Director’s Responsibilities and Liabilities
If you are active in an industry associations, you may serve one or more terms on the Board of Directors. The Board of Directors govern most non-profit organizations. If you are asked to serve (or are currently a director) on any non-profit board, you should be aware of your legal responsibilities and liabilities. Here are some of the things you should know.
Directors do not have to be perfect. Directors only have to demonstrate honesty, good faith, loyalty and reasonableness of conduct, given the circumstances.
Directors manage the business and affairs of an association. A director's duty can be formally stated in two parts: a) a director must act honestly and in good faith and in the best interests of the association; and b) a director must exercise the care, diligence and skill that a normally prudent person would exercise in comparable circumstances.
The officers of the association (secretary, treasurer, president, etc.) have the same duties and liabilities as directors. This applies whether or not the officer is also a director.
A director owes the association the duties of loyalty, honesty and good faith. These are fiduciary duties. The personal interests of any director must not conflict with the association. If this happens, the director is liable to pay for any loss the association suffers and has to pay to the association any benefits the director wrongfully received.
In short, directors:
1. Must not take opportunities for themselves that are available to the association.
2. Should not allow their personal interests to conflict with the association's.
3. Should declare their interests in contracts with the association.
4. Should refrain from voting (and probably even taking part in the discussion) on resolutions where they have a personal interest.
5. Have an obligation to keep association information confidential.
6. Must keep in mind that their decisions must be in the best interests of the members of the association.
Standards of Performance
Directors must exercise the "care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances." This standard of conduct requires directors to take all reasonable care applicable to the circumstances, examples being:
1. Directors should regularly attend committee and board meetings.
2. A duty to become informed before acting.
3. Insisting on receipt of enough information on the operations and issues affecting the association to be able to make informed decisions.
4. Making such inquiries as necessary, including obtaining advice from outside experts, to ensure decisions are informed.
The result does not have to be perfect because directors are often required to take risks in advancing the association's interest, but the risks have to be calculated and the decision supportable.
Duty to Manage
Directors, as a Board of Directors, manage the business and affairs of the association. Practically speaking, it is impossible for the board to attend to every detail of the organization's operation. Generally, the role of the board is more one of supervision than of hands-on management.
The board may delegate duties to officers but the board can not give up its general duty to manage. In other words, directors should not abdicate their duty though excess or irresponsible delegation.
Reliance on Professional Advice
Sometimes, a director's standard of performance on technical or complicated matters will be good enough if the director relies on others, e.g., accountant, lawyer, engineer, etc.
However, a director must still make sure advice is obtained from professionals who are independent and have appropriate experience and expertise. Directors can not ignore their own knowledge of the facts or fail to exercise responsible judgment. In the end, directors' decisions can be supported by professional advice; but the decision can not be delegated to such professionals.
General tort principles can make directors personally liable if they have intentionally or negligently caused harm to third parties. Examples of where directors can be held personally liable for damages include:
1. fraudulently inducing the association to breach a contract
2. improper or unjust dismissal of employees; and
3. libel and slander, and so on.
Please note that directors, who act in good faith and within the scope of their authority, will not be held liable for the tortuous acts of the association. It is only when directors act in bad faith or outside the scope of their authority, will they have a problem. For example, an employee may be fired without just cause, but the dismissal may be in the best interests of the association.
There are numerous federal and provincial laws under which directors and officers can incur personal liability. Most of the statutes make directors civilly liable for failing to ensure the association does what the lay says it should. Some legislation provides quasi- criminal liability if the director authorizes, directs, participates or acquiesces in the offense.
There are three ways directors can reduce the risk of liability - due diligence, disclosure of personal interests and self defense.
Mistakes happen. Directors will not be liable for errors made in circumstances where they acted honestly, in good faith and made reasonable efforts to make an informed decision that was in the association's interests. Simply put, assume some directors face personal lawsuits because they made a bad decision. If the bad decision was made after due diligence, the directors should be all right.
Due diligence can be established if the record or evidence shows the directors made an informed decision. This is demonstrated by:
1. obtaining necessary information relating to the issues involved;
2. examining the information;
3. making inquiries;
4. where appropriate, seeking outside professional advice; and
5. taking the time necessary to ensure that the decisions are informed decisions.
It helps if directors put in place systems to address compliance and that the systems are periodically reviewed for adequacy. That is why a Director's Handbook, including various check sheets, are commonly developed by societies and associations. Of course, if check sheets are available and not followed, then the directors will likely pay.
Disclosure of Personal Interests
Directors must disclose any personal interest they may have in association dealings at the first opportunity in writing. Alternatively, the director can disclose the interest orally and request the nature and extent of the interest to be entered in the minutes of a meeting.
A director with a material interest must not vote on any resolution to approve the contact. If a director or officer does not disclose his interest and the contract is approved then:
1. the contract could be voided because the conflicted director is present or even just counted in determining the quorum at the meeting authorizing the agreement; and
2. the director could have to pay the association any profit he made from the contract.
It is a good idea for the association to maintain a register of disclosures. The register should be open to examination by members as well as directors.
A director who is present at a directors' meeting is deemed to have consented to resolutions passed or actions taken unless:
1. the director requests that an abstention or dissent be entered in the minutes;
2. the director sends written dissent to the secretary of the meeting before the meeting is adjourned;
3. the director sends a dissent by registered mail or delivers it to the registered office of the association immediately after the meeting is adjourned, or
4. the director otherwise proves that he or she did not consent to the resolution or action.
A director who votes for or consents to a resolution or action is not entitled to dissent. So, if you think the Board is wrong, it is not enough to abstain - vote against the motion and make sure the vote is recorded.
INDEMNITY AND INSURANCE
There are steps that can be taken to shield a director from paying for mistakes. Unfortunately, the protection only helps the wallet. The hassle, inconvenience and waste of time incurred dealing with the problem still remains.
An association may indemnify a current or former director or officer against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by the director in respect to any civil, criminal or administrative action if:
1. the director acted honestly and in good faith with a view to the best interests of the association; and
2. in the case of a criminal or administrative action that is enforced by a fine, the director had reasonable grounds for believing his or her conduct was lawful.
A couple of things can be done to ensure that a director does not face personal loss. First the association's by-laws should state that if a director's actions meet the statutory fiduciary requirements, the director would be indemnified. Second, protection for a director may be improved by an agreement for indemnification between the director and the association.
Now the only problem is whether or not the association has the money to pay the director back. This leads to the topic of directors' insurance.
An association may purchase and maintain insurance for the benefit of current and former directors against liability incurred in the capacity as a director or officer of the association. Of course, the general exception still applies. The director must act honestly and in good faith and in the best interests of the association, otherwise the insurance will not cover the problem.
Contact your insurance agent for more information and options available.
Risk management is not buying insurance or winning lawsuits. It is protecting and conserving the association's resources and providing membership services sensibly. The purpose of risk management is to improve your operations by having risks acknowledged and controlled. Remember, insurance should be the last decision - not the first - otherwise it is substituting action for thought.
Acting as a Director
If you are to act in a responsible manner as a director of an incorporated non-profit organization, follow these steps:
1. Attend all board meetings.
2. Ensure that you receive and read, prior to meetings, all documents and reports on which voting will take place.
3. Review with care all minutes of the meetings.
4. Keep notes of your impressions of the meetings.
5. Keep a notebook of all minutes and other important documents.
6. Insist on written professional opinions from specialists on whose advice the Board is expected to act on.
7. Insist the minutes record any disclosure, dissent, or refrain from voting by you or any other member of the Board.
8. Vote against any disbursement if there is a question of the insolvency of the corporation.
9. Send a letter by registered mail to the non-profit corporation if the Secretary or Chairperson refuses to record your disclosure, dissent or refrain from voting.
10. Know the nature and extent of the association by-laws and policies.
11. Install internal controls to oversee cheques and execution of contracts.
12. Maintain a director's manual containing all corporate documents and relevant information, and ensure that is kept up to date.
13. Comply with the duty of confidentiality for all corporate information.
[This article is based on information provided by Kirk Sisson, Q.C., of the law firm of Sisson Warren Sinclair of Red Deer, Alberta Canada. Because of the differences in jurisdictions, this article is for general information only, and should NOT be construed as providing legal advice. Please contact a local legal professional if you have any specific questions or concerns.]