available to assist in their
transition. Board members should be on the alert
for individuals to fill upcoming, open board seats
and encourage qualified candidates to consider
joining the board. Creating job descriptions and
desired qualifications for board members helps to
identify and recruit skilled directors needed for
the successful operation of the foundation.
DUTY OF LOYALTY
The duty of loyalty requires that board members
hold the interest of the organization and the
public first and foremost in their minds as
they make decisions. They must loyally place
the charity’s interest above any self-interest,
acting fairly and independently to further the
charitable purposes and advance the best interest
of the organization. This duty can sometimes
be jeopardized by conflicts of interest that
arise between one’s personal interest and the
organization’s interest.
There are two types of such conflict situations
that surface in boards of grantmaking
foundations. First, a director may have a
personal, financial interest in a decision. Second,
a trustee may have a loyalty that could influence
a decision where no personal financial interest is
at stake.
Board members who engage either directly or
indirectly in transactions or activities between
themselves as trustees/directors and themselves
as individuals risk breaching this duty of
loyalty. A breach can also occur when they are
involved in transactions with family members
or businesses in which they hold an interest.
Examples of such breaches include engaging in
competing enterprises to the detriment of the
foundation, diverting an organization’s assets
for personal gain and deriving any kind of secret
profit or other advantage in dealing with or on
behalf of the organization.
Because board members are often involved in
their communities in a variety of ways, it is
not uncommon that conflicts of interest arise.
These conflicts need not be disastrous, if board
members and organizations establish and follow
procedures for disclosing and resolving them.
Adopting and implementing a written conflict of
interest policy can avoid many of
the problems that arise from situations where
the organization’s and individual’s interests are
opposed.
For grantmakers, this duty of loyalty applies
particularly — but not exclusively — to awarding
grants and to business activities. Accordingly,
conflict of interest policies should include
written disclosures made by board members of
their relationships with other nonprofits and
businesses that might seek to provide services
for the foundation. Potential conflicts include
serving on the board of a nonprofit seeking a
grant from the foundation, having a relative
employed by the nonprofit and owning a
printing company that has submitted a bid for
printing the annual report. These conflicts should
be disclosed and you should not vote on the
proposal. Additionally, the board may choose to
prohibit you from discussing the grant award or
the printing bid. Board meeting minutes should
document any member’s disclosure of conflict
and absence from voting and discussion.
It is recommended that formal, written
disclosures of possible conflicts be made by board
members on an annual basis. Trustees should be
sure to disclose any potential areas of conflict at
each board meeting.
WAYs TO AVOID TROUBLE IN DEMONsTRATINg
LOYALTY TO THE ORgANIZATION YOU sERVE

• Disclose your financial interest

whenever the charity proposes entering
into a business relationship with you, a
family member or a business in which
you hold an interest. Do not debate or
vote.
• Disclose your relationships with
nonprofit organizations in the
community you serve, whether as a
board member or in another volunteer
capacity.
• Insist that your foundation adopt
and regularly implement a conflict of
interest policy that includes written
disclosure and ineligibility to vote.
• Educate new board members about the
duty of loyalty and its importance to
the ethical and legal operations of the
foundation.
• Regularly review the conflict of interest
policy.

A cONFLIcT OF INTEREsT POLIcY

• Gathers information on board

members’ affiliations and those of their
spouses, parents and children, and
whether these affiliations are volunteer
or paid positions.
• Mandates that members with conflicts
reveal such conflicts.
• Prohibits directors with conflicts from
either voting on or seeking to influence
a decision.
• Requires that minutes record when
a board member is excluded from
discussion and voting.
DUTY TO MAINTAIN AccOUNTs
The duty to maintain accounts means that
directors have the responsibility to properly and
accurately manage not only financial matters and
records, but also accounts and records related
to grantmaking activities. In terms of financial
matters, board members must be prudent in the
investment of charitable assets. This standard
requires that directors exercise the level of care
a prudent person under similar circumstances
would exercise. Although directors may rely on
reports and information provided by other board
members, board committees and professionals
that the directors reasonably believe to be reliable
and competent in the matters presented, each
director has a responsibility to exercise his or her
independent judgment in a prudent manner. That
responsibility cannot be delegated. (See Ohio
Revised Code Section 1702.30.)
The processes and procedures for managing
accounts vary in complexity based on the size
and structure of the foundation as well as
accounting methods that change from time to
time. Whatever processes are crafted, directors
should ensure that they demonstrate the wise use
of funds, the fiscal soundness of the organization
and that the assets are being used for their
intended charitable purpose by:
• Keeping accurate records of income,
investments, expenses and transactions.
• Developing and monitoring annual
budgets that direct spending designed to
achieve the organization’s programmatic
plans.
• Establishing internal accounting systems
that provide for a system of checks and
balances, so no one person has total
control over finances.
 • For public charities, assisting the
organization in developing resources
for its program, crafting fund-raising
goals and policies, ensuring that appeals
are presented honestly and fairly and
monitoring the performance of fund-
raising professionals.
• Maintaining accurate board minutes that
contain board approval of expenditures
and investments.
Boards can develop and adopt certain policies
to help fulfill the duty of care, including asset
allocation, spending and investment policies.
Directors should also be clear about the frequency
of review of these policies as well as the
frequency and structure for oversight of financial
managers. Additionally, adoption of a formal
records retention policy is advised.
Similarly, the duty to maintain accounts applies
to records of grantmaking activities. For funding
requests, this means directors should ensure that
all necessary documents — such as tax exempt
letters — related to grants are procured and kept
in grant files.
DUTY OF COMPLIANcE
The duty of compliance requires that the board
conduct the foundation’s business in a manner
that obeys all legal requirements and other
obligations imposed on the foundation. These
requirements may be imposed by federal and
state laws and regulations, the foundation’s own
governing documents or agreements with and
representations made to donors or others. In
general, the following requirements will apply to
grantmaking foundations.
Under federal law and regulations, foundations
recognized as 501(c)(3) organizations are
subject to annual filing requirements with the
Internal Revenue Service and must operate
in conformance with federal regulations for
501(c)(3) organizations. Most foundations either
file an annual Form 990, if a public charity, or
Form 990-PF, if a private foundation. Compliance
with federal law and regulations requires that
these returns accurately reflect the financial
activities of the foundation. In order to maintain
its 501(c)(3) status, the foundation must be
operated exclusively for charitable purposes
and must avoid certain transactions that inure
to the benefit of individuals. Private foundations
are subject to additional federal regulations,
including requirements to make certain minimum
distributions for charitable purposes annually
and to avoid self-dealing transactions.
Foundations are also required to register with
the Ohio Attorney General under the Charitable
Trust Act and to file annual financial reports,
along with any applicable fees, with the Attorney
General. These reports are generally due when
the federal Forms 990 are filed. Recent changes
in the Attorney General’s administrative rules
allow Ohio foundations to file a verification
form and filing fee with the Attorney General,
eliminating the need to file the complete 990 for
state purposes. For more detailed information on
foundation registration and annual reporting
requirements with the Ohio Attorney General,
please refer to the brochure Guide for Grantmaking
Foundations, available on either the Attorney
General or Ohio Grantmakers Forum Web sites.
If the foundation is organized as a nonprofit
corporation, it is required to file a statement of
continued existence with the office of the Ohio
Secretary of State every five years. It is especially
important for the board to update its status with
the Secretary of State if it has moved, changed
contact information or revised its bylaws.
Certain requirements of the federally enacted
American Competitiveness and Corporate
Accountability Act of 2002, generally known
as the Sarbanes-Oxley Act, apply to nonprofit
entities. In particular, the Act makes it illegal for
corporations, including charitable foundations,
to retaliate against an employee who reports
suspected illegal activity by the foundation. It is
also illegal for the foundation to destroy or alter
documents to prevent them from being used in
official proceedings.
The board must also ascertain that the
foundation’s operations are consistent with the
purposes for which it is organized. Frequent
reference should be made to the foundation’s
governing documents — articles of incorporation,
trust document or will.
The foundation has a duty to comply with the
agreements and representations it has made with
its donors and the public. Individual donors have
a right to rely on the representations made during
discussions about gifts and on specific limitations
imposed on their donations. The public has a
right to rely on representations the foundation
has made as to the manner in which it will be
operated, whether those representations were
made in the course of seeking public benefits,
including tax exempt status, or in seeking
contributions to the foundation. As a result, the
board must be careful to abide by those promises.
CONcLUsION
This guide is intended as an overview of the
fiduciary responsibilities of grantmaking
foundation directors, providing a basic
understanding of those requirements. It is not
intended as an exhaustive discussion of the
legal requirements, but as a point of reference
to give foundation directors a sense of what is
expected of them. Although the requirements
may seem daunting and technical, in most cases
compliance comes down to basic common sense
— approaching your duties as an important
responsibility and taking the necessary care in
carrying out those duties. Always consult your
own legal counsel for specific advice as to your
particular situation.

Ohio Grantmakers Forum

37 W. Broad St., Ste. 800
Columbus, OH 43215
(614) 224-1344
www.ohiograntmakers.org
A

CHARITABLE LAW SEcTION

150 E. GAY ST., 23RD FL.
COLUMBUs, OH 43215
614-466-3180
FAX: 614-466-9788