Introduction
People serve as volunteer directors or officers for not-for profit organizations for different reasons. They come from varying backgrounds and bring different experiences to the table. However, many people do not understand their duties and corresponding liabilities as directors . In the first part of a series entitled, “So you’ve joined a not for profit board of directors … Now what?”, I will discuss directors’ duties.
Duty of Care
A director of a not-for-profit corporation has a “fiduciary duty” to act only in the best interest of the corporation. “Fiduciary” means a “duty of utmost good faith.” In New Brunswick (and in many other provinces), the legislation governing not-for-profit corporations (Companies Act in New Brunswick) does not provide for a statutory standard of care for directors of a not-for-profit corporation. Therefore, a director of a not for profit corporation in New Brunswick has a common law subjective standard of care to the corporation. This requires a director to demonstrate reasonable skills for a person of his/her knowledge and experience (see Re: City Equitable Fire Insurance Company Limited, [1925] 40 ChD 41 ). This standard is “subjective” because it depends on a person’s particular experiences and qualifications.
Comparitavely, under the Canada Not-for-profit Corporations Act (“CNCA”), subsection 148(1) creates an objective standard of care for directors of federal not for profit corporations:
Duties of directors and officers
148. (1) Every director and officer of a corporation in exercising their powers and discharging their duties shall
(a) act honestly and in good faith with a view to the best interests of the corporation; and
(b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
This standard is “objective” because it does not take into account a particular person’s experiences or knowledge. Instead, the focus is on what a “reasonably prudent person” would do in comparable circumstances.
What does this mean?
If this is confusing to you, you are not alone. One author notes that “identifying the standard of care with any precision is a challenging task.” (Terrance S. Carter and Ryan M. Prendergast, Duties and Liabilities of Directors and Officers of Charities and Non-Profit Organizations (Toronto: Law Society of Upper Canada Emerging Issues in Directors’ and Officers’ Liability 2011, March 29, 2011) While it’s difficult to put a subjective standard of care into practice, a not-for profit director’s duties can be broken down into the following sub-duties, which are a little easier to understand:
1. Duty of Loyalty – As a fiduciaries, directors must act with honesty and in good faith in what they reasonably believe to be in the best interests of the corporation. This means that a not for profit director should disclose any conflicts of interest; should place the corporation’s interests above oneself; should not speak negatively about the corporation in public.
2. Duty of Skill or Competence – Directors of not for profit corporations must exercise a certain degree of skill in overseeing the operations of the corporation. This requires directors to make the best decisions they can with the information available. A director will not be liable for mistakes that were made after an honest and good faith evaluation of the circumstances surrounding the decision.
3. Duty of Diligence – Directors of not for profit corporations have a duty to at minimum attend regular meetings, become informed of all aspects of the corporation and to understand and comply with the corporation’s objectives as stated in its Letters Patent and corporate bylaws.
In the next installment of “now what”, I will discuss some specific examples of each of these duties in practice. For more information regarding not for profit directors, check out the links below: