Expertise and skill should be key considerations for not-for-profit corporations (NFPs) when selecting their directors and officers. Directors and officers of a not-for-profit corporation are under a fiduciary obligation to the NFP in the same manner as directors and officers of business corporations.[1] This fiduciary relationship requires directors and officers to ensure that they exercise their powers with skill and diligence and in the best interest of the corporation. It is essential that directors and officers discharge their responsibilities in accordance with the applicable standard of care, determined by the incorporating statute of the corporation in question. Common law imposes a subjective standard of care but some incorporating statutes override this and expressly provide for an objective standard of care.[2] In applying an objective standard of care to determine whether a director or officer has breached their fiduciary duty, a court will test their actions against those of a reasonably prudent person in the circumstances. Directors and officers of NFPs incorporated under a provincial statute in which the standard of care is not codified[3] are held to the common law subjective standard of care – where a court examines the particular skill and ability of the director in question.
The standard of care of directors and officers is made up of two entwined concepts: (i) skill and diligence; and (ii) the Business Judgment Rule. Skill and diligence require a director or officer to utilize an appropriate degree of skill in carrying out their obligations while always being fully engaged in the organization’s management, and familiar with its mandate, policies and operations. The Business Judgement Rule, on the other hand, is a rebuttable presumption where the courts will defer to the decisions of directors and officers taken in good faith, in the absence of conflicts of interest, provided that the directors/officers acted fairly in carrying out reasonable investigation and considered reasonable alternatives in making the decision. In UPM v. UPM[4], the court explains that it ….. “looks to see that the directors made a reasonable decision, not a perfect decision.”
Although no minimum level of skill is required, directors and officers should ideally be selected based on their individual skill and experience and upon consideration of how those skills may be applied usefully in discharging their duties. Directors that are subject to a subjective standard of care may be held to a higher standard based on their skills and experience. Directors who are lawyers or accountants, for example, will be expected to utilize their particular expertise in exercising greater care than a director who does not have these specialized skills and educational background.
The realm of not-for-profit organizations is subject to stringent regulation which directors and officers should constantly keep in mind. Reporting obligations, regulatory requirements, audits and so on mean that directors and officers must not only be skilled and experienced, but also make active efforts to enhance their knowledge in the sector and develop the necessary skill to constantly meet the standard of care.
This is especially important for directors of registered charities who may be held to a higher standard of care – equivalent to that of a trustee of a charitable trust. The trustee standard requires directors to exercise the degree of skill, prudence and diligence of a reasonable and prudent person in managing their own affairs. Registered charities are also within the purview of the Income Tax Act (ITA)[5] and the Canada Revenue Agency, which imposes a duty on directors to ensure compliance with the ITA in several areas, such as ensuring the organization operates exclusively for charitable purposes and that it meets its disbursement quota.
Where a director or officer breaches their fiduciary duty resulting in a loss to the corporation, including improperly managing the corporation’s assets or recklessly making decisions which directly result in a loss of its assets, they may be held personally liable for such loss. While most governing documents for registered charities and other NFPs may provide for director’s and officer’s liability insurance for the benefit of the corporation, directors and officers should nevertheless seek out sound advice from experienced legal counsel in the not-for-profit space.
[1] Ontario (Public Trustee) v. Toronto Humane Society [1987] O.J. No. 534
[2] s.148(1) of the Canada Not-for-Profit Corporations Act S.C. 2009, c. 23, and provincial not-for-profit legislation e.g. Ontario: s.43(1) Not-for-Profit Corporations Act, 2010, S.O. 2010, c. 15; British Columbia: s.53(1) Societies Act, SBC 2015, c 18; Manitoba: s117(1) The Corporations Act, CCSM c C225.
[3] Such as Alberta’s Societies Act, RSA 2000, c S-14
[4] UPM-Kymmene Corp. v. UPM-Kymmene Miramichi Inc. 2002 CarswellOnt 2096
[5] R.S.C., 1985, c. 1 (5th Supp.)
