4. Fiduciary Duties

By law, a board must act in the interests of the organization. In legal vocabulary, the board is a fiduciary, and owes fiduciary duties to the organization.

The fiduciary duties of federally-regulated not-for-profit corporation are defined in common law rather than statute, so defining them precisely is a question of interpretation. Some provincial statues are more explicit.

One legal expert breaks fiduciary duties into two categories: Duty of Care and Duty of Loyalty.

Duty of care

The duty of care requires a board to act to the best of its ability. The board should not make reckless, ill-advised or ill-informed decisions or knowingly do anything that could hurt the organization. This duty has a number of components.

1. Competence

A director is required to act with skill in carrying out their duties. How much skill? The Canada Not-for-profit Act defines it as that which "a reasonably prudent person would exercise in comparable circumstances." In other words, you don't need to be an expert, but you must recognize when you are out of your depth and act accordingly.

Federal legislation holds directors to an objective standard of care. All directors are expected to act with "reasonable prudence." Most provincial jurisdictions, however, hold directors to a higher standard of competence depending on their expertise, called the subjective standard of care. Accountants, for example, would be expected to act with greater competence in financial matters than non-accountants.

2. Diligence

Directors should attend all meetings, read all relevant documents, including board by-laws, policies, meeting agendas and committee reports, meet deadlines and obligation and keep minutes of meetings. If a decision requires special expertise, the board should find outside help and become sufficiently informed on the topic themselves. Directors should vote based on their own informed opinion, and not just follow the lead of others.

3. Exercise of power

Avoiding taking decisions is as much a breach of duty as making a poorly-informed one. Directors are required to exercise their power for the advancement and well-being of the organization. One of their chief powers is hiring and firing the station manager, so they should be prepared to evaluate their performance regularly.

4. Obedience 

A director must obey the bylaws, regulations and policies of the organization, and all laws governing it, and ensure that the rest of the organization does so as well.

The duty of care does not mean you may never make mistakes! But it does mean that you have to make every effort to avoid them. It's like driving. No one is expected to have the skills of a Formula 1 champion, but if you text while driving, you'll be found guilty when you cause an accident.

Duty of Loyalty

A director is required to act honestly and in good faith towards the organization. Directors should be forthright and open in all their dealings with staff, the public and regulators. If a director no longer has the time to commit to the board, lacks the expertise to make a decision or has a conflict of interest, they should say so.

Conflict of interest can be very difficult to avoid for directors, given that most are involved in many organizations and enterprises (and are valued for this.) Directors must avoid even the appearance of a conflict of interest. If in doubt, declare your interests, speak to the board chair, abstain from votes, and be prepared to resign if necessary. 

You sit on the board of directors at a small rural radio station. The manager has told the board the station needs to hire a summer intern. Your nephew has been looking for work for weeks and would be a perfect fit for the job. What do you do?

Liability

Generally, boards are not liable for the actions of their corporations. There are some exceptions.

Breach of duty

If a board fails in any of its fiduciary duties, it might be sued. For example, a station goes bankrupt and it is found that the board had not reviewed the station's financial statements for the last five months, each director declaring they thought others had "taken care of it." They might be sued by members.

Unpaid salary

A board may be sued for up to six months of unpaid wages, depending on the province of your organization. You may still be liable for unpaid wages for up to a year after quitting a board position.

Unauthorized activities

A non-profit organization is only permitted to carry out the activities described in its registration with Corporations Canada. If a board conducts activities outside that mandate it may be liable for the consequences. For example, a radio station branches out into printing a newsletter with the board's approval. A staff member is hurt in the printing press. The board could be sued for damages. 

More reading

You can consult Innovation, Science and Economic Development Canada's excellent Primer for Boards of Directors of Not-for-Profit Coporations for more information on the laws and liabilities of boards. 

Primer for Directors of Not-for-Profit Corporations

ISED

This book is essential reading for the serious director. The authors - all of them lawyers -  hack through the legal weeds of duty of care, liability, financial risk, insurance and indemnification, and suggest ways first-time directors can prepare themselves for the challenges ahead.