Introduction

Charitable purpose is the primary differentiating factor between nonprofits and their for-profit siblings. Tax-exempt nonprofits are granted special tax status in exchange for pursuing specified public benefits. The underlying rationale is that philanthropic activities will reduce the burdens on government or otherwise provide a social good (Phelan 2010: 12:8). This trade-off between generating a public benefit and receiving an associated tax advantage is the policy basis upon which the nonprofit sector exists.

In order to align the governance of nonprofits with this core policy goal, directors of philanthropic organizations and trustees of charitable trusts are subject to fiduciary standards that serve as guides for their conduct. Those legal obligations are similar to the fiduciary duties of for-profit company directors and trustees of investment trusts. However, nonprofit directors have an additional fiduciary duty, one of obedience to the organization’s charitable mission and purpose. That duty of obedience also engenders an oversight responsibility to prevent drift away from both its charitable mission and the public purpose that underlies the nonprofit’s tax exemption.