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Directors’ responsibilities – Heightened awareness and standard

not-for-profitWhile directors’ fiduciary obligations in the for profit sector has been the subject of considerable academic writing and, indeed, lawsuits, the principles that inform directors conduct and responsibility in that sector apply equally to the not for profit sector.

We can expect to see a growing trend by which directors of not for profit organizations and charities will be watched more closely in their conduct and the decisions they make.  As the not for profit and charity sectors grow in size and importance in Canada, it is reasonable to assume that decisions, conduct and operational results will be monitored by members, donors and government oversight.

There are over 170,000 charitable and not for profit organizations in Canada. The CRA has registered 85,000 of these as registered charities.

The recent paper Charities in Canada as an Economic Sector published by Imagine Canada[1] provides an important analysis of the growth of the charitable sector in Canada and its impact on economic growth in the country.  It notes that the sector is growing by demand, i.e. “As the population grows, ages and becomes more diverse and as economies become richer, the demand for the services that the sector provides – health, social services, recreation, culture and so on-tend to increase.  The growth of the charitable sector is thus driven by demand and value the sector produces.”[2]

Another important point raised by the authors of the Imagine Canada paper is the growing trend of diminishing donations and the consequent need for charities and not for profits to find alternative sources of revenue, including business income.

These significant changes in the sector confirm that the “business” of managing and operating not for profit and charity organizations is becoming more complicated with increased attention to enhancing management (both skills of the professionals and processes for ensuring organizations are managed properly).  Both large organizations with professional staff and small organizations without staff, relying on volunteers to operate the organization are  under the microscope whereby proper business practices and good governance cannot be neglected.  Members and donors will continue to rightfully demand that organizations operate effectively, efficiently, legally and ethically.

Directors will continue to be held to the high standards required of them to conduct themselves as fiduciaries.  But we can also anticipate that the standards might well change in alignment with the changes taking place in the sector.  For example, as organizations recruit “experts” to their Board of Directors to provide their expertise in certain areas of operations, e.g. finance, fundraising, marketing, management oversight etc. those directors will be expected to contribute meaningfully and expected to perform as directors relying on their skills, experience and expertise.  If they fall short in doing so, they may well be held accountable if something amiss occurs in the organization.

The larger not for profits and charities generally have directors with considerable experience and expertise who understand and recognize the responsibility that being a director entails.  They are well versed in the workings of the organization and do the work required of them to be well prepared to make informed decisions.  However, serious errors in decision making can and do occur and certainly there have been many cases of unethical conduct resulting in serious consequences – operational failure and revocation of charitable status to name the two most serious.  It is not uncommon to see directors not paying the kind of attention to the not for profit or charity they are involved in as they would to the their own business.

For small not for profits and charities – usually ones without staff – managed by directors as volunteers, the results can be just as devastating.  In these situations, directors managing the organization as volunteers are doing so (by and large) in their spare time and in addition to their full time jobs, i.e. they are not always able to pay the full attention that some of these organizations require.  For most organizations, the situation can work well and the volunteer team can distribute the responsibilities among themselves so that members and donors are content with how the organization operates.  But that is not always the case.  The risk of serious mistakes being made can be just as high (perhaps higher) in the not for profit and charity sector as in the for profit sector given the points noted above.

How can directors perform their obligations well and in accordance with good governance?  Management must provide timely and informed reports and information on all matters that need the attention of directors.  Directors must take the time to study reports, communicate with staff, ask questions and exchange views with everyone on the team (staff and directors).  Transparency and exchange of information is essential for directors to be fully informed and able to make the proper decisions.  Confidential information needs to be handled sensitively (usually by in camera sessions or private briefings).  When needed, outside, third party expert advice should be sought.  Professional advisors should be relied upon to help analyze problems and recommend solutions for the directors to consider.  For those organizations without staff, volunteers much also engage in ongoing and forthright communication and work closely together.

Above all, directors working collaboratively with staff (or as volunteers among themselves) must engage in honest and ethical conduct.  Very negative consequences for the organization and potential liability for individuals acting as directors can and will result from the failure to act in this way.

By: Mark S. Anshan, Legal Counsel at Drache Aptowitzer

[1] Emmett, Brian and Emmett, Geoffrey, Charities in Canada as an Economic Sector, Discussion Paper, Imagine Canada, June, 2015.

[2] Page 4.

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Drache Aptowitzer LLP

Tax and Charity Lawyers at Drache Aptowitzer LLP
Drache Aptowitzer LLP is one of Canada’s foremost experts in the law related to charities and non-profit organizations. Their team of bloggers is led by Adam Aptowitzer LLB. He is a lawyer practicing in the areas of charity and tax law. He is a member of both the bars of Alberta and Ontario. He has been speaking and writing on the topic of charity law for several years and been published in numerous publications including the Canadian Taxpayer, the Canadian Fundraiser and the Not-for-Profit News and has been cited as an expert in many publications including the National Post.Read more here
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