Primer for directors of not-for-profit corporations (Rights, Duties and Practices)
Directors of not-for-profit corporations are, like the organizations they serve, a diverse lot. Perhaps the two characteristics they are all most likely to share are that they are well-intentioned and time-pressed. This book was created with both these factors in mind. We have attempted to prepare a text that will help directors do a good job, as well as protect themselves from potential claims arising from their actions or decisions. We have also attempted to do so in a friendly fashion that does not require prolonged study, but highlights the essentials of what you need to know.
Questions and checklists are included in each chapter to assist readers in addressing the issues raised in the text.
If successful, this book will:
- 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;
- 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;
- 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.
Throughout this book, we have sought:
- to keep the language as simple and untechnical as possible;
- to organize the information in an accessible way and in small, easily digestible sections;
- li>to keep the text concise; and,
- to do all of the above without compromising the integrity of the information.
This book focuses on incorporated not-for-profits. This 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. It excludes, however, the countless informal groups or associations, trusts, cooperatives and other entities that are constituted outside of either federal or provincial not-for-profit corporation statutes.
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. Additionally, 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.
Different terms can mean different things to different people. For the sake of clarity, this primer uses the following terms and definitions:
- "Not-for-profit corporation" refers to entities incorporated under either federal or provincial not-for-profit legislation. In some cases these corporations are charities, in others not. Section 149(1)(l) of the federal Income Tax Act sets out a definition of "non-profit organizations", however it excludes [registered] charities, which are defined in a separate section. To avoid confusion, we generally do not use the term "non-profit organization". The term "not-for-profit" should be understood as applying to the corporate, rather than tax, status of the organization.
We address primarily corporations established under the not-for-profit corporation statutes of the federal and provincial governments. Many other organizations, with a not-for-profit aspect, have been created under Special Acts, Private Acts or other legislation. While some of the principles and advice set out in this book may apply to such organizations, their governance is also regulated by the statutes under which they were created. Corporations incorporated under these statutes are outside the scope of the present text.
- "Charity" refers to either entities that have qualified for charitable registration under the Income Tax Act or entities whose objects would cause the courts to treat them as charities as a matter of law. Although registration of an entity by the Canada Customs and Revenue Agency determines whether it is eligible to issue tax receipts for donations, it is still possible for entities to be "charities" for other purposes even where they are not registered. If the courts determine that, given their purposes and activities, entities are charities, then their operations may be subject to provincial statutes regulating charities and to common law rules dealing with charities.
- "Letters patent" refers to the document(s) setting out the corporate objects or purposes, which are filed with the government of the jurisdiction in which the corporation is established.
- "Organization" is a non-legal term; generally it is used to refer to an association of persons who have come together to pursue some common purpose(s). An organization may be structured legally as a corporation, a trust, a cooperative or other legal entity, or as an unincorporated association. As this book is intended for directors of corporations, unless otherwise specified, the term organization when used in this text should be understood as referring to incorporated organizations.
- "Bylaws" refers to the fundamental rules of governance of the corporation. In some jurisdictions, it is mandatory to file these with the government, in others it is not.
- "Board of directors" or "board" refers to the governing body of the corporation. Some institutions or organizations may use different terms or titles to identify those overseeing the corporation's management. However, "board of directors" is the most widely recognized and accepted term.
- "Director" refers to a member of a board of directors. The term "director" should be understood as referring to any duly elected or appointed member of the board. Most corporations statutes contemplate the possibility of ex officio directors and honourary directors. Some corporations include in their governance structure provisions that restrict the capacity or limit the powers, such as voting rights, of particular individuals affiliated with their board. As such individuals remain potentially subject to liability they are not distinguished from other "directors" in the text.
- "Chair" refers to a person presiding over the board or a committee.
- "Executive director" refers to the individual presiding over the day-to-day operations of a corporation.
- "Member" refers to a person with voting rights in the corporation.
- "Stakeholders" refers to members, and other constituencies of the corporation. These could include (but are not limited to): donors, staff, volunteers, alumni and clients. Again, depending on the practice of your corporation, you may be familiar with some of these functions by other terms.
Readers will find it helpful to be aware of several legal concepts found throughout this book.
- "Statute" or "statutory law" is the general term for legislation and regulations, either federal or provincial, that govern conduct;
- "Common law" is the term for the findings of courts that govern conduct beyond the requirements of statute. Because common law is determined by the collective decisions of judges, it is constantly changing and evolving.
- "Case law" is the term for the findings of courts concerning a particular legal point, or more generally (and in contrast to statutory law) the entire body of judicial findings.
- "Joint and several liability" is the term describing two distinct ways that liability (and thus responsibility to pay damages) may apply. It means that directors are liable both together with one or more of the other directors, and individually, to pay damages. Where this type of liability applies, a party winning an action may pursue any, some or all the directors to satisfy the judgement.
Unless otherwise specified, when we state a rule in this book, we are referring to the federal not-for-profit corporations statute, the Canada Corporations Act, and/or the common law that applies to corporations incorporated under this Act. Each province has its own not-for-profit corporations statutes, and although in general these statutes are very similar, there are important differences. Consequently, it is often impossible to state categorically a rule that applies across all jurisdictions.
Some of this book deals with what directors must do, much of it concerns what directors ought to do, and we also - occasionally - touch on what directors may do. Case law concerning not-for-profit law is relatively rare. While, for instance, there are numerous judgements dealing with conflict of interest in the context of for-profit directors, few rulings are available with respect to the same issue in the not-for-profit context. This results in a large grey area where the line between what the director must do, and what he or she may be permitted to do is blurred. So we cannot tell you, definitively, the legal standard that applies when the director of a charitable not-for-profit deals with the corporation's assets. Where the law is made clear - either through statute or through court decisions - we have attempted to set this out.
Good corporate practice
A recent report of the Institute on Governance suggests good governance is about achieving desired results in a way consistent with democratic values and social justice. It identifies the elements of good governance as:
…Vision (envisioning the future), Direction (setting goals and providing a general 'road map'), Resources (securing resources necessary to achieve the goals or reach the direction), Monitoring (periodically ensuring that the organizational vehicle is well-maintained and progressing, within legal limits, toward its destination), and (ensuring efficient use of resources; reporting progress and detours to stakeholders). Footnote 1
This process obviously goes well beyond meeting legal requirements. How any corporation attains these elements will turn on the characteristics of the corporation and its mandate. However, it can be said that good corporate practice will be impossible without engagement, competent decision making and ongoing evaluation.
In legal proceedings, adherence to good governance practice will not necessarily provide a complete defence. Where, however, a corporation or director can point to having followed an established practice in keeping with good governance, or to have chosen a course in an effort to achieve good governance, this often provides a highly persuasive argument in the corporation or director's favour.
Not-for-profit corporations can qualify for special tax status, and registered charities enjoy an even more generous tax treatment. This means that the public often sees itself as having an interest in how these corporations operate. Concerns can include a not-for-profit corporation unfairly competing with a for-profit entity, or a charity's misuse of donations it receives. These issues are, to some extent, addressed through the legal and regulatory schemes that apply. However, boards and directors also need to be mindful that these considerations give their corporation a public face it otherwise wouldn't have.
Many not-for-profit corporations - and, in particular, charities - enjoy high credibility with the public.Footnote 2 Indeed, this credibility is one of the key strengths of the sector. Essential to maintaining, and building on, such public trust is a corporation's commitment to transparency.
Corporate failures are perhaps the situation in which the impact on public trust of board decisions is most apparent - we can all recite the high profile cases that have resulted in adverse publicity in recent years. More openness would not have solved the underlying problems in many of these cases, but lack of disclosure almost invariably magnified the harm done to the corporation.
Few not-for-profits are sustainable over the long term if they don't enjoy the support of at least a segment of the public. Leaving aside legal requirements, there is a very practical reason for not-for-profit directors to act prudently and with all due care, and for corporations to commit to being as open as possible about their operations. More often than not, a corporation's long term health will turn on its effectiveness in stewarding public trust.
There is no downside to any director always complying with the intent of the law when the letter of the law is unclear, acting in accordance with good governance practice, or being mindful of how a particular action or decision would be seen by the public; indeed, it is a necessity if not-for-profit corporations are to meet the growing demands on them for integrity, accountability and transparency.
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