Non-profit corporations have directors, officers and members. That’s a lot of people. What do each of them do?
Executive directors usually run the organization’s day-to-day operations. They know more about the organization than anyone else and have a lot of influence on it.
What happens if they disagree with the board of directors or question its authority? What decisions can they make without the board’s approval?
This article explains the duties and powers of executive directors and their relationship to the board of directors.
Note: The rules explained in this article apply only to incorporated non-profits. See the first question below to find out whether your organization is incorporated.
Is your non-profit incorporated?
Non-profits that want to incorporate must apply to the government. They will usually apply under either the Quebec Companies Act (Part III) for incorporation in Quebec or under the Canada Not-for-profit Corporations Act for federal incorporation.
How do you know if your organization is incorporated? Check whether you have either letters patent or articles of incorporation. These are documents issued by the government when they accept an application to incorporate. The documents will say whether the incorporation was federal or provincial.
An incorporated non-profit might also be called
- a corporation or legal person having no share capital,
- a non-profit corporation, or
- a non-profit legal person.
Where do executive directors get their powers?
Organizations are not physical people and must act through real people. These people include directors. A director is part of a group called a board of directors. The board supervises the running of the organization.
The board itself does not run the organization’s daily activities. Instead, it delegates some of its powers. This means it gives other people permission to act on its behalf and make everyday decisions. For example, it can:
- appoint an executive director to run the day-to-day affairs of the organization
- delegate some powers to an executive committee made up of directors. (Quebec organizations must have at least seven directors and, in order be able to delegate powers to an executive committee, this possibility must be mentioned in the by-laws).
If there is an executive director to run the day-to-day operations, a committee might not be necessary. But an organization that has both should clearly define what each can do.
Important! There are some powers (called discretionary powers) that the board of directors can’t delegate, such as these:
- adopt, modify and cancel by-laws
- fill vacancies on the board of directors
But the board of directors can’t just do whatever it wants. Sometimes it needs permission from the organization’s members, for example, when the board wants to borrow money but the by-laws, letters patent or articles of incorporation say nothing about this.
How are executive directors chosen?
The board chooses executive directors. They must be officers of the organization, but not necessarily directors or members.
Executive directors are employees of the organization and usually get a salary.
The board of directors must make sure its executive director is competent, for example, by appointing a selection committee, posting a job offer or having candidates pass psychometric tests.
If the board puts an incompetent person in a position of responsibility and the organization suffers as a result, the board might have to compensate the organization. The incompetence would have to be serious and obvious when the person was appointed.
Powers of executive directors
Executive directors are officers of the organization and have the powers assigned to them in the organization’s by-laws. The powers can differ from one organization to another.
The by-laws can also allow the board to change the executive director’s powers at any time. The board does this by adopting a resolution.
For example, if the board wants to limit an officer’s powers when it comes to hiring employees, the directors must vote on the issue. If a majority of directors vote to limit this power, the decision is written and signed by the directors. This is called a resolution.
If there is any doubt about the executive director’s powers, the board should either adopt a resolution or change the by-laws to clarify them.
Duties of executive directors
These are some of the responsibilities of executive directors:
- fulfill their duties
- act within the limits of their powers
- act with care, diligence, skill, honesty and loyalty
- avoid conflicts of interest
- not use, for their own benefit, any information or property they receive or are responsible for as part of their duties, unless authorized by the organization. Otherwise, they might have to compensate the organization for any harm it suffers or give back any profits they made.
Supervision of executive directors
In federal non-profits, the board of directors must actively supervise the executive director.
But if there is any reasonable doubt about how the executive director is running the operations, the board of both federal and Quebec non-profits must investigate. Sometimes, they must also take action. If not, the board might have to compensate the non-profit.
For example, if the board notices that the executive director has a much higher standard of living that her salary can provide, it must investigate to see if any money was stolen from the organization. The board must also take action if a series of events would raise suspicions.
Important! This doesn’t mean the board must constantly monitor the executive director.
What if the executive director refuses to answer the board’s questions?
The board of directors can dismiss an executive director for insubordination for not answering its questions satisfactorily. The board can also take other action, such as giving a warning or taking other disciplinary action.
How can the board of directors ensure that the executive director gives it reliable, correct information?
The law is silent on this. But the board must act with care and diligence. This means that before taking any action, it must get the information it needs to make informed decisions and minimize the risk of error.
So, it seems reasonable that the board of directors can question an executive director to ensure that information he gives is correct and reliable.
But the board doesn’t have to do anything unless it suspects the information given by the executive director is incorrect or unreliable.
Can the executive director disobey the board of directors?
Not in theory. Because executive directors act on behalf of the board, they can’t challenge the board’s decisions or policies. The board can dismiss an executive director for insubordination.
Executive directors have a lot of influence on the organization since they are responsible for its day-to-day operation.
To the public, the executive director represents the organization. But he is still an employee who must answer to the board of directors.
An executive director can disobey the board of directors if, for example, the board asks him to do something illegal.
What if executive directors don’t fulfill their duties?
The board of directors can only take action against executive directors when they intentionally do something wrong or are very careless.
The legal consequences might not be as serious for executive directors who are volunteers.
Some federal and Quebec laws impose duties on executive directors. For example, federal and provincial tax laws require organizations to deduct tax from employees’ salaries. Executive directors must learn what their legal responsibilities are and even consult a professional if necessary.
Some laws that impose duties on executive directors:
- Act respecting labour standards
- Professional Code
- Consumer protection Act
- Bankruptcy and Insolvency Act
- Immigration and Refugee Protection Act
Who is responsible when an executive director’s decision harms someone?
The organization, and not the directors, are responsible for the executive director’s actions.
But executive directors who act in their own names or exceed their powers can be sued for the harm they caused.