Kate Neonakis Directors’ Liability in a Not-for-Profit Organization

Overview  Introduction  Not-for-profit Organizations  What is a Board  What is a Director  Role of the Director  Liability  Protection against liability  Avoiding Liability through risk management.  Conclusion

Introduction  36% of Canadian volunteers hold positions on boards and committees  Not-for-profit organizations within a changing society  Unintentional transgressions

Not-For-Profit Organizations  Types of not-for-profit organizations  Objectives of not-for-profit organizations  Differential tax treatment

Legal Structure of a Not-For-Profit Organization  Corporations/Societies  Trusts  Unincorporated Associations  Co-operatives

What is a Board  ‘Hands-on’ or policy governing  Responsibilities of the board Provide leadership Govern the affairs on behalf of its members

What is a Director  Operating mind of the organization De facto director  Special categories of directors Ex officio Director Honourary Director Public Director (public representation)

Role of the Directors  Governing the affairs of the organization on behalf of the members  Management of the Organization Supervising senior staff Providing strategic planning Developing and implementing corporate policy  Relationship of Trust

Role of the Directors  Duties  Standard of Care  Liability

Duties of Directors  Duty of loyalty  Duty of diligence  Duty to exercise power  Duty of obedience  Duty to continue

Heightened Duties  If the organization takes on the characteristics of a trust Duty to comply with donor restrictions Duty to invest Duty to protect and conserve trust property Duty to apply to the court for clarification Duty to keep accounts

Standard of Care  The level and attention that a director must give to each of their duties  Individuals with greater abilities have greater responsibilities

Liability  What is liability and its consequences  General rule  Incurring liability Lack of experience Dereliction of duty Abuse of power Under Federal or Provincial statutes Jointly responsible

Statutory Liabilities  Employees Wages Source deductions under Income Tax Act Sexual/Physical Harassment  Environmental  Taxation – compliance  Excise Tax Act

Protection from Liability  Directors acting within the scope of their authority.  Due diligence  Volunteer Protection Act  Indemnity from corporation  Directors’ and officers’ liability insurance

Scope of Authority  Not liable if acting within their scope of authority  Liability can be incurred if act is outside the scope of authority  Acts confirmed by the corporation  Acts beyond the objects and powers of the corporation

Due Diligence  Exercising the care, diligence and skill of a prudent person  Acting in good faith not sufficient  Reliance on professional advisors, staff

Volunteer Protection Act  The Volunteer Protection Act, S.N.S provides limited protection to volunteers  Limitations are Must be within their volunteer responsibilities Does not override Federal legislation

Indemnity  Many organizations ‘indemnify’ their directors against liability.  An indemnified director could be compensated for Legal fees Fines paid under a statute A financial settlement that resulted from a lawsuit Any other legal obligations

Directors' and Officers’ Liability Insurance  Used to mitigate risk  Similar to general liability insurance  Covers the ‘wrongful acts’ of a director An error A misstatement A misleading statement, act, or omission Other breaches of duty by an insured person in her or her insured capacity

Directors' and Officers’ Liability Insurance  Allegations of a wrongful act  Cost of defending a claim  Understanding the insurance policy and its exclusions  Coverage is usually excluded for Directors acting outside the scope of their duties Breach of contract, including wrongful dismissal Fines and penalties under a statute or regulation Complaints under a human rights code

Avoiding Liability Through Risk Management  Be mindful of the risks  Examine situations cautiously  Think ahead of the potential risks and consequences

Avoiding Liability Through Risk Management 3 part process 1.Look at the situation to determine what can go wrong and what harm could result 2.Identifying practical measures that can be taken to avoid the harm 3.If harm does occur, identify practical measures that can be taken to lessen the impact of the harm

Avoiding Liability Through Risk Management  Linked to the concept of ‘Standard of Care’  Measures to be taken Training and educating staff and volunteers Enforcing reasonable rules Inspecting and maintaining facilities and equipment Screening and supervising staff and volunteers Properly documenting meetings and decisions and Meeting all statutory reporting requirements

Avoiding Liability Through Risk Management  The most effective and least expensive risk management technique is common sense  Voluntary organizations can capitalize on this by Recruiting capable board members Providing an orientation Clear job descriptions Supporting Professional development Reward risk management thinking and behavior

Conclusions  Generally board members are monitors, not managers  Only responsible to the extent that they knew or ought to have known of potential problems and failed to remedy them  Nevertheless, the risks are real