Before you join the board of a non-profit organization, it is important to understand what you’re undertaking. This includes understanding the job of a non-profit director, your duties and responsibilities, as well as your potential liabilities. Directors are personally responsible if they fail to fulfill their legal duties to the corporation.
Responsibilities of a non-profit board
Joining a board of directors of a non-profit corporation can be a rewarding and fulfilling experience. It does, however, require a commitment to understanding and fulfilling the duties and responsibilities that come with the role.
A director of a non-profit corporation is a member of the corporation’s governing board. The board is responsible for overseeing the corporation’s affairs on behalf of its members. It also provides strategic direction and leadership.
A director of a non-profit corporation is a volunteer, generally not compensated. They may be appointed or elected to their job. At the same time, a director may also be an officer of the corporation. An officer is someone who performs a specific corporate role such as president, treasurer or secretary.
Accepting a job as a director on a non-profit board means taking on certain responsibilities and the associated liabilities. Directors are personally responsible if they fail to fulfill their legal duties to the corporation. Understanding the role and duties of directors helps one to see how directors should act and where things can go wrong.
Legal duties of directors and officers
Directors have legal duties to which they must adhere. Any judgment as to whether or not directors have acted as they should is assessed by the legal system in light of their legal duties. Have they acted as they agreed to when they signed on as directors of the organization? Have they fulfilled their legal duties?
Those duties are spelled out in the non-profit corporation laws enacted by provincial, state and federal governments. Review the laws in the jurisdiction in which the organization is incorporated. Directors of charities are held to an even higher standard of conduct than those of other types of non-profit corporations.
The principle legal duties of non-profit directors can be summarized for most jurisdictions as follows:
- Duty to manage;
- Duty of loyalty;
- Duty of care; and
- Duty to obey.
Duty to manage
The duty to manage sets out that the director shall manage, or supervise the management of the activities and affairs of a corporation. An example of failing to manage: a director doesn’t properly deal with a complaint or allegation made by an employee.
Duty of loyalty
The duty of loyalty requires that a director act honestly and in good faith in the best interests of the corporation. There should be no conflict between a director’s obligation to the non-profit organization and the director’s personal situation. An example of failing to act with loyalty: hiring a family member for a role even though they are not the best candidate for that job.
Duty of care
The duty of care sets out that a director must exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. While this can be quite subjective, not adhering to the duty of care often arises from not understanding the role one has taken on as a director. Directors need to separate their profession from their role as directors. For example, while a director may be an accountant by profession, it is not their role to act as an accountant on the board. If you’re an independent director then your role is to be the best director that you can be.
Duty to obey
Finally, the duty to obey sets out that a director must follow applicable laws, acts, regulations, and by-laws. An example of failing the duty to obey: not understanding the tax code that applies to a director’s non-profit. Failing to understand this could result in inadvertently failing to comply putting the organization’s charitable status at risk.
When are you personally liable?
A non-profit corporation is its own legal entity. This means that the corporation has a legal status that is separate and distinct from its directors, members and other stakeholders. As a legal entity, a corporation can sign contracts, own property, sue, and be sued and be held vicariously responsible for the acts of its employees. In general, directors are not personally responsible for the acts of the corporation. Directors ARE however, personally responsible if they fail to fulfill their legal duties to the corporation. In other words, directors and officers may be held personally liable should they fail to fulfill those duties or be sued for allegedly failing to fulfill those duties.
The legal expectations of a non-profit corporation and its board members are detailed in laws, regulations, and the organization’s own bylaws. Nevertheless, claims still happen. A third party may decide to bring legal action against the board, or even individual directors, claiming that they suffered injury as a result of the board or director’s alleged wrongful act; a wrongful act such as an error, misstatement, breach of duty etc.
Here are a few examples of situations that can give rise to claims:
- differences of opinion on what is expected;
- a lack of transparency on how the organization is run;
- decisions not well documented; and
- disgruntled employees or members.
Even if the courts prove the allegations to be false, simply defending against them can be costly.
What happens if you get sued?
Before you sign on to a director role, pay attention to the corporation’s indemnification and insurance program. Ensure you understand it well and that it meets your needs.
Indemnification is about making things right so that directors do not suffer financially as a result of doing their jobs. In an indemnity and insurance program, law, contract, and insurance work together to protect the personal liability of directors and officers. With no D&O insurance or other indemnity mechanism in place, many might consider the prospect of holding a director or senior management position to be too risky and organizations could have a difficult time filling those roles with the best people for the job; or with anyone at all.
Non-profits are subject to statutory requirements, such as the Canada Not-for-profit-Corporation Act, that spell out what a non-profit organization may and may not do in terms of indemnifying its directors and officers.
Corporate bylaws should include the organization’s own unique terms about when, where, and how the organization will and will not indemnify its directors and officers.
The indemnification agreement is usually part of the employment or appointment agreement between an individual director and the organization. This contract can be enforced in a court of law. The agreement states that if something goes wrong and the director has done their best, the organization will reimburse, to the director, the defence costs and the damages incurred. Some agreements also stipulate that the organization must obtain D&O insurance coverage.
Not-for-profit directors’ and officers’ liability insurance
Not-for-profit directors’ and officers’ liability insurance protects directors and officers from personal financial loss as a result of claims brought against them in the course of their regular duties of managing or overseeing the management of the organization. The policy specifies what will be paid to the organization by the insurance company, if an event occurs that requires the organization to indemnify a director or officer as required by that person’s indemnification agreement and the corporate bylaws. In the case of a non-profit organization, directly indemnifying a director or officer and then requesting reimbursement from the insurer is often not feasible or possible. In such situations the insurance may indemnify the director or officer directly.
- Be aware of the liability risks associated with accepting a non-profit board position.
- Directors are personally responsible if they fail to fulfill their legal duties.
- Defending against allegations can be costly.
- Indemnification is about making things right so directors don’t suffer financially for doing their job.