January 27, 2025

‍

Directors of nonprofits may find themselves faced with a decision that will impact both their organizations and the communities they serve. A director will often consult with experts before making certain decisions. It is important to know whose advice the law explicitly allows directors to rely on.

Nonprofit directors are bound by fiduciary duties that require them to act in the best interests of the organization and its purposes. State laws often outline the types of professionals or experts a director may rely on when exercising their fiduciary duties and making decisions on behalf of the organization.  

Before exploring the differences between state laws regarding director reliance on professionals, it is good to have some general information about fiduciary duties. The word itself is derived from the Latin word fidere which means “to trust.” This is central to understanding fiduciary duties. They are the duties with which a director, board member, or officer is entrusted. The typical fiduciary duties of a director are the duty of care, the duty of loyalty, and the duty of obedience (for more on the duty of obedience, check out Napa Legal’s resource here). There are many smaller derivative duties that may be entrusted to a director that could also affect who the director may rely on.

‍

So, when would a director need to rely on a professional and which professionals would they be relying on? An easy example of when a director might rely on a professional is when the board requires guidance on complex tax and financial matters. The director has a duty to ensure that the nonprofit is in compliance with all relevant tax laws, so when making changes to the organization, a director may consult an accountant or tax lawyer to ensure compliance. Likewise, legal advice is typically received from a lawyer.  

Most states allow directors to rely on professionals in their areas of expertise. Some states limit that reliance to lawyers, accountants, or other professionals actually hired and retained by the organization, while many others allow a broader reliance on any professional with expertise in a related field.  

But what about questions of faith and morals? Who can a director rely on when the organization must answer a moral or doctrinal question in the course of its operations?

The answer depends on the state. In the Faith and Freedom Index, Napa Legal has ranked the states based on how accommodating the reliance laws are to faith-based nonprofits.

Express permission to rely on religious authorities

Some states explicitly permit directors to rely on guidance from religious authorities when fulfilling their fiduciary duties. For instance, a state might affirm that a director can rely in good faith on information or opinions provided by recognized religious figures or authorities within their organization. This legal framework directly acknowledges the role of religious guidance in organizational decision-making, expressly allowing the directors of faith-based nonprofits to rely on the advice of priests, ministers, rabbis, or other religious authorities when making decisions on religious issues.

In states like Arizona, the law states this standard of reliance clearly:  

In discharging duties, a director is entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, if prepared or presented by . . . [i]n the case of corporations organized for religious purposes, religious authorities and ministers, priests, rabbis or other persons whose position or duties in the religious organization the director believes justify reliance and confidence and whom the director believes to be reliable and competent in the matters presented.

Note that the director’s reliance needs to be based on his belief that the religious authority’s position justifies reliance, but there is no requirement that the belief be reasonable. This is distinct from many reliance statutes (including several below) that require a reasonable belief.

‍

Permission to rely on experts in general

Other states, while not explicitly mentioning religious authorities, allow directors generally to rely on individuals or entities they reasonably believe to be competent and reliable in specific matters. This broader language can encompass guidance from religious leaders if the director believes such individuals possess the necessary expertise. However, the absence of explicit mention of reliance on religious authorities means the extent of reliance on religious authority may vary depending on the interpretation of the law by state agencies or courts.  

States like Maryland have these general reliance statutes:

A director is entitled to rely on any information, opinion, report, or statement, including any financial statement or other financial data, prepared or presented by:

(i) An officer or employee of the corporation whom the director reasonably believes to be reliable and competent in the matters presented;

(ii) A lawyer, certified public accountant, or other person, as to a matter which the director reasonably believes to be within the person's professional or expert competence; or

(iii) A committee of the board on which the director does not serve, as to a matter within its designated authority, if the director reasonably believes the committee to merit confidence.

Notice that here a director may be able to rely on a religious authority in matters of faith and morals because he is an expert in the area of faith and morals. Note also that in states with laws like those in Maryland, a director would have to establish that it is reasonable to presume that the individual is an expert.  

Permission to rely only on experts retained by the organization

Some states limit directors to relying on the advice of outside professionals only if those professionals are retained by the nonprofit. This approach restricts reliance primarily to individuals formally associated with the nonprofit; laws written this way may be read to exclude guidance from external religious authorities unless those authorities are formally retained by the organization.

Washington state law has an example of this limited reliance statute:  

In discharging the duties of a director, a director may rely on information, opinions, reports, or statements, including financial statements or other financial data, if prepared or presented by . . .

(b) Legal counsel, public accountants, or other persons retained by the corporation as to matters involving skills or expertise the director reasonably believes are matters:

(i) Within the particular person's professional or expert competence; or

(ii) As to which the particular person merits confidence. . . .

No law stating which professionals a director may rely on

There are a few states that are silent as to whether a director, in fulfillment of his fiduciary duties, may rely on the opinion of individuals who can reasonably be assumed to have expertise on a certain matter, and does not expressly permit a director to rely on guidance from religious figures within the organization’s faith tradition. 

South Dakota, New Hampshire, and Illinois do not have a statute addressing reliance by directors of nonprofits.  

Note that the absence of a strong reliance statute does not mean that a director definitely cannot rely on religious authorities. In the absence of a reliance statute, a director may still be able to rely on the state’s business judgment rule or on First Amendment arguments. But it is helpful when states have clear reliance laws so organizations know they may rely on religious authorities, rather than having to resort to complicated legal arguments and possibly even litigation to resolve whether reliance on a religious authority was proper. Clear laws prevent needless confusion, not to mention time and money spent on lawyers and litigation.

In conclusion, while directors must faithfully and obediently operate in the best interest of their organizations, the extent to which they can clearly rely on the guidance of religious authorities varies widely by state. Understanding these legal nuances enables directors to effectively fulfill their duties while remaining true to religious principles that often guide their organizations’ mission.  

For more information on what directors should know before and after they join a board, check out Napa Legal’s comprehensive Board of Directors Toolkit.