Four Things That Every Not-For-Profit Director Should Know
March 7, 2007
Matthew S. Kelleher
Becoming a director of a not-for-profit corporation can be a terrific way to contribute to the community and support important causes and organizations. However, it is important to understand that this role comes with inherent legal duties, obligations and risks. Following is a brief summary of the core duties and obligations imposed upon every director of a Canadian not-for-profit corporation. (Note: This discussion is based on the provisions of the federal Corporations Act; somewhat different rules may apply to not-for-profit corporations that exist under provincial and territorial corporate statutes.)
1. Management of the Corporation – The board is responsible for the control, management and governance of the corporation and its affairs.
To properly discharge this duty, the board must ensure that the basic objects of the corporation are carried out and that its activities do not fall outside its objects. At a minimum, the directors must be (or become) familiar with the business and affairs of the corporation (including financial) and with its articles or incorporating statute and by-laws and must ensure compliance with all applicable laws.
It is commonly accepted that directors must supervise the activities of senior management, develop and implement corporate policies, provide long-term strategic guidance and ensure financial stability. While the board may, in practice, choose to delegate certain responsibilities to senior management, such delegation does not relieve the board from its core responsibilities. Moreover, there are increased restrictions on the delegation of responsibility in charitable corporations for the treatment of charitable property.
2. Fiduciary Duty – Directors stand in a fiduciary relationship with the corporation and have a duty to act honestly, loyally and in good faith in the best interests of the corporation. A director must be disinterested and impartial in all decision-making relating to the corporation.
The courts have interpreted this duty broadly. Generally, the fiduciary duty requires directors to act in the corporation’s best interests and to be disinterested and impartial in all decision-making relating to the corporation. It should be noted that this duty is owed only to the corporation.
While the corporation’s interests will usually align with those of the corporation’s members and other stakeholders, there may be circumstances where such interests diverge. However, decisions of the board must always be made with reference to the best interests of the corporation.
3. Minimum Standard of Care – In carrying out his or her duties as a director, a director must exercise the care, diligence and skill that may reasonably be expected of a person with that director’s knowledge and experience.
The standard of care owed by directors of not-for-profit corporations is not specifically set out in the federal Corporations Act, but has been developed by the courts over time. The standard of care required of each director is subjective (that is, it takes into account the individual director’s actual education, knowledge and experience).
For example, directors who are lawyers or accountants will be held to a higher standard when considering issues of law or finance, respectively. Directors should each consider their own education and experience in order to understand the standard of care that applies to their duties as a director. Despite the subjective nature of the standard of care, it is generally accepted that, at minimum, the standard is that which may be reasonably expected of a reasonable and prudent person in the circumstances.
In addition, if the corporation is also a registered charity, the directors may be considered trustees of certain property of the corporation. In these circumstances, the courts have imposed an even higher standard on directors by requiring the degree of care, diligence and skill to be expected of a reasonable and prudent business person in the management of his or her own affairs.
A director of a not-for-profit corporation may be exposed to personal liability if the director fails to discharge his or her duties and obligations to the corporation in a manner that meets the minimum standard of care required.
4. Conflict of Interest – Directors must avoid situations where their duties to the corporation conflict, directly or indirectly, with their personal interests or with a duty they owe to other persons or corporations. Directors must declare and manage such conflicts in an appropriate manner.
Generally, a director should not have a personal interest in any contract or arrangement (existing or proposed) with the corporation. The by-laws or other internal policies of many not-for-profit corporations will include a description of specific steps to be taken by a director who has or may have a conflict of interest.
A director must declare his or her conflict to the board at the first meeting at which the matter is discussed or, if a director becomes interested in a contract or arrangement after it has been entered into by the corporation, at the first meeting held after the conflict arises.
A director must also refrain from voting in respect of any contract or arrangement (existing or proposed) in which he or she has a conflicting interest.
This article provides only a general summary of the main aspects of this area of law.