You are a director of Swings Unlimited, a registered charity that builds public playgrounds for children in inner cities.
Your charity’s bookkeeper made mistakes in the receipts for donations he prepared last year. As a director of Swings Unlimited, you wonder if you’re responsible for this mistake.
This article explains the responsibilities of directors of unincorporated registered charities. The rules for directors of incorporated registered charities are slightly different.
They are explained in our article Duties of Directors – Incorporated Charities. To learn more about what it means to be incorporated, consult our article Charity inc. – Incorporation and Registered Charities.
What is a director?
Organizations are not physical things: no one can see or touch them. This means that organizations like registered charities must act through real people. These people include directors.
A director is part of a group of directors called a “board” of directors. The board supervises the running of the organization.
It is the board as a group that makes decisions, not individual directors on their own. The only exception to this is when a director has been given specific permission to do something on behalf of the board.
Directors are chosen in different ways depending on the organization’s rules. For example, they can be appointed or elected.
What does the board of directors do?
Not all boards operate in exactly the same way, but as a general rule, the board of a registered charity has these responsibilities:
- making sure the organization carries out the mission it has set for itself. (A description of the mission must be included in the documents the charity filed with the government when it applied to register. It will also be described in the charity’s constitution.)
- making sure the organization respects laws that apply to it (tax, health and safety, environment, etc.)
- managing the financial affairs of the organization (budgets, spending, etc.)
- making sure buildings, equipment and other things belonging to the organization are taken care of
- hiring competent senior employees
- creating rules on how important issues will be handled within the organization, for example, keeping certain information confidential
- keeping any records required by law, for example, copies of receipts for donations made to the charity
- giving members access to information about the affairs of the organization
What are the responsibilities of individual directors?
Some organizations have written job descriptions for directors or informally discuss what is expected of them.
But on top of this, the law creates responsibilities for individual directors. These responsibilities apply even if the charity has employees who take care of its day-to-day operations.
- Directors must manage the affairs of the charity with care. This means they must pay attention, attend meetings, hire competent people, try to exercise good judgment and take reasonable steps to manage risks to the organization. They don’t have to be experts, unless they were chosen because they are experts in a particular area. In that case, they must make sure the charity benefits from their expertise. If directors have to deal with issues that go beyond their knowledge, they must seek outside expert help.
- Directors must put their own personal interests aside when they make decisions. For example, directors can’t use their position to get a family member a job with the organization or get business for a company they own. This is referred to as the rule on “conflicts of interest”.
- Directors must make sure the charity respects any laws that apply to its activities. Registered charities must respect income tax laws, but other laws might also apply depending on the nature of the charity. For example, laws on employees, health and safety, and the environment might apply. To learn more, consult our article Rules Registered Charities Must Follow.
- Directors must also make sure the charity follows any internal rules it has created for itself. These rules could deal with things such as how meetings are called or how directors are chosen. At least some of these rules will be founding a document called a constitution, but there may also be other documents with similar rules.
What is the role of the board versus other parts of the organization?
The board is only one part of an organization. There may also be members, employees, volunteers and committees.
The board supervises the operations of the charity. But if the charity has members, they have a right to take part in certain important decisions that affect the organization as a whole. In particular, members have a right to participate in decisions on changing the mission of the organization or changing its internal operating rules (for example, rules on how directors are chosen). They also have a right to take part in any decision to stop the operations of the organization.
As for other decisions concerning the general operation of the charity, the board usually has the final say.
Can the board ask other people to do things on its behalf?
Unless the rules of the organization forbid it, the board can “delegate” some tasks. This means it gives permission to someone else to do things on its behalf. This other person could be, for example, a senior staff person responsible for day-to-day operations.
However, when it delegates, the board must make sure that:
- it delegates to competent people
- the organization’s mission is being carried out
- staff are being treated fairly
- the organization is respecting the law
In other words, the board still has ultimate responsibility for the affairs of the organization.
Are there any risks to being a director?
There are some risks to being a director of an organization, especially if the organization is not incorporated. Directors can be personally responsible for debts that the organization cannot pay. They can be personally responsible when the organization does not respect the law or does not respect its commitments to people outside the organization. For example, if the organization rents a room for a special event and it turns out it cannot pay the rental fee, the directors will be responsible for paying. This can be a big risk when the organization is not incorporated.
Even when the organization is able to pay its debts, directors can occasionally be held personally responsible for harm caused because of something they did or should have done while acting as directors. Usually a simple error of judgment will not be enough to hold a director personally responsible: there must be a serious mistake or failure to act that the director knew or should have known was wrong.
In practice, the greatest personal risks for directors come from a few areas:
- failure to make proper deductions off salaries of employees and pay them to the government (deductions for employment insurance, pensions, parental insurance, etc.)
- failure to charge sales taxes (GST and QST) when required and to pay them to the government
- dismissal of an employee or fellow director or expulsion of a member done in bad faith or without following a fair procedure (for example, giving the person a chance to present her side of the story)
- fraud or breaking the law (Fraud generally means misleading someone to get an unfair or illegal advantage, or misleading in a way that causes someone to suffer a financial loss.)
- doing something for the charity without permission of the board of directors (making a contract, for example)
How can these risks be kept to a minimum?
The best way to reduce risks is for directors to:
- be aware of their responsibilities
- carry out their responsibilities with care
- get outside expert help for issues beyond their knowledge
- take steps to avoid problems
- avoid letting problems linger
- get permission from the board if they need to do something on its behalf or on behalf of the organization
Here are other ways to reduce risk:
Incorporation means you create a legal entity that exists separately from the directors of the organization. Incorporation can reduce some risks for directors. To learn more, consult our article Charity Inc. – Incorporation and Registered Charities.
There are insurance policies that cover damage things the charity owns, and insurance that covers injuries to people on the charity’s premises. Charities can also buy “directors and officers insurance”. It offers some added protection against claims the directors caused harm because of something they did or should have done. To learn more about this kind of insurance, consult the risk protection section of this document on the website of Innovation, Science and Economic Development Canada.
This is a written promise by the organization to cover any costs a director might have to pay as a result of acting as a director. These costs could be fines or lawyer’s fees, for example. This promise is usually included in an organization’s constitution, by-laws or other internal rules. Note that these clauses will not help directors who have acted criminally or dishonestly or who have deliberately caused harm.
Another way for directors to reduce personal risk is to make sure that, if they disagree with a decision taken by the board, this disagreement is recorded in the written record of the meeting, called the “minutes”.