RELEVANT
REVIEWS
Primer for Directors of
Not-for-Profit Corporations: Rights, Duties and
Practices
2002. Broder, Peter, co-ordinating editor. Ottawa, ON:
Industry Canada. ISBN: 0-662-32550-8. 99 pages.
Intention, Focus, and Limitations of
the Book
This publication was created to help well-intentioned, time-pressed directors of not-for-profit corporations in Canada do a good job, as well as protect themselves from potential claims arising from their actions or decisions.
To aid in this, the publication includes questions and checklists with each chapter to assist readers in addressing the issues raised in the text.
The introduction states that, if successful, the book will:
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Provide directors of not-for-profit corporations with guidance that
both alerts them to their basic legal rights and obligations and provides them with some simple tools to help them exercise those rights and meet those obligations.
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Provide prospective directors with a good understanding of their potential responsibility should they agree to serve on the governing body of a not-for-profit corporation, and advice on what to ask in order to make an informed decision on whether or not to take on that responsibility.
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Provide staff and volunteers working with boards with an outline of the role of directors in a not-for-profit corporation and a ready tool to share with the members of their governing bodies and colleagues to ensure a common understanding of who does what, how, and why.
The introduction also states that the publication focuses on incorporated not-for-profits, which includes, but is not limited to, entities such as trade and community associations, sports clubs, health and social service agencies, environmental organizations, arts groups, religious congregations, international development organizations, and human rights and civil liberties groups.
And, that this focus excludes the countless informal groups and other entities that are constituted outside of either federal or provincial not-for-profit corporation statutes.
The introduction also makes the important point that regardless of the
activities of the corporation that they serve, directors of incorporated
organizations all share a common requirement to supervise the management
of their corporation; and, that they face other obligations based on the
scope and type of activities their corporation undertakes, and the
statutory and common law obligations arising from that activity.
And, since this document was generated as part of the process to reform
the Canada Corporations Act, when a rule is stated in the publication it
refers to this federal not-for-profit corporations statute, and/or the
common law that applies to corporations incorporated under this Act.
This is important to note since each province has its own not-for-profit
corporations statutes that, although they are usually very similar,
have important differences.
The introduction also makes the point that the approach of the book is
to focus on the legal requirements directors have: what they must do; what directors ought to do; and, occasionally what directors may do.
It goes on to point out that meeting these obligations is part of good
corporate practice, but that good governance goes well beyond meeting
legal requirements. It includes engagement, competent decision making,
and ongoing evaluation. Importantly too, the introduction notes that few
not-for-profits will be sustainable over the long term if they do not
enjoy the trust of at least a segment of the public on an ongoing basis.
The introduction also contains a useful section on the definitions and
legal concepts used in the document.
Chapter One: Corporation Directors -
What, Who, Why & How
Chapter one was written by Wayne Amundson, who many of you will recognize from his many years of service with the Canadian Society of
Association Executives as their Executive Vice-President. He is now
based in Calgary, Alberta and is president of his own association
consulting firm, Association Xpertise Inc. (http://www.axi.ca)
He is the only non-lawyer to have been asked to contribute to the publication.
The chapter starts with an introduction that outlines what sets a
not-for-profit corporation apart from a for-profit corporation, the
advantages and disadvantages of incorporation, and an overview of the
role and responsibility of the board of directors in this corporate
structure.
There is also a section that talks about the types of not-for-profit
corporations that exist, proposes two principal categories for governance
purposes, and discusses the governance implications to directors of the
two types:
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Public benefit, which carry on activities that are primarily
for the benefit of the public.
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Mutual benefit, which carry on activities that are primarily for the benefit of their members.
A section also distinguishes between and discusses special categories of
directors, including: Ex officio; honourary directors or officers;
and public directors.
A section also discusses organizational mandate and stresses the
importance of directors knowing the mandate of their organization, and
the corporate governance documents that provide the framework for how not-for-profit entities operate.
A section on accountability is also included, which makes the point that
all not-for-profit directors are potentially accountable to someone or some entity, often to multiple parties, and often in many forms. What is
important is for not-for-profit directors to know the nature and source of this
accountability and which takes precedence in their particular
circumstances.
The chapter concludes with a discussion of the elements of good
governance, and includes the eight tasks required of the boards of
charities and public-benefit not-for-profits to further develop effective governance, identified by the Panel on Accountability and Governance in the Voluntary
Sector, chaired by Ed Broadbent.
Chapter Two: Duties of Directors
The author of this chapter is Jane Burke-Robertson, a Barrister and
Solicitor who is based in Ottawa and advises charities and not-for-profit organizations.
The introduction outlines the role and duties of directors, as well as
their civil duty. This includes the role and responsibility for management of the corporation and the common law fiduciary duties, which include the duties of care and loyalty, and responsibility to not breach their fiduciary duty to the corporation and to avoid committing civil wrongs, for which they can be held personally liable.
The chapter goes on to state specifically what the duty of care entails,
in terms of the duty of skill or competence and the duty of diligence, as well as what this means for directors of charitable not-for-profit corporations and special trusts, and how directors can practically meet these duties.
It does the same for the duty of loyalty and provides practical advice
on meeting the duty of honesty and good faith which forms part of loyalty, including pointing out that directors must not delegate his or her general
responsibilities for governing the corporation and making sure that there
is proper supervision of those who have been given tasks that are permissible for directors to delegate to others.
It also covers the no-profit and no-conflict rule, and deals
specifically with personal self-interest conflicts, conflict in duties owed to another person or organization, relief of conflicts of interest in incorporation statues, relief of conflict of interest by courts (in the case of charities), and the practical implications of the duty of loyalty and the duty to avoid conflicts of
interest.
It also covers the duties directors have towards members, including
ensuring the corporation and its directors abide by the terms of its
letters patent and bylaws, treating all members equally, and treading carefully in the "sensitive and litigation-rich area" of members' discipline.
Chapter Three: Liability of Directors
Jane Burke-Robertson also authored this chapter.
This chapter explains the liability exposure of directors and is
organized under a number of headings:
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Liability and contracts - which relates to situations where directors enter into a contract without proper authorization or on behalf of a non-existent corporation.
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Liability in tort (a civil wrong) - which relates to situations where directors' own actions are tortious.
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Liability for breach of fiduciary duty
- which touches on the detail provided in chapter 2.
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Liability for breach of trustee duties
- which relates to situations where the corporation is a charity or directors deal with assets that are impressed with a trust.
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Common law liabilities - which relates to directors acting without proper corporate authority.
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Statutory liabilities - which relates to the numerous obligations imposed on directors under federal and provincial legislation.
Chapter Four: Rights and Powers
Chapter four is authored by Terrance S. Carter and Jacqueline M. Connor, both of who are Barristers and Solicitors with Carter & Associates, based in Orangeville, ON. (www.charitylaw.ca)
The introduction sets out that, in general, the rights and powers of
directors of a not-for-profit corporation are found in the legislation
governing its incorporation, in the corporation's letter patent and,
to a limited degree, in the common law.
Since this document focuses on not-for-profit organizations incorporated
under the Canada Corporations Act, it contains sections on directors'
rights and powers under the Act.
These rights include, for example:
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The right to unimpaired access to all the resources of the corporation as necessary in order to effectively perform their managerial duties.
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The right at any reasonable time to inspect and copy all the books,
records, and documents (not only those that are publicly avail
and to inspect the physical property owned or used by the corporation.
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The right to receive proper advance notice of all board meetings.
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The right to review the minutes of any board meeting they were unable to attend and any financial statements presented, and to voice any objection to any information these contain.
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The right to attend meetings, subject to the directors' fiduciary duty
to avoid conflict of interest.
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The right to vote at meetings of the board of directors.
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The right to vote on the approval of the minutes of all previous
meetings of the board of directors and to voice any objections to them.
Directors' powers include, for example:
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The power to manage the affairs of the corporation (which must be
exercised with somewhat greater care by directors of charities)
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Standard (incidental and ancillary) powers, such as the power to
purchase or acquire assets or properties in order to carry out
the purposes of the corporation.
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The power to borrow money.
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The power to dispose of property.
Chapter Five: Committees
This chapter was authored by Peter Broder, Legal Counsel and Policy
Analyst, Canadian Centre for Philanthropy. (www.ccp.ca)
It makes the point that committees are an essential tool for the
effective and efficient functioning of a not-for-profit corporation's board of directors.
It also stresses the importance of good co-ordination between the board and the Executive Director to determine the proper committee structure,
particularly regarding the striking of committees to deal with
operational issues, which is usually more appropriately handled by staff.
The chapter also stresses that committees should also have terms of
reference, and it offers a list of the minimum elements they should
contain.
It also makes the often neglected point that adequate insurance coverage should always be in place to protect committee members - including those
that are not board members - that may arise from any liability that may
arise from bona fide committee decisions or actions.
The author also suggests that indemnification provisions in the articles
of incorporation or the bylaws should also contemplate protection against actions arising from committee work.
The chapter goes on to identify and give examples of two types of
committees:
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Special - short-term committees struck to deal with, or make
recommendations on, a specific governance or organizational issue
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Standing - permanent committees struck to deal with, or make
recommendations on, on-going governance or organizational
issues. And, since the work of standing committees is integral to the work of the board, the author advises that they be included in the bylaws, although it is not
mandatory.
It points out that committees, like directors, face certain limitations
on their powers, and, that a board can never do indirectly through a committee what it is not empowered to do as a board.
The point is also made that committee members should have a clear
understanding of their powers, and their terms of reference.
The author also points out that it is important for staff to report
either to another staff member or the full board, but not to a committee.
Examples of standing committees the chapter deals with in some detail
are the nominating, audit, and executive committees.
A section also deals with committee procedures, and stresses that
directors need to be aware that delegating responsibility to a committee does not necessarily protect them from liability arising from committee decisions or actions.
A note on advisory boards is also included, and the need to define the
relationship between the advisory board, the board of directors and the
staff well, to avoid any possible misunderstanding by the public or
stakeholders.
Chapter Six: Risk Protection
This chapter was also authored by Terrance S. Carter.
It focuses on the directors protecting themselves against the risk that
they will be sued or otherwise held to account for a detrimental occurrence arising from their actions or inactions.
It starts with the premise that one of the first things a prospective
director should do is assess whether there are sufficient protections available to make them comfortable serving on the board of a particular not-for-profit corporation.
It goes on to discuss selected legal risks faced by directors of
not-for-profit corporations, and provides an overview of some of the steps
that can be taken to protect against legal exposure.
Specifically, the chapter deals with:
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Due Diligence, including the liability risk for lack of corporate authority, contract liability risk for directors, liability risks for negligent mismanagement, the importance of appropriate
screening procedures, reliance on assistance and advice, and reliance on management.
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Indemnification, which is an agreement by the corporation to cover
the cost of, or compensate directors for, losses or damages caused by
lawsuits based on the directors' actions or inactions in his or her capacity as a director.
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Insurance, including directors and officers liability insurance, and limitations in general liability protection, as well as the case of charitable corporations.
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Statutory Protection, including protection from third party contractual
liability, and protection from conflict of interest.
It also lists a number of other practical measures that can be taken to
reduce board members exposure to liability, such as:
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Strike a legal risk management committee.
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Encourage directors to obtain independent legal advice where appropriate.
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Reduce the number of persons serving as members on the board of directors.
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Increase the use of committees and advisory boards made up of individuals who are not board members.
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Transfer personal assets of board members to their spouses before joining the board of directors.
Chapter Seven: Taxation
This chapter was authored by David Stevens, Goodman and Carr, LLP and
Faculty of Law, McGill University, whose practice is based in Toronto.
It focuses on the taxation rules that govern not-for-profit corporations
that are and are not charities, with the bulk of the attention being paid to the difficulties and challenges faced by those that are charities.
Registered charities are defined, the differences between a charitable
organization and foundations are set out, the allowable relationship
between executives of registered charities and sources of capital is noted,
the charitable registration process is set out, and de-registration is
outlined.
The chapter also provides considerable detail on the regulation of
charities, centred around two basic rules:
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A charity must be exclusively charitable.
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A charity must spend a certain percentage of its funds on a
charitable activity.
The regulation issues the chapter discusses include:
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Control of corporations
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Investments
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Business activities
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Political activities
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Borrowing activities
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International activities
Part of the chapter is also devoted to discussing the treatment of gifts
to registered charities and qualified donees, including:
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What constitutes a "gift"
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The treatment of receipted donations
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Disbursement quotas
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The quota for charitable organizations
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The quota for public foundations
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The quota for private foundations
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Quota shopping and disbursement avoidance
The last part of the chapter outlines and discusses corporate structure
options that charities can consider to address the difficulties and challenges the rules governing charities present.
One important example is a structure to address the restriction on
conducting political activities. Another is the issue of how to carry on
a commercial activity and still maintain appropriate control.
Chapter Eight: Director Development
The final chapter of the publication is authored by Wayne Amundson.
This short chapter points out that orientation and training are key to
developing a committed and effective board, and discusses three important
tools that can assist in these areas:
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The board manual
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The board retreat
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Board evaluation
It includes an outline of some of the items that should be included in a board manual, a comment on the purpose and value of a retreat, and the
importance of an overall board and individual director evaluation process.
My Thoughts On This Publication
This publication has some very important points to make about topics of importance to all directors of incorporated societies, whether they be incorporated federally or provincially, such as the rights and powers of directors, dos and don'ts of committees, and risk protection.
After having read this publication I am certainly more informed about
these subject areas in particular, and I am pleased to see that the issues have been framed in these ways.
There are also some great tips on what directors can practically do to
meet these obligations, and some great questions to ask to ensure directors go into a not-for-profit organizations with their eyes open.
Where this publication suffers is in its attempt to be a primer
for a wide number, yet limited scope of societies and their directors even though in the introduction it states that its main audience is directors of
organizations incorporated federally under the Canada Incorporations Act,
and secondly directors of organizations that are incorporated under a
provincial statute.
This is not surprising, really, since it was commissioned as part of
Industry Canada's project to revise the Canada Incorporations Act.
This is a good deal that is directed towards charitable corporations as
well, which, again is not surprising, since the Canadian Centre for Philanthropy was commissioned to do the research.
There is also a variety of authors with varying approaches to their
topics. This makes the publication more difficult to read and interpret than it should be.
As well, there is a lack of consistency on who the audience is. Some
chapters focus on directors of federally incorporated societies,
others include limited information about some points found in some provincial statutes (primarily Ontario's), while many of them have directors of charitable corporations as their target.
As an example, the chapter on taxation focuses almost exclusively on
charities. Since this is a primer, it seems to me that it would have
been worthwhile to state at the start of the chapter that the majority of this information is only applicable if you happen to be a director of a federally or provincially incorporated society that is also a registered charity.
Otherwise, don't worry about it. Or, if your group is thinking of becoming a registered charity here are some of the things you should keep in mind
before taking the plunge.
It appears to me that this publication tries to fit its purpose around
the information instead of the other way around: Notwithstanding the first chapter's good attempt to set the scene for all directors in making sure
they understand who they are accountable to and in what way.
It seems to me that what is very important for directors to know is that
they have certain obligations under the law if you are a director of a
society, whether it is incorporated or not. If they are the director
of an incorporated society, whether it be federal or provincial, these obligations are kicked up a notch. If their incorporated society is also a registered charity, their obligations as a director are kicked up another notch. And, based on the other activities of their specific society they may have to be concerned about a whole bunch of other obligations, rules, and regulations
- for example, if you have employees, Revenue Canada becomes a bigger issue as does Workers Compensation.
On the operational side of things it is important to be able to
translate this framework into a workable operational system that ensures directors meet theirs and their societies obligations.
This is where the information in the publication on the right of
directors to have full access to organizational information, for example, is especially important, as is the information on how to set up and use committees properly.
This is where the issue of a model of board governance becomes
particularly pertinent, since determining how to operate efficiently and
effectively as a board of directors, especially in terms of how to
distinguish between the role and responsibility directors have and the role and
responsibility those who carry out the work have (whether they be
directors doing the work where there is no staff, staff hired to do the
job, or volunteers), consumes a good deal of time in many societies.
Chapter 6 on Risk Protection touches very briefly on this issue on page
64, where the author questions the applicability to Canada of some models of board governance - notably originating in the United States (in the
footnote the author specifically identifies John Carver's policy model of
board governance)- based on the obligations that are legally imposed on
directors in Canada, particularly directors of charitable corporations.
Since the Carver policy model of board governance is the rage in Canada,
it would have been very useful to have had more emphasis placed on the issue of models of board governance and questions directors and societies
should ask themselves before choosing one.
This points to something that puzzles me a bit. The publication does
not refer to or include other resources for further information or reading.
This is unfortunate since many excellent additional resources do exist.
A good example is the publication I featured in my September 2001, Number 6 E-Mail Review, on the duties and responsibilities of directors of non-profit corporations, entitled:
Duties and Responsibilities of Directors of Non-Profit Corporations.
1999. Kelly, Hugh M., Q.C. and Frederick, Mark R. Toronto, ON: Canadian Society of Association Executives (CSAE). 36 pages. ISBN: 0-921998-16-3.
It is also surprising, since Industry Canada itself has produced other
related publications, which can be found on their website listed below.
Given that this publication is promoted as a primer, it would be
useful to point directors to other sources of related information.
My Recommendation
Should directors of incorporated societies, whether they be incorporated federally or provincially, or whether they be also charitable corporations as well, procure a copy of this publication?
Certainly.
There are many gems of information contained in this publication that I
haven't found elsewhere.
Just be aware of the limitations I have pointed out in terms of its
changing focus and the need to interpret the information and its applicability correctly in terms of your own situation.
Besides, this is your federal tax money at work. You should always be
interested in how your money is spent!
Being a director of a non-profit in Canada is a complicated job, as this
publication clearly sets out. The more people who take on these positions
know about the complications and sort out what it means in terms of their
own circumstances the better.
Working for a non-profit corporation can also be complicated, and the
more the staff, volunteers, and others know about the obligations that govern what the corporation can and cannot do the better they will be able to do their job, and the corporation will be able to fulfill its mission.
Where the Publication Is Available
This publication can be downloaded from the Industry Canada website:
English
French
It also appears that the French version is not available on the website yet.
You can also contact Industry Canada to request a free copy of the
publication by calling their Ottawa office at (613) 954-5031 or toll
free 1-800-328-6189. Listen to the prompts and access their publications
section. (Note: Limited quantities available.)
 Donald Golob
is the Principal of Donald Golob Consulting, a
Vancouver-based firm specializing in Facilitation, Strategic Planning and
Training Services for Not-For-Profit Organizations Since 1995.
(604-988-3273).
This review was excerpted from Golob's
E-Mail Review© - a free e-mail review of books and
resources for not-for-profit organizations (Number 14,
February 2003)
Relevant
Reviews takes an occasional look at publications and
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of
relevance to associations and non-profits.
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