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GUEST
ARTICLE - Carter and Man
Good
Governance in Meeting the Duties of Directors of
Charities and Not-For-Profits
Introduction
Various jurisdictions in Canada and the
United States have been looking at developing tougher
corporate governance laws since the collapse of Enron
and Worldcom. Accountability
requires good governance from the not-for-profit and
charitable sector as much or more than in the for-profit
sector. In
the for-profit sector, corporations are primarily
accountable to their shareholders for the ability of the
corporation to return a profit.
In the not-for-profit and charitable sector,
however, organizations are accountable to their members
as well as to the general public.
This summary outline examines the role of good
governance in achieving accountability to a
not-for-profit and charitable corporation’s members,
stakeholders, and the public.
What does
"Good Governance" Mean?
1. Governance is not the
same as “Good Governance”
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“Governance” in the
voluntary sector means “the processes and structures
that an organization uses to direct and manage its
general operations and program activities ”
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It includes the
“structures, functions (responsibilities), processes
(practices) and organizational traditions that the board
of an organization uses to ensure accomplishment of the
organizational mission”
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“Good
Governance” means achieving desired results and
achieving them in the right way,
i.e. in ways that are consistent with the normative
values of democracy and social justice
2. Characteristics of
“Good Governance”
In 1997, the United Nations published a
list of characteristics of good governance, which
includes:
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Participation in
decision making and reaching broad consensus on what is
in the best interest of the organization
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Accountability and
transparency
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Responsive, effective
and efficient performance
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Equity and sound rule
of law
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Strategic planning
3. Elements of "Good
Governance" (From
M. Gill, “Governance Do’s and Don’ts – Lessons
from Case Studies on Twenty Canadian Non-Profits”,
Final Report, June 2001)
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Vision - envisioning
the future and developing a corporate mission that will
be flexible and responsive to possible future challenges
and opportunities
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Direction - setting
goals for the corporation
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Resources - securing
resources to achieve the desired results and realize the
corporation’s vision and goals
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Monitoring -
periodically reviewing the relationship between the
corporation’s resources and its vision and direction,
ensuring that the organizational vehicle is
well-maintained and progressing, within legal limits,
towards its destination
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Accountability -
ensuring efficient use of resources and reporting
progress and detours to the corporation’s stakeholders
How
to Achieve Good Governance
Good governance is the responsibility of
the directors, who have the duty and power to manage the
affairs of a corporation.
The key for the directors achieving good
governance is the exercise of due diligence.
In order to exercise due diligence, directors
must be familiar with and understand the governing
documents of the corporation, its objects and
activities, and its financial position.
The directors must also understand the statutes,
regulations and policies under which the corporation
operates and be familiar with the regulators who have
jurisdiction over the corporation.
Good governance also includes being aware of and
taking a pro-active approach in the following areas that
are identified in a Report by the Panel on
Accountability and Governance in the Voluntary Sector,
entitled “Building on Strength: Improving Governance
and Accountability in Canada’s Voluntary Sector”,
February 1999:
1.
Mission and Strategic
Planning
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Directors are
responsible for developing and carrying out the mission
of the corporation, which includes determining the
organization’s vision and direction as well as
ensuring the availability of resources.
In carrying out their duties, the directors must
fulfill their duty to ensure that the corporation act
within the authorized powers of the corporation.
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The organization’s
mission statement and organizational goals must be
consistent with the law and within the corporation’s
authorized powers, including, but not limited to:
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the letters patent of
the corporation
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the organization’s
constitution
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the corporate by-laws
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the organization’s
trust deed
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federal and provincial
legislation
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other restrictions
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Directors should
undertake a periodic review of the corporation’s
mission and strategic plan to ensure that they are
compatible with the organization’s vision, direction,
and resources, as well as in compliance with the law.
2. Transparency and
Communication
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Directors are
responsible for communicating to members, stakeholders
and the public about the affairs of the corporation.
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In order to ensure
effective communication, the board should:
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establish policies for
communication and feedback
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establish a code of
ethics for the board
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establish a complaint
and grievance procedure
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meet regularly
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keep proper minutes and
corporate records
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respond appropriately
to requests for information
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develop a privacy
policy
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Effective communication
from the board to its members, stakeholders and the
public and the establishment of appropriate means for
the latter to be heard will ensure the ability of the
board to respond to appropriately to issues that may
arise and to evaluate the corporation’s mission and
goals.
3.
Organizational
Structures
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Directors must develop
appropriate structures for the organization that will
enable it to achieve its vision.
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Developing an
organizational structure includes deciding whether to
incorporate or to carry on as an unincorporated
association.
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No single structure is
appropriate for all organizations; each organization is
different and its structure may change over time.
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Depending on what
organizational structure is deemed appropriate, the
directors must produce the documents which determine the
organization’s structure, objects and authority, such
as:
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letters patent
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constitution
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by-laws
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Directors must ensure
the proper and legal approval of:
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In order for the
structure of an organization to be effective, the
directors must develop proper and legal procedures for
directors and members meetings
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A corporate audit
committee is a useful and important means to help ensure
that the directors’ duty to comply with the statutory
and common law are satisfied by reviewing the structure
of the corporation at regular intervals and reporting on
whether the organization is in compliance with the laws,
rules, regulations etc., and whether the management,
information and control systems are in place to carry
out these laws.
4. The Role of the Board
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In addition to
understanding the corporation’s goals, structure, and
activities, directors must understanding the role of the
board and their duties as directors
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Directors should
develop a board governance policy and a code of conduct
for board members to give the directors guidance for how
to proceed under various circumstances that might arise
and ways in which the directors may discharge their
duties.
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The board should
develop a conflict of interest policy to assist the
directors to discharge their duty to avoid conflict of
interests so that expectations of directors in the event
of conflict of interest are clear both to the directors
themselves, to members or other stakeholders, or to the
public.
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Directors need to
ensure their continuous education with regard to the
activities of the corporation, relevant legislation, and
the industry within which the organization operates.
5.
Fiscal Responsibility
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Fiscal responsibility
is a very important part of ensuring that a corporation
can meet its goals and objectives.
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Even if management runs
the day-to-day affairs of the corporation, the directors
are ultimately responsible for establishing and
maintaining fiscal responsibility in order that the
directors may discharge their duty to manage and protect
the assets of the organization.
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Directors must
establish a budget, monitor and control expenditures,
and maintain proper accounting books and records.
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Directors must prepare
and audit the financial statements of the corporation.
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Directors must exercise
proper management of the assets of the corporation,
investing them appropriately if necessary.
6. Human Resources
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Directors should ensure
that an effective management team is in place and
providing oversight of human resources.
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Effective management of
employees includes:
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ensuring compliance
with employment legislation and workplace safety
regulations
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establishing policies
and procedures for the day-to-day operations of the
corporation and for certain extraordinary circumstances
that might arise
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Effective management of
volunteers involves establishing policies for
recruitment and supervision of volunteers, and
especially screening potential volunteers.
7. Implementing Assessment
and Control Systems
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Directors should
establish a framework of internal regulation, including
a code of ethical conduct and policies on various areas
of concern, to give management and employees guidance on
how to handle issues that might arise.
This would assist the directors to fulfill a
number of their duties, such as the duty of honesty, the
duty of loyalty, and the to act in the best interests of
the organization etc.
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Establishing periodic
review and audit procedures for the corporations,
policies and assessment and control systems will enable
a pro-active approach to emerging issues and challenges
or to changes in the legislative or operating
environment of the corporation
8. Planning for the
Succession and Diversity of the Board
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One of the main
benefits of incorporation is longevity; a corporation is
not contingent on the availability or capacity of its
members.
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In appointing new
directors it is important to ensure the diversity of the
board, making sure that the directors bring a variety of
useful and relevant expertise to the operations of the
corporation.
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New directors need to
be given appropriate orientation to the organization and
its governing documents, structure, and activities, as
well as the duties of directors.
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Existing directors need
to be continually reminded of their duties, as well as
to keep up-to-date with changes in the law that is
relevant to the operations and governance of the
organization.
Terrance
S. Carter, B.A., LL.B. and Theresa
L.M. Man, B.Sc., M.Mus., LL.B. are with Carter &
Associates (Carters),
one of the leading law firms in Canada in the area of
charity and not-for-profit law. Carters is able to
provide a full range of legal services to its charitable
and not-for-profit clients, as well as to individuals,
corporations and businesses.
This summary is provided
as an information service by Carter & Associates. It
is current only as of the date of the summary and does
not reflect subsequent changes in the law. This summary
is distributed with the understanding that it does not
constitute legal advice or establish the
solicitor/client relationship byway of any information
contained herein. The contents are intended for general
information purposes only and under no circumstances can
be relied upon for legal decision-making. Readers are
advised to consult with a qualified lawyer and obtain a
written opinion concerning the specifics of their
particular situation.
© 2003
Carter & Associates. Reproduced with permission.
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JULY 2003
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