Club of Rome: Eco-nomics for an Ecological Civilization
Directors duties presentation
1. Board of Directors Roles &
Responsibilities -
What Every Board Member Should Know
Presented by: Melissa Krishna
Deputy General Counsel – Special Projects
Pacific Rubiales Energy Corp. (TSX: PRE)
3. Why be a director?
What attracts people to be on a board?
Prestige/status
Interesting and challenging
Satisfying to contribute to the development and growth of an organization
Networking opportunities
Career development
What detracts people from being on boards?
Time commitment
Voluntary
Exposure to liability
4. Ask the Right Questions
What do I know about the organization?
Am I committed to the mission of the organization?
Is it a registered charity?
What potential liabilities do directors of this type of organization face?
What is the financial position of the organization?
Who are the stakeholders?
Am I comfortable with the approach and tone of the organization’s
fundraising efforts?
What is the organization’s reputation and perception from those
unconnected to the organization?
5. Ask the Right Questions (cont’d)
Are the right relationships in place to allow you to
perform effectively as a director?
Who are the other directors – specifically who are the other independent
directors?
What is the relationship of the board with any major stakeholder?
How is the organization funded?
What is the relationship of the board with the Executive Director?
What type of relationship does the board have with the organization’s
auditors?
Do I have any conflicting relationships or interests?
6. Ask the Right Questions (cont’d)
Do I have the time for this commitment?
How many board meetings are held each year?
How long do board meetings generally last?
Is each board member assigned a particular responsibility?
How many committees will I be expected to sit on?
How much prep time is involved for each meeting?
How many other boards am I on?
Are board meetings held at an easily accessible location – how much
travel time is involved?
7. Review the Right Documents
Financial statements
Board mandate
Code of Conduct
Press coverage about the organization including past fundraising efforts
Fundraising reports
Organizational charts/Employee records
Corporate organizational chart
Annual reports
Letters Patent/By-laws
Indemnities and D&O insurance
Tax filings
8. So, it is important to really understand the
underpinnings of the organization – role play
anyone?
10. What is the responsibility of the
Board?
Ensure the objects of the organization are properly undertaken
Ensure the organization does not undertake activities outside its
corporate objects
Set long-range objectives and strategic plans for the organization
Ensure the organization’s financial stability and overall performance
Hire and supervise management, staff and volunteers to do the day-
to-day work of the organization
12. What is the role of a director of an
NPO?
A director is a person who participates in the administration, guidance and
supervision of the affairs of an organization by being on its board
In most provinces, an NPO must have at least 3 directors
In a small organization, directors may be involved in the day-to-day
management of the organization
May also be an officer or a member of the organization
Essential for directors to understand
Why the organization exists
How it is legally structured
Interests of its stakeholders
How risks are managed
13. What kind of organization are you the
director of?
• Registered under the ITA and subject to strict
compliance requirements
• Common law charities: poverty relief;
education; religion; other
• Able to issue tax receipts
• No tax paid on income or capital gains
• Income cannot be paid out to directors
• 50% of directors should be at arms’ length
Charitable
Organization
• CRA does not maintain list as not registered
• Cannot issue tax receipts
• Common examples – sports clubs, recreation
clubs, professional associations
• If profit is earned (incidentally), income must
be used by NPO to carry out its non-profit
purposes
Not for Profit
Organization
14. Director = Fiduciary?
What is a
“fiduciary”?
A fiduciary is a person
having a legal duty to act
primarily for another
person’s benefit and is a
person who:
• Owes another person the duties
of good faith, trust, confidence
and candor; and
• Must exercise a high standard
of care in managing another’s
property
Why are directors
in a fiduciary
relationship?
Because of the
position they occupy
within an organization
The assets belong to
the organization
which can only act
through its directors
15. What fiduciary duties do directors
have?
To act with a
certain level of
skill
To act with
competence and
diligence
Duty of
Care
To act honestly
and in good
faith
To act in the
best interests of
the
organization
Duty of
Loyalty
16. How can a director fulfill
the Duty of Care?
This duty is comprised of the following
responsibilities:
Duty to
Exercise
Power
Duty of
Obedience
Duty to
Continue
Duty of
Diligence
18. Duty to Exercise Power (cont’d)
Directors can breach their fiduciary duty through inaction and
inattention
Directors must take decisions
For charities, directors have an obligation to apply the funds or cause
them to be applied in accordance with the charitable purpose
Directors are responsible for managing the organization, implementing
and enforcing policies and supervising management/staff
Directors must further the organization’s goals and objectives
Directors must properly maintain books, records and minutes of the
corporation
19. An example of ineffective exercise of
power
Video:
http://www.youtube.com/watch?v=FaUkWHT8fEE&l
ist=PLcKPJk4kXm7Om6dKDyzdpOK5IWCEwjasp
20. Duty of Obedience
Directors must comply with all applicable laws and the
organization’s governing documents
Directors should ensure that valid corporate decisions are
implemented
21. Duty to Continue
Directors have continuing obligations to the organization which cannot
be relieved by resignation – for example, confidentiality
Can only resign from the organization where there are adequate
individuals to replace the resigning director
Resignation to avoid personal liability is ineffective and may
constitute a breach of fiduciary duty where the director puts own
interests ahead of those of the organization
22. Duty of Diligence
Directors must be diligent in attending to their legal duties. This is done by:
Being familiar with the organization and being informed;
Preparing for and attending meetings;
Reviewing the minutes of any missed board meetings.
23. Duty of Diligence (cont’d)
Directors should exercise their best judgment when voting on any
decisions, and not simply vote with the majority for no well-informed decision
If a director cannot attend meeting in person, they will generally lose their
ability to vote
Where advice of a specialised nature is required, the board should obtain the
services of a qualified professionals
24. Duty of Diligence (cont’d)
Directors must properly maintain minutes of the organization and ensure that
all other corporate books and records are being maintained in proper order
25. Is there such a thing as too much
diligence?
Video:
http://www.youtube.com/watch?v=iQHr
Zyvao1I
26. How can a director fulfill the
Duty of Loyalty?
This duty is comprised of two main
components
The duty to act honestly
The duty to avoid conflict
of interest
27. Duty to Act Honestly
Directors must deal honestly with the
organization
Directors must not act for an improper purpose
Directors must not act fraudulently
Directors should also be candid about informing
the board if they can no longer afford the time
commitment of being a director
28. Duty to Avoid Conflict of Interest
A conflict
of
interest
can
develop in
two ways:
A personal
conflict between
the director’s
own self-interest
and the best
interest of the
organization
•Directors must act in
the best interests of
the organization and
not their own
A conflict of
duties that the
director owes to
the organization
he or she serves
and to another
organization
•Directors must avoid
situations in which
they have competing
fiduciary duties
29. What should a director do if faced with
a conflict of interest?
30. What should a director do if faced with
a conflict of interest?
Immediately declare the conflict or anything that gives a director the
appearance of a personal benefit
Must abstain from discussing or voting on the matter
Where conflict places the director in a situation in which s/he believes s/he
cannot act in the best interests of the organization as a result of the
conflict, resign
Certain non-profit corporate legislation provides for a narrow exception to the
no-conflicts rule where director follows the declaration of interest provisions
(example: section 98 of the Canada Corporations Act)
In Ontario, directors of charitable organizations may not receive any direct or
indirect benefit/remuneration from the organization without court approval
If conflict has materialized, resign as director of charity if director stands to benefit
directly or indirectly
31. Case study
Andy is the founder of a not-for-profit organization and is also a director. As the
organization has grown, the board has identified a need to appoint an executive
director. Andy, being the founder, has been nominated as a potential candidate for
the position of executive director. In his role as executive director, Andy would be
required to travel significantly.
What questions should we ask in order to identify the issues in the above scenario?
Some considerations:
Is the NFO a charity? Is the charity in Ontario?
Is the executive director a paid position? If not, will Andy be reimbursed for travel?
If not a charity, do the NFO’s by-laws provide for a beneficiary to sit as director?
If it is a charity, is there a court order allowing Andy to get paid and sit on the board?
Conflict of interest – Andy should abstain from voting
32. Standard of Care
For profit
corporations
• Objective
• Directors need to ask: how would a reasonably prudent person conduct
the affairs of the organization?
NFOs
• Subjective
• Directors need to ask: what level of skill and care can be reasonably
expected from a person with my knowledge and experience?
Charities
• Higher order of fiduciary obligations similar to trustees
• Directors need to ask: what level of care would a reasonable and
prudent person of my skill set exercise in managing his or her own
affairs?
34. Liability for Lack of Corporate Authority
An organization’s corporate authority is set out in its letters patent and other
governing documents
Where directors act outside the scope of this authority by undertaking activities
not defined in the letters patent, they may be found liable for the consequences of
such actions
Effectively, directors are considered to have taken the decisions or actions as
individuals rather than as a corporate body, so the “corporate shield” does not
apply
Where necessary, amendments to the governing documents should be made by the
corporation
Example: Letters patent of a NFO state that the corporation’s object is to relieve
poverty by distributing used clothing to the homeless in Ottawa. The corporation applies
for charitable status and is approved. After some research, the directors realize that
what is really needed in the area is a soup kitchen, as winter approaches and food is
needed as much as clothing.
What should be done?
35. Liability for Negligent Mismanagement
Directors can be held personally liable where their own conduct or inaction in
managing the organization contributed to the victim’s injury – for example, situations
involving negligent mismanagement
Negligent mismanagement arises when the injury suffered by the victim can be
attributed to carelessness in the oversight of some aspect of the corporation’s
operations
Where the board knew of, or ought to have foreseen, a systemic problem and failed to
address it
Example: when directors fail to adequately supervise the hiring of
employees/volunteers or to adequately monitor their conduct – common where
allegations of sexual abuse or harassment of employees is involved
Example: where the board adopted a communications policy that resulted in
liber/slander – such as where the practice of denigrating a competitor is endorsed by
the board
36. Liability for Breach of Trust
Remuneration of Directors
In Ontario, directors may not receive direct or indirect remuneration
A director cannot be a paid employee, contractor, etc. of the organization
Legitimate out-of-pocket reimbursements are permitted
Can apply to court to allow for remuneration, but very difficult to obtain
Dealing with Charitable Property
Directors responsible for the way charitable property is handled
Where mismanagement occurs, directors can incur personal liability
for the full amount of any loss
37. Investment of Charitable Funds
Directors have a duty to protect charitable property
Includes a specific/positive duty to invest charitable assets
It is prudent to create an investment policy based on your organization’s risk
tolerance
Directors can face liability exposure as a result of a failure:
To determine and comply with the investment power in governing documents
To determine and comply with statutory investment power of applicable province
To invest in accordance with prudent investor standard
To develop and implement investment and delegation plans
Liability can range from:
Bad investments Overly conservative Missed opportunities
38. Case study
Suzie is the chair of the board of directors of an Ontario charity. Suzie is also a
vice-president at a wealth management fund which is currently assessing
executive bonuses and compensation. Suzie’s co-worker, Gerald, has requested
an opportunity to present to the board on an extremely lucrative investment
product that is projecting a return on investment of 25%. The product involves
investment into a private equity firm which is assessing mining projects in Chad
and Angola.
Gerald is a qualified finance professional with no direct ties to the charity. After
Gerald’s presentation, Suzie, reminds the directors, as chair of the board, that
the directors have a duty to invest the charity’s funds and that inaction could
also be held to be a breach of fiduciary duty.
What should this board do?
Six months after the fact, it is discovered, that all of those who invested in the
product recommended by Gerald enjoyed an ROI of 30%!
How does this change your response?
39. Commingling of funds:
To do or not to do?
Charities are entrusted with public money --- higher level of responsibility
Directors should be aware of gifts that are subject to restrictions, limitations,
etc. such as endowment funds, donor restricted funds, etc.
The general rule is that gifts are to be held in separate accounts and should
not be commingled
In Ontario, charities are now allowed to commingle restricted funds in a single
account for investment purposes (subject to statutory requirements below)
May only commingle if it advances the administration and management of each
restricted fund;
May allocate all gains/losses/income/expenses on a pro rata reasonable basis;
Must maintain detailed records relating to each individual fund and the combined
fund
BUT cannot commingle restricted funds with general funds
40. To commingle or Not to commingle?
Towards the end of a fundraising drive to raise money to send books to a school in
Indonesia, the board of directors learns that the dollars would go further if the
donation was instead made directly to the school. Since the money still benefits the
same school, the board approves the donation.
A charity receives a donation with instructions from the donor to spend the money on
its current efforts to empower youth by running an after-school book club. The
directors decide to put the donation into a perpetual endowment fund, out of which
they would draw sufficient funds each month, amortized over 3 years for the full
amount of the donation.
One of the donors who was going to deliver her donation to the charity is delayed in
getting her payment to the charity due to some administrative setback, but promises
that the charity will have the donation the following month. The charity’s G&A
account is running low. The directors approve the borrowing from one of the charity’s
donor-restricted funds to supplement the shortfall for this month, so long as the
money is replaced the following month when the donation is received.
41. Statutory Liabilities
Not-for-Profit Corporations Act (Ontario)
Directors are jointly and severally liable for employee wages, not exceeding 6
months wages and 12 months vacation pay (but only if employee can’t collect from
corporation)
Failure to keep proper books, records and registers at the head office and failure to
make such records available for inspection by entitled persons
Failure to disclose an interest in a contract – liable for any profit realized from the
contract, voidability of contract and if convicted, penalty of up to $200
Income Tax Act (Canada)
Directors are jointly and severally liable to pay all employee income tax deductions
for two years after ceasing to be a director
For charities, directors may be personally liable if not compliant with numerous
reporting requirements under the Act
Directors could also face penalties where they provide improper tax advice to
others
42. Statutory Liabilities (cont’d)
Anti-terrorism Act (Canada)
Liability risks include seizure of charitable property, loss of charitable status and even
criminal charges
If directors found to be directly or indirectly support or facilitate broadly defined
terrorist activities or groups – even if not known to directors!
Child and Family Services Act (Ontario)
Directors may be liable where its employees fail to report suspected child abuse and
where child abuse occurs as a result of its failure to properly monitor its employees
and operations
Environmental Protection Act (Ontario) and related legislation
Directors are required to take reasonable care to prevent unlawful discharge of
contaminant into the natural environment
43. Fundraising
There are a number of statutes that must be complied with when
undertaking charitable fundraising
Non-compliance may result in personal liability of directors
Some of the statutes to consider are:
The Income Tax Act (Canada)
The Charities Accounting Act (Ontario)
The Competition Act (Canada)
The Privacy Act (Canada)
The Insurance Act (Ontario)
The Securities Act (Ontario)
44. Tools for Directors
Due to the onerous responsibilities placed on directors, specifically in
the not-for-profit sector, courts have established the following
guidelines for directors:
Directors are not liable for mere errors of judgment;
Directors are not required to give continuous attention to the
organization’s affairs;
Director responsibilities are intermittent and performed at periodic board
and committee meetings;
Directors need not attend all board meetings to discharge their fiduciary
obligations;
Directors may entrust certain matters of business to officers, so long as
they continue to supervise;
Directors are justified, in the absence of grounds for suspicion, in trusting
that officers of the organization will perform their duties honestly
45. Tools for Directors (cont’d)
Business judgment rule
Courts look to see that directors made a reasonable decision, not a perfect one
Directors must show that, in coming to a decision, they acted prudently and on a reasonably
informed basis
Due Diligence Defence
In order to demonstrate that an informed decision has been made, directors should:
Have a general knowledge of the laws that affect their organization; and
Inform themselves about the governance model and structure of the organization, what the
organization does and how and who the beneficiaries are
For example, to show awareness and compliance with the ITA, directors can establish a
payroll trust account requiring the Executive Director to provide regular reports on
remittances.
46. Tools for Directors (cont’d)
D&O Insurance and Indemnification
Factors for not-for-profit boards when considering whether directors should have
insurance coverage or indemnity agreements:
1. The degree of risk to which the director or officer is or may be exposed to;
2. Whether, in practice, the risk cannot be eliminated or significantly reduced by
means other than indemnity or insurance;
3. Whether the amount or cost of insurance is reasonable in relation to the risk;
4. Whether the cost of the insurance is reasonable in relation to the revenue
available;
5. Whether it advances the administration and manage of the property to give the
indemnity or purchase the insurance.
47. Risk Assessment
Examples of major risks for NFO:
Loss of major source of funding
Reduction in market value of investments
Fraud and reputational risk
Actual or alleged abuse by employee or volunteer
Create a risk profile and identify the organization’s risk tolerance, based on:
Strength of finances
Donor support
Reputation and Credibility
Competence of volunteers and staff
48. Risk Management
How can boards manage risk?
Strategic planning sessions
Reports at board meetings from staff on performance and risk issues (important to not
just hear from Executive Director)
Motions at board meetings to approve major programs or projects
Periodic sessions specifically to discuss and reassess major risks
In-camera board sessions in all board meetings
4 ways to deal with risk:
Avoid
Transfer (insurance)
Mitigate (checks/balances)
Accept
49. Video: Do you recognize this guy?
(http://www.youtube.com/watch?v=oG_BoGHjUho)
50. Indemnification
Indemnification is a legal term which means “to pay the costs of or to reimburse
another person for costs incurred”
For an NFO, director indemnification would mean the payment by the organization of
the legal costs, expenses, settlements and judgements of a director or
officer, provided that they:
Arise out of his or her acts or omissions while acting within the capacity of a director or
officer,
Are the subject of actual or threatened legal proceedings, and
Where the director has acted honestly and in good faith with a view to the best interests of
the corporation
For charities, indemnification is only permitted so long as doing so doesn’t render the
charitable organization insolvent
Due to the fact that indemnification provisions governing NFOs only permit rather
than require (as is the case with for-profit statutes) indemnification, it is important
for directors to obtain a contractual indemnification agreement (even where letters
patent/by-laws require indemnification because by-laws can be changed)
51. Insurance
TYPE OF COVERAGE:
Must ensure that there is a broad definition of “wrongful act” in the policy that does not
unduly limit coverage
Must ensure there’s a broad definition of “insured person” – should include the reality of
the NFO world – to include employees, volunteers, part-time workers and students
LIMITS
Since the reality of NFOs is that they are often not well-funded and may not be able to
fully indemnify their D&Os, inadequate insurance limits is unwise
DEDUCTIBLES
Generally there is no deductible for coverage afforded to insured individuals under an
NFO policy
However, there will be a modest deductible when coverage is for the NFO itself
EXCLUSIONS
Usually, for fraud, criminal activity, pollution, illegal profit, etc.
For NFO, likely will have a professional services exclusion – for claims based on negligent
supervision and incidentally on professional advice
NFOs must be careful not to engage directors in their professional capacity
52. Other Means of Reducing Liability
Exposure
Form a legal risk management committee
Encourage directors to obtain independent legal advice
when in doubt
Reduce the number of persons serving as members on the
board
Increase the use of committees and advisory boards made
up of individuals who are not board members – diversify
responsibility
Delegate to board committees
54. Final Case Study
Joe owns a construction company and sits on the 6 member board of an Ontario
charitable organization. The head office of the organization is in serious need of
renovations
Joe has recently lost a major client and is looking for ways to supplement the
shortfall
Joe’s company is proposed as a possible option for renovating the head office. Joe
declares his conflict and excuses himself from discussions and voting. Joe usually
takes the minutes of meeting.
Due to the size of the renovation, the decision of the board will be based on majority
voting. Andy was unable to attend the meeting and asked Jane to deliver his vote in
favour of hiring Joe’s company
Andy, being an accountant, has undertaken a substantive role in the preparation of
the organizations financials and tax filings and has spent a considerable amount in
photocopying and filing fees
The board wishes to reimburse Andy and offers to pay him cash. However, Andy would
rather that his daughter be enrolled in the charity’s free music lessons offered to
youth
