Education Foundations – Directors’ Personal Liability

February 24, 2016 | Nadya Tymochenko

School boards and private schools often choose to establish a separate corporation for the purposes of fundraising, and register the corporation as a charity.  Foundations can generate many benefits for a school or school board and the community they serve, but for those who volunteer to sit on the board of directors, there are significant responsibilities.
At common law and pursuant to statute, a director has a fiduciary duty to act in the best interests of the corporation. An even higher duty of care is owed for a board of directors of a registered charity responsible for funds held in trust for charitable purposes.  The standard of care, sometimes referred to as a trustee standard, requires a director to demonstrate “a degree of skill and prudence comparable to a reasonable business person caring for his or her own property.”
Directors of a charity may be held personally liable for a breach of trust, imprudent investment of the corporation’s property, mismanagement of the corporation’s assets, the misdirection of a special purpose trust managed by the corporation, or a breach of corporate authority.
Ensuring that adequate monitoring processes are in place, and requesting regular reports from management, agents and advisors can assist directors in meeting their duty of care.  A foundation should have an appropriate investment policy, and directors should receive regular reports verifying that investments are made in compliance with the policy.  Similarly, directors should receive reports regarding the allocation of trust funds that have been established with special purposes.  Directors should ensure that they receive, review and understand the foundation’s financial statements and auditor’s reports to satisfy themselves that assets and liabilities are being managed prudently. 

In addition to the duty of care, directors also owe a duty of loyalty to the foundation, and must therefore avoid situations where their personal interests conflict with those of the foundation, or where their loyalty to the foundation may be compromised by a duty of loyalty to another organization, such as the school or school board.  The duty of loyalty includes an obligation to protect the foundation’s confidential information.  Confidentiality and conflict of interest policies can assist directors in understanding and meeting these duties.

Directors should be familiar with the foundation’s articles of incorporation or letters patent, and bylaws, which together define the corporate authority and governance structure.  The bylaw may address the foundation’s indemnification of directors.  Directors should also review the extent of the foundation’s liability insurance for directors and officers, and any exclusions.

Some statutes (for example, statutes relating to employment, employee safety, disability accommodation, taxes, electronic communications, and corporate record keeping) impose personal liability on directors, where a failure to ensure the foundation’s compliance can result in a fine, repayment of a debt, and in some cases, imprisonment.  However, a director may be able to establish a “due diligence” defense where there is evidence that the board requested and received confirmation that the foundation complied with its statutory duties, and it was reasonable to rely on the information provided. 

Contributing time and energy to an educational foundation can be personally fulfilling and of great benefit to the community.  A board of directors which is well-informed about its legal responsibilities and has ensured that measures are in place to protect the foundation’s assets in a manner consistent with common law and statutory requirements will serve the charity and its beneficiaries well.


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