You are a director of Farms R Us, a registered charity. Your group educates the public about farming by holding agricultural fairs.
You have an employee who handles your charity’s day-to-day operations. He forgot to file some important documents with the government. As a director, you’re wondering if you’re responsible for this mistake.
This article explains the responsibilities of directors of incorporated registered charities.
The rules for directors of unincorporated registered charities are slightly different. They are explained in our article Duties of Directors – Unincorporated Registered 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 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. The mission will be described in the organization’s letters patent or articles of incorporation. The mission must also be included in the documents the charity filed with the government when it applied to register.
- making sure the organization respects laws that apply to its activities (tax, health and safety, day cares, 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, for example, keeping certain information confidential
- keeping any records required by law, for example, copies of receipts for donations made to the charity
- keeping members of the organization informed 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.
1. 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 minimize 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.
2. Directors must act in the best interests of the charity, not their personal interests or the interests of their family, friends or businesses. For example, directors can’t use their position with the charity to get business for a company they own. Putting personal interests above those of the organization as a whole is referred to as a “conflict of interest”. To learn more, consult our article Conflicts of Interest.
3. Directors must make sure the charity respects any laws that apply to its activities. These include the law under which the charity was incorporated and income tax laws. But other laws might also apply depending on the nature of the charity (laws on employees, health and safety,the environment, religious congregations, day cares, etc.) To learn more, consult our article Rules Registered Charities Must Follow.
4. Directors must make sure the charity respects its letters patent or articles of incorporation. And any by-laws, which are internal rules the organization has created for itself. By-laws usually deal with how meetings are called, how directors are chosen, who can become a member of the organization, etc.
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.
Usually, the board usually has the final say on decisions about running the organization.
There are a few exceptions to this rule:
- Sometimes the members of the organization must approve a decision of the board. For example, the members must approve changes to by-laws or a change in the organization’s mission.
- For some organizations incorporated at the federal level under the Canada Not-for-Profit Corporations law, members can adopt agreements that limit the powers of the board.
- There are also special rules for religious organizations incorporated in Quebec: the boards of these organizations must sometimes get decisions approved by a person named by the religious authorities.
- Daycares can also be subject to special rules about how their boards function.
It is therefore important for board members to read the articles of incorporation or letters patent and the by-laws of their charity and the law under which the charity was incorporated to see which decisions need approval of the members or another person.
Can the board ask other people to do things on its behalf?
Yes. The board can “delegate” some tasks. This means it gives permission to someone to do things on its behalf and make everyday decisions. This other person could be, for example, a senior staff person responsible for day-to-day operations.
The board doesn’t have to constantly supervise people to whom it delegates. But it 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?
Directors of an incorporated registered charity will usually not be personally responsible for harm caused by things they do or failed to do while acting as directors. It is the charity as an organization that will be responsible. This is because an incorporated organization has a legal existence separate from the people who run it. To learn more, consult our article Charity Inc. – Incorporation and Registered Charities.
A simple error of judgment will not be enough to hold a director 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 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
- unpaid salaries: directors of federally incorporated charities can sometimes be held responsible for up to 6 months of salaries of employees that go unpaid. To understand what it means to be incorporated “federally”, consult our article Charity Inc. – Incorporation and Registered Charities.
- 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.)
- failure to respect the charity’s articles of incorporation, letters patent or by-laws
- 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 board permission to do things on behalf of the board or the organization
Here are other ways to reduce risk:
There are insurance policies that cover damage to 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 through something they did or failed to do. 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.
Making sure the organization’s by-laws have an “indemnification clause” can also reduce risks for directors. This is a written promise by the organization to cover any costs a director has to pay as a result of acting as a director. These costs could be fines or lawyer’s fees. 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.
Directors can also reduce personal risk by making sure that, if they disagree with a decision taken by the board, this disagreement is recorded in the written record of the board meeting, This record is called the “minutes”.