Board of Directors
Obligations, Liabilities and Protections
A director is an individual who is a member of a governing board of an organization. As a rule, directors are elected or appointed to their positions on the board. They may also be officers, where an officer fulfills certain corporate roles and functions (such as those duties of a ‘president,’ ‘treasurer’ or ‘secretary’ of the organization).
Directors and officers of non-profit organizations are responsible for governing the affairs of the organization on behalf of its members. Directors and officers have a relationship of ‘trust’ with the members of the organization, and it is from this trust relationship that certain important legal duties arise.
Information in the tabs below has been excerpted from Volunteer Canada's paper "Directors’ Liability: A Discussion Paper on Legal Liability, Risk Management and the Role Of Directors in Non-Profit Organizations", which was funded by the Government of Ontario.
Obligations
The basic responsibility of directors is to represent the interest of the members in directing the affairs of the organization, and to do so within the law.
This legal duty is, in representing the members of the organization and acting as their ‘trustee,’ directors have three basic duties:
- Duty of Diligence: this is the duty to act reasonably, prudently, in good faith and with a view to the best interests of the organization and its members;
- Duty of Loyalty: this is the duty to place the interests of the organization first, and to not use one’s position as a director to further private interests;
- Duty of Obedience: this is the duty to act within the scope of the governing policies of the organization and within the scope of other laws, rules and regulations that apply to the organization.
These duties extend broadly, and are owed to:
• the organization as a whole;
• the organization’s members, participants, clients, staff and volunteers;
• other directors; and
• anyone else who may be affected by the decisions of the board and the activities of the organization, including the general public.
Duties are expanded upon in the Duties tab.
Duty of Diligence
Diligent directors always act prudently and in the best interests of the organization. When performing their duties as directors, they are expected to exercise the same level of care that a reasonable person with similar abilities, skills and experience would exercise in similar circumstances. If a director has a special skill or area of expertise, such as an accountant or lawyer would have, he or she has a duty to achieve a standard of care that corresponds to his or her professional abilities.
Directors have a responsibility to act cautiously and to try to anticipate the consequences of their decisions and actions before they undertake them. They are honest and forthright in their dealings with members, with the public and with each other. Directors are also well-informed about the activities and finances of the organization. They have an obligation to foresee potential risks inherent in a situation and to take reasonable steps to manage those risks.
Duty of Loyalty
Directors are required to put the interests of the organization first. These interests will always take precedence over any other interest, including a director’s personal interests. As well, directors who are involved in more than one organization may find themselves in a conflict of interest.
Loyal directors will avoid putting themselves in a situation of a conflict of interest. When this is unavoidable, they will act properly in disclosing the conflict and ensure that they play no part in discussing, influencing or making decisions relating to that conflict.
Confidentiality is also an important aspect of the duty of loyalty. Directors have an obligation to keep organizational business private, and to not discuss certain matters with people outside the organization. Confidential matters may include:
- information about personnel (i.e. disciplinary matters); and
- information about clients served by the organization, the organization’s finances or legal matters.
A board acts as one entity. Loyal directors support the decisions of the board, even if they might not personally agree with the decisions and might not have voted to support the decisions in the board meeting.
Duty of Obedience
Nearly all non-profit organizations are ‘private tribunals’ (that is, autonomous organizations that have the power to write rules, make decisions and take actions that affect their members and participants). Legally, private tribunals are recognized as having a contractual relationship with their members. This relationship is defined in the organization’s governing documents, which include:
- its constitution;
- bylaws;
- policies, and
- rules and regulations.
Directors have a duty to comply with the organization’s governing documents, and to ensure that staff and committees of the organization do as well. Over time, organizations may move away from their legal purpose, and policies may become out of date and no longer reflect the practices of the organization. Obedient directors ensure that governing documents remain current and accurate, and oversee the process that is used to amend and update governing documents.
Directors also have a duty to obey external laws and rules that are imposed upon organizations. A wide range of laws and statutes apply to corporations and individuals: the obedient director ensures that the organization complies with these. In particular, an organization that is an employer has many statutory responsibilities to its employees. These responsibilities include:
- protecting employees (and others) from discrimination and harassment.
- paying wages;
- providing paid time off for holidays;
- making deductions from wages and remitting these to the government; and
- providing a safe workplace;
A director who fails to fulfill his or her duties may be liable. The term ‘liability’ refers to the responsibility of directors and organizations for the consequences of conduct that fails to meet a pre-determined legal standard. Usually, the term ‘consequences’ refers to damage or loss experienced by someone, and being responsible for such consequences means having to pay financial compensation.
Liability arises in the following three situations:
1. When a law (statute) is broken. The consequences of breaking a law are:
• paying a fine;
• having restrictions placed on one’s rights or privileges; or
• being imprisoned.
2. When a contract is breached or violated, where a contract is a legally enforceable promise between two or more parties. The consequences of breaching or violating a contract are:
• correcting the breach through some form of performance or service; or
• paying financial compensation.
3. When an act, or a failure to act, whether intentionally or unintentionally, causes injury or damage to another person (tort). The consequence of intentionally or unintentionally injuring or damaging another person is:
• payment of a remedy in the form of financial compensation.
More on Torts
Directors, volunteers and staff are responsible for acting in a reasonably diligent and safety-conscious manner so that others affected by our actions (members and members of members) will not face an unreasonable risk of harm. Failure to do so may be negligence, as are other ‘wrongful acts’ such as:
- errors;
- omissions; and
- actions or decisions that harm others through interfering with their rights, opportunities or privileges.
Wrongful acts relate primarily to how directors govern the organization, manage its funds, supervise its staff and make decisions that affect members, clients and the public.
Volunteers, employees and directors of organizations must always be mindful of risks—this means examining situations cautiously and thinking ahead to the potential consequences of decisions and actions. The process of risk management is a simple three-part activity:
1. looking at a situation and asking what can go wrong and what harm could result;
2. identifying practical measures that can be taken to keep such harm from occurring; and
3. if harm does occur, identifying practical measures that can be taken to lessen the impacts of harm and pay for any resulting damage or losses.
Risk management is based in large part on common sense and is linked to the concept of ‘standard of care.’ These measures will tend to revolve around:
• training and educating staff and volunteers;
• enforcing reasonable rules;
• inspecting and maintaining facilities and equipment;
• screening and supervising staff and volunteers;
• properly documenting meetings and decisions; and
• meeting all statutory reporting requirements.
Many associations, societies, community groups and sport clubs are not incorporated and thus have no legal status. Yet the legal status of an organization can have a significant effect on the potential liability of directors. The incorporation of an organization under a federal or provincial statute establishes the organization as a legal entity that exists independently as separate and distinct from its members. This legal entity can:
• own property in its own name;
• acquire rights, obligations and responsibilities;
• enter into contracts and agreements; and
• sue and be sued as if it were a real person.
For example…
An unincorporated organization is not a separate legal entity and has no legal status. While carrying out their duties, directors can be held personally and jointly liable for the activities of the organization. A third party cannot sue the organization (as it is not a legal entity) but can, and likely would, sue the directors collectively and individually instead.
An incorporated organization offers directors the protection of what is termed the ‘corporate veil.’ As a separate legal entity, the organization is one step removed from the directors and members. Lawsuits must be brought against the corporation, and directors of such corporations are, to a large extent, protected from liability for actions they took in their capacity as directors.
Insurance is one of many techniques used to manage risks. The risk is transferred to the insurance company through the insurance policy. Directors’ and Officers’ insurance covers costs that the directors and officers of an organization might become legally obligated to pay as a result of damages to another party arising from a director’s own ‘wrongful acts.’ In such an insurance policy, a wrongful act is defined as:
• an error;
• a misstatement;
• a misleading statement, act, omission; or
• other breach of duty by an insured person in his or her insured capacity.
The purpose of this insurance is to provide the financial backing for the indemnity that the organization provides to its directors. The cost of defending any claim can be significant. Importantly, many of these policies exclude coverage for:
• directors acting outside the scope of their duties, including any actions that are dishonest, fraudulent or criminal (i.e. gossip, slander or libel);
• breach of contract, including wrongful dismissal;
• fines and penalties under a statute or regulation; and
• complaints under a human rights code, including a complaint of discrimination, harassment or sexual harassment.
Insurance is one of many techniques used to manage risks. The risk is transferred to the insurance company through the insurance policy. Insurance covers costs that the directors and officers of an organization might become legally obligated to pay as a result of:
General Liability Insurance provides protection from a lawsuit of negligence from bodily injury or property damage.
Special Event Insurance provides additional protection that extends to a specific special event like a tournament, tournament, clinic or other event.
Accident Insurance covers costs as a result of of an accident to a participant in league play, in lump sum payments.
The purpose of these insurances is to provide the financial backing for the indemnity that the organization provides to its directors. The cost of defending any claim can be significant.
Importantly, many of these policies exclude coverage for:
• directors acting outside the scope of their duties, including any actions that are dishonest, fraudulent or criminal (i.e. gossip, slander or libel);
• breach of contract, including wrongful dismissal;
• fines and penalties under a statute or regulation; and
• complaints under a human rights code, including a complaint of discrimination, harassment or sexual harassment.
Clearly, volunteer directors take on a range of legal responsibilities and face many potential liabilities. It is almost universal practice for these organizations to ‘indemnify’ their directors for liabilities that they might incur in carrying out their duties as directors. An indemnified director would be compensated for the following:
• legal fees;
• fines that were paid under a statute;
• a financial settlement that resulted from a lawsuit; or
• any other legal obligation that a director was required to fulfill.
There is no obligation to indemnify imposed upon unincorporated groups. Indemnification is only as good as the organization’s financial ability to pay it. This is where insurance comes in, provided the group has insurance.