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Directors duties presentation

  1. 1. Board of Directors Roles & Responsibilities - What Every Board Member Should Know Presented by: Melissa Krishna Deputy General Counsel – Special Projects Pacific Rubiales Energy Corp. (TSX: PRE)
  2. 2. What makes a good director?
  3. 3. Why be a director?  What attracts people to be on a board?  Prestige/status  Interesting and challenging  Satisfying to contribute to the development and growth of an organization  Networking opportunities  Career development  What detracts people from being on boards?  Time commitment  Voluntary  Exposure to liability
  4. 4. Ask the Right Questions  What do I know about the organization?  Am I committed to the mission of the organization?  Is it a registered charity?  What potential liabilities do directors of this type of organization face?  What is the financial position of the organization?  Who are the stakeholders?  Am I comfortable with the approach and tone of the organization’s fundraising efforts?  What is the organization’s reputation and perception from those unconnected to the organization?
  5. 5. Ask the Right Questions (cont’d)  Are the right relationships in place to allow you to perform effectively as a director?  Who are the other directors – specifically who are the other independent directors?  What is the relationship of the board with any major stakeholder?  How is the organization funded?  What is the relationship of the board with the Executive Director?  What type of relationship does the board have with the organization’s auditors?  Do I have any conflicting relationships or interests?
  6. 6. Ask the Right Questions (cont’d)  Do I have the time for this commitment?  How many board meetings are held each year?  How long do board meetings generally last?  Is each board member assigned a particular responsibility?  How many committees will I be expected to sit on?  How much prep time is involved for each meeting?  How many other boards am I on?  Are board meetings held at an easily accessible location – how much travel time is involved?
  7. 7. Review the Right Documents  Financial statements  Board mandate  Code of Conduct  Press coverage about the organization including past fundraising efforts  Fundraising reports  Organizational charts/Employee records  Corporate organizational chart  Annual reports  Letters Patent/By-laws  Indemnities and D&O insurance  Tax filings
  8. 8. So, it is important to really understand the underpinnings of the organization – role play anyone?
  9. 9. Video: 10 reasons why Boards Fail (
  10. 10. What is the responsibility of the Board?  Ensure the objects of the organization are properly undertaken  Ensure the organization does not undertake activities outside its corporate objects  Set long-range objectives and strategic plans for the organization  Ensure the organization’s financial stability and overall performance  Hire and supervise management, staff and volunteers to do the day- to-day work of the organization
  11. 11. Video: Essential Duties of a Non-profit Board (
  12. 12. What is the role of a director of an NPO?  A director is a person who participates in the administration, guidance and supervision of the affairs of an organization by being on its board  In most provinces, an NPO must have at least 3 directors  In a small organization, directors may be involved in the day-to-day management of the organization  May also be an officer or a member of the organization  Essential for directors to understand  Why the organization exists  How it is legally structured  Interests of its stakeholders  How risks are managed
  13. 13. What kind of organization are you the director of? • Registered under the ITA and subject to strict compliance requirements • Common law charities: poverty relief; education; religion; other • Able to issue tax receipts • No tax paid on income or capital gains • Income cannot be paid out to directors • 50% of directors should be at arms’ length Charitable Organization • CRA does not maintain list as not registered • Cannot issue tax receipts • Common examples – sports clubs, recreation clubs, professional associations • If profit is earned (incidentally), income must be used by NPO to carry out its non-profit purposes Not for Profit Organization
  14. 14. Director = Fiduciary? What is a “fiduciary”? A fiduciary is a person having a legal duty to act primarily for another person’s benefit and is a person who: • Owes another person the duties of good faith, trust, confidence and candor; and • Must exercise a high standard of care in managing another’s property Why are directors in a fiduciary relationship? Because of the position they occupy within an organization The assets belong to the organization which can only act through its directors
  15. 15. What fiduciary duties do directors have? To act with a certain level of skill To act with competence and diligence Duty of Care To act honestly and in good faith To act in the best interests of the organization Duty of Loyalty
  16. 16. How can a director fulfill the Duty of Care? This duty is comprised of the following responsibilities: Duty to Exercise Power Duty of Obedience Duty to Continue Duty of Diligence
  17. 17. Duty to Exercise Power
  18. 18. Duty to Exercise Power (cont’d)  Directors can breach their fiduciary duty through inaction and inattention  Directors must take decisions  For charities, directors have an obligation to apply the funds or cause them to be applied in accordance with the charitable purpose  Directors are responsible for managing the organization, implementing and enforcing policies and supervising management/staff  Directors must further the organization’s goals and objectives  Directors must properly maintain books, records and minutes of the corporation
  19. 19. An example of ineffective exercise of power Video: ist=PLcKPJk4kXm7Om6dKDyzdpOK5IWCEwjasp
  20. 20. Duty of Obedience  Directors must comply with all applicable laws and the organization’s governing documents  Directors should ensure that valid corporate decisions are implemented
  21. 21. Duty to Continue  Directors have continuing obligations to the organization which cannot be relieved by resignation – for example, confidentiality  Can only resign from the organization where there are adequate individuals to replace the resigning director  Resignation to avoid personal liability is ineffective and may constitute a breach of fiduciary duty where the director puts own interests ahead of those of the organization
  22. 22. Duty of Diligence  Directors must be diligent in attending to their legal duties. This is done by:  Being familiar with the organization and being informed;  Preparing for and attending meetings;  Reviewing the minutes of any missed board meetings.
  23. 23. Duty of Diligence (cont’d)  Directors should exercise their best judgment when voting on any decisions, and not simply vote with the majority for no well-informed decision  If a director cannot attend meeting in person, they will generally lose their ability to vote  Where advice of a specialised nature is required, the board should obtain the services of a qualified professionals
  24. 24. Duty of Diligence (cont’d)  Directors must properly maintain minutes of the organization and ensure that all other corporate books and records are being maintained in proper order
  25. 25. Is there such a thing as too much diligence? Video: Zyvao1I
  26. 26. How can a director fulfill the Duty of Loyalty? This duty is comprised of two main components The duty to act honestly The duty to avoid conflict of interest
  27. 27. Duty to Act Honestly  Directors must deal honestly with the organization  Directors must not act for an improper purpose  Directors must not act fraudulently  Directors should also be candid about informing the board if they can no longer afford the time commitment of being a director
  28. 28. Duty to Avoid Conflict of Interest A conflict of interest can develop in two ways: A personal conflict between the director’s own self-interest and the best interest of the organization •Directors must act in the best interests of the organization and not their own A conflict of duties that the director owes to the organization he or she serves and to another organization •Directors must avoid situations in which they have competing fiduciary duties
  29. 29. What should a director do if faced with a conflict of interest?
  30. 30. What should a director do if faced with a conflict of interest?  Immediately declare the conflict or anything that gives a director the appearance of a personal benefit  Must abstain from discussing or voting on the matter  Where conflict places the director in a situation in which s/he believes s/he cannot act in the best interests of the organization as a result of the conflict, resign  Certain non-profit corporate legislation provides for a narrow exception to the no-conflicts rule where director follows the declaration of interest provisions (example: section 98 of the Canada Corporations Act)  In Ontario, directors of charitable organizations may not receive any direct or indirect benefit/remuneration from the organization without court approval  If conflict has materialized, resign as director of charity if director stands to benefit directly or indirectly
  31. 31. Case study  Andy is the founder of a not-for-profit organization and is also a director. As the organization has grown, the board has identified a need to appoint an executive director. Andy, being the founder, has been nominated as a potential candidate for the position of executive director. In his role as executive director, Andy would be required to travel significantly.  What questions should we ask in order to identify the issues in the above scenario?  Some considerations:  Is the NFO a charity? Is the charity in Ontario?  Is the executive director a paid position? If not, will Andy be reimbursed for travel?  If not a charity, do the NFO’s by-laws provide for a beneficiary to sit as director?  If it is a charity, is there a court order allowing Andy to get paid and sit on the board?  Conflict of interest – Andy should abstain from voting
  32. 32. Standard of Care For profit corporations • Objective • Directors need to ask: how would a reasonably prudent person conduct the affairs of the organization? NFOs • Subjective • Directors need to ask: what level of skill and care can be reasonably expected from a person with my knowledge and experience? Charities • Higher order of fiduciary obligations similar to trustees • Directors need to ask: what level of care would a reasonable and prudent person of my skill set exercise in managing his or her own affairs?
  33. 33. Exposure to Director Liability
  34. 34. Liability for Lack of Corporate Authority  An organization’s corporate authority is set out in its letters patent and other governing documents  Where directors act outside the scope of this authority by undertaking activities not defined in the letters patent, they may be found liable for the consequences of such actions  Effectively, directors are considered to have taken the decisions or actions as individuals rather than as a corporate body, so the “corporate shield” does not apply  Where necessary, amendments to the governing documents should be made by the corporation  Example: Letters patent of a NFO state that the corporation’s object is to relieve poverty by distributing used clothing to the homeless in Ottawa. The corporation applies for charitable status and is approved. After some research, the directors realize that what is really needed in the area is a soup kitchen, as winter approaches and food is needed as much as clothing.  What should be done?
  35. 35. Liability for Negligent Mismanagement  Directors can be held personally liable where their own conduct or inaction in managing the organization contributed to the victim’s injury – for example, situations involving negligent mismanagement  Negligent mismanagement arises when the injury suffered by the victim can be attributed to carelessness in the oversight of some aspect of the corporation’s operations  Where the board knew of, or ought to have foreseen, a systemic problem and failed to address it  Example: when directors fail to adequately supervise the hiring of employees/volunteers or to adequately monitor their conduct – common where allegations of sexual abuse or harassment of employees is involved  Example: where the board adopted a communications policy that resulted in liber/slander – such as where the practice of denigrating a competitor is endorsed by the board
  36. 36. Liability for Breach of Trust  Remuneration of Directors  In Ontario, directors may not receive direct or indirect remuneration  A director cannot be a paid employee, contractor, etc. of the organization  Legitimate out-of-pocket reimbursements are permitted  Can apply to court to allow for remuneration, but very difficult to obtain  Dealing with Charitable Property  Directors responsible for the way charitable property is handled  Where mismanagement occurs, directors can incur personal liability for the full amount of any loss
  37. 37. Investment of Charitable Funds  Directors have a duty to protect charitable property  Includes a specific/positive duty to invest charitable assets  It is prudent to create an investment policy based on your organization’s risk tolerance  Directors can face liability exposure as a result of a failure:  To determine and comply with the investment power in governing documents  To determine and comply with statutory investment power of applicable province  To invest in accordance with prudent investor standard  To develop and implement investment and delegation plans  Liability can range from:  Bad investments Overly conservative Missed opportunities
  38. 38. Case study  Suzie is the chair of the board of directors of an Ontario charity. Suzie is also a vice-president at a wealth management fund which is currently assessing executive bonuses and compensation. Suzie’s co-worker, Gerald, has requested an opportunity to present to the board on an extremely lucrative investment product that is projecting a return on investment of 25%. The product involves investment into a private equity firm which is assessing mining projects in Chad and Angola.  Gerald is a qualified finance professional with no direct ties to the charity. After Gerald’s presentation, Suzie, reminds the directors, as chair of the board, that the directors have a duty to invest the charity’s funds and that inaction could also be held to be a breach of fiduciary duty.  What should this board do?  Six months after the fact, it is discovered, that all of those who invested in the product recommended by Gerald enjoyed an ROI of 30%!  How does this change your response?
  39. 39. Commingling of funds: To do or not to do?  Charities are entrusted with public money --- higher level of responsibility  Directors should be aware of gifts that are subject to restrictions, limitations, etc. such as endowment funds, donor restricted funds, etc.  The general rule is that gifts are to be held in separate accounts and should not be commingled  In Ontario, charities are now allowed to commingle restricted funds in a single account for investment purposes (subject to statutory requirements below)  May only commingle if it advances the administration and management of each restricted fund;  May allocate all gains/losses/income/expenses on a pro rata reasonable basis;  Must maintain detailed records relating to each individual fund and the combined fund  BUT cannot commingle restricted funds with general funds
  40. 40. To commingle or Not to commingle?  Towards the end of a fundraising drive to raise money to send books to a school in Indonesia, the board of directors learns that the dollars would go further if the donation was instead made directly to the school. Since the money still benefits the same school, the board approves the donation.  A charity receives a donation with instructions from the donor to spend the money on its current efforts to empower youth by running an after-school book club. The directors decide to put the donation into a perpetual endowment fund, out of which they would draw sufficient funds each month, amortized over 3 years for the full amount of the donation.  One of the donors who was going to deliver her donation to the charity is delayed in getting her payment to the charity due to some administrative setback, but promises that the charity will have the donation the following month. The charity’s G&A account is running low. The directors approve the borrowing from one of the charity’s donor-restricted funds to supplement the shortfall for this month, so long as the money is replaced the following month when the donation is received.
  41. 41. Statutory Liabilities  Not-for-Profit Corporations Act (Ontario)  Directors are jointly and severally liable for employee wages, not exceeding 6 months wages and 12 months vacation pay (but only if employee can’t collect from corporation)  Failure to keep proper books, records and registers at the head office and failure to make such records available for inspection by entitled persons  Failure to disclose an interest in a contract – liable for any profit realized from the contract, voidability of contract and if convicted, penalty of up to $200  Income Tax Act (Canada)  Directors are jointly and severally liable to pay all employee income tax deductions for two years after ceasing to be a director  For charities, directors may be personally liable if not compliant with numerous reporting requirements under the Act  Directors could also face penalties where they provide improper tax advice to others
  42. 42. Statutory Liabilities (cont’d)  Anti-terrorism Act (Canada)  Liability risks include seizure of charitable property, loss of charitable status and even criminal charges  If directors found to be directly or indirectly support or facilitate broadly defined terrorist activities or groups – even if not known to directors!  Child and Family Services Act (Ontario)  Directors may be liable where its employees fail to report suspected child abuse and where child abuse occurs as a result of its failure to properly monitor its employees and operations  Environmental Protection Act (Ontario) and related legislation  Directors are required to take reasonable care to prevent unlawful discharge of contaminant into the natural environment
  43. 43. Fundraising  There are a number of statutes that must be complied with when undertaking charitable fundraising  Non-compliance may result in personal liability of directors  Some of the statutes to consider are:  The Income Tax Act (Canada)  The Charities Accounting Act (Ontario)  The Competition Act (Canada)  The Privacy Act (Canada)  The Insurance Act (Ontario)  The Securities Act (Ontario)
  44. 44. Tools for Directors Due to the onerous responsibilities placed on directors, specifically in the not-for-profit sector, courts have established the following guidelines for directors:  Directors are not liable for mere errors of judgment;  Directors are not required to give continuous attention to the organization’s affairs;  Director responsibilities are intermittent and performed at periodic board and committee meetings;  Directors need not attend all board meetings to discharge their fiduciary obligations;  Directors may entrust certain matters of business to officers, so long as they continue to supervise;  Directors are justified, in the absence of grounds for suspicion, in trusting that officers of the organization will perform their duties honestly
  45. 45. Tools for Directors (cont’d) Business judgment rule  Courts look to see that directors made a reasonable decision, not a perfect one  Directors must show that, in coming to a decision, they acted prudently and on a reasonably informed basis Due Diligence Defence  In order to demonstrate that an informed decision has been made, directors should:  Have a general knowledge of the laws that affect their organization; and  Inform themselves about the governance model and structure of the organization, what the organization does and how and who the beneficiaries are  For example, to show awareness and compliance with the ITA, directors can establish a payroll trust account requiring the Executive Director to provide regular reports on remittances.
  46. 46. Tools for Directors (cont’d)  D&O Insurance and Indemnification  Factors for not-for-profit boards when considering whether directors should have insurance coverage or indemnity agreements: 1. The degree of risk to which the director or officer is or may be exposed to; 2. Whether, in practice, the risk cannot be eliminated or significantly reduced by means other than indemnity or insurance; 3. Whether the amount or cost of insurance is reasonable in relation to the risk; 4. Whether the cost of the insurance is reasonable in relation to the revenue available; 5. Whether it advances the administration and manage of the property to give the indemnity or purchase the insurance.
  47. 47. Risk Assessment  Examples of major risks for NFO:  Loss of major source of funding  Reduction in market value of investments  Fraud and reputational risk  Actual or alleged abuse by employee or volunteer  Create a risk profile and identify the organization’s risk tolerance, based on:  Strength of finances  Donor support  Reputation and Credibility  Competence of volunteers and staff
  48. 48. Risk Management  How can boards manage risk?  Strategic planning sessions  Reports at board meetings from staff on performance and risk issues (important to not just hear from Executive Director)  Motions at board meetings to approve major programs or projects  Periodic sessions specifically to discuss and reassess major risks  In-camera board sessions in all board meetings  4 ways to deal with risk:  Avoid  Transfer (insurance)  Mitigate (checks/balances)  Accept
  49. 49. Video: Do you recognize this guy? (
  50. 50. Indemnification  Indemnification is a legal term which means “to pay the costs of or to reimburse another person for costs incurred”  For an NFO, director indemnification would mean the payment by the organization of the legal costs, expenses, settlements and judgements of a director or officer, provided that they:  Arise out of his or her acts or omissions while acting within the capacity of a director or officer,  Are the subject of actual or threatened legal proceedings, and  Where the director has acted honestly and in good faith with a view to the best interests of the corporation  For charities, indemnification is only permitted so long as doing so doesn’t render the charitable organization insolvent  Due to the fact that indemnification provisions governing NFOs only permit rather than require (as is the case with for-profit statutes) indemnification, it is important for directors to obtain a contractual indemnification agreement (even where letters patent/by-laws require indemnification because by-laws can be changed)
  51. 51. Insurance TYPE OF COVERAGE:  Must ensure that there is a broad definition of “wrongful act” in the policy that does not unduly limit coverage  Must ensure there’s a broad definition of “insured person” – should include the reality of the NFO world – to include employees, volunteers, part-time workers and students LIMITS  Since the reality of NFOs is that they are often not well-funded and may not be able to fully indemnify their D&Os, inadequate insurance limits is unwise DEDUCTIBLES  Generally there is no deductible for coverage afforded to insured individuals under an NFO policy  However, there will be a modest deductible when coverage is for the NFO itself EXCLUSIONS  Usually, for fraud, criminal activity, pollution, illegal profit, etc.  For NFO, likely will have a professional services exclusion – for claims based on negligent supervision and incidentally on professional advice  NFOs must be careful not to engage directors in their professional capacity
  52. 52. Other Means of Reducing Liability Exposure  Form a legal risk management committee  Encourage directors to obtain independent legal advice when in doubt  Reduce the number of persons serving as members on the board  Increase the use of committees and advisory boards made up of individuals who are not board members – diversify responsibility  Delegate to board committees
  53. 53. Board Assessment
  54. 54. Final Case Study  Joe owns a construction company and sits on the 6 member board of an Ontario charitable organization. The head office of the organization is in serious need of renovations  Joe has recently lost a major client and is looking for ways to supplement the shortfall  Joe’s company is proposed as a possible option for renovating the head office. Joe declares his conflict and excuses himself from discussions and voting. Joe usually takes the minutes of meeting.  Due to the size of the renovation, the decision of the board will be based on majority voting. Andy was unable to attend the meeting and asked Jane to deliver his vote in favour of hiring Joe’s company  Andy, being an accountant, has undertaken a substantive role in the preparation of the organizations financials and tax filings and has spent a considerable amount in photocopying and filing fees  The board wishes to reimburse Andy and offers to pay him cash. However, Andy would rather that his daughter be enrolled in the charity’s free music lessons offered to youth
  55. 55. Questions?
  56. 56. Resources $FILE/Primer_en.pdf    director-series/20-questions-series/item12325.pdf  .pdf  director-series/20-questions-series/item12324.pdf  What Directors Need to Know: Corporate Governance by Carol Hansell