Directors and Trustees of Charities
Being invited to serve as a director or a trustee
of a charity can be a prestigious honour, but it is a role that carries significant
responsibilities. Directors and trustees - and how diligently and effectively they carry
out their responsibilities - will greatly determine how successful the charity is in
meeting its stakeholders' expectations and in delivering on its charitable purposes. Also,
like any other director of a publicly accountable organization, they may also be exposed
to personal liability if they are found to have failed to perform their duties
appropriately.
Before Accepting
Before accepting a position as a director or
trustee of a charity, make sure you are aware of and understand all of the
responsibilities that come with that role. Begin by reading the charity's governing
documents. Incorporated charities will have letters patent or articles of incorporation.
Charitable trusts will have a trust deed that governs the duties and powers of trustees.
Most charities also have their own by-laws.
You should also review the charity's
administrative history. If anything appears to be suspicious, be sure to investigate it
carefully before deciding whether or not to accept your appointment. After all, once you
become a director or trustee of a charity, you may find yourself personally liable for its
actions - unless you can show that you acted diligently and in good faith in fulfilling
your responsibilities. Some of the standards against which the actions and behaviour of
directors or trustees may be judged are described below.
Compensation
The Canada Revenue Agency (CRA) will not approve
the registration of a charity if its directors or trustees are being paid for their
services as directors or trustees. Directors and trustees can be reimbursed for reasonable
expenses they incur as part of the role, such as for travel and hotel expenses in order to
attend an out-of-town board meeting. The CRA does not object to directors being paid for
other types of services provided to the charity, if such a payment is permitted by the
charity's governing documentation and the legislation under which it was incorporated.
Standard of Care
Directors and trustees are required to meet a
standard of care required by common law and equity. In Ontario, for example, directors are held to the same standard of care as someone in
a fiduciary position, such as a trustee of a trust. This means that a director must act in
the best interests of the charity, and not in his or her own self-interest. The director
must act honestly, in good faith and in the best interest of the corporation. In other
words, directors of charitable corporations are held to the highest standard of care
possible.
Some provinces legislate the standard of care,
which sometimes also extends to the charity's officers. Consult with your professional
advisors to learn about how the applicable legislation affects the standard of care of
directors and trustees in your province.
Duty to Ensure the Charity Carries out its
Charitable Purposes
Charities that are registered for income tax
purposes must use their assets solely for their charitable purposes and not for anything
else. Directors and trustees have a responsibility for ensuring that this occurs.
Therefore, they must be sure they understand what those charitable purposes are, as they
are set out in the charity's governing documents and registration. They must also
understand the charity's disbursement quota, and ensure that the charity meets it.
Duty to Not Act in Self-interest
Directors and trustees have a duty to put the
interests of the charity before their own personal interests and this includes avoiding
any appearance of self-interest. Therefore, they need to ensure that their own personal
interests do not interfere with their ability to administer and manage the charity in the
charity's best interests.
Generally, a director or trustee should not pursue
any transaction or other activity with the charity that may provide him or her with a
personal benefit. In the event that a director or trustee does have an interest in a
transaction, that interest should be disclosed to the charity. Sometimes such an activity
may be in the best interests of the charity. For example, a director or trustee may have
an interest in a corporation that will provide services to the charity under terms that
would be beneficial to the charity.
Any time a director or trustee has a conflict of
interest - even if the contract would be beneficial to the charity - they should consult
with their professional advisors to determine the appropriate procedure for handling the
disclosure of the conflict and the transaction itself.
Depending on the charity's governing documents,
legislation governing the charity and the circumstances of the transaction, the director
or trustee may have to do one of the following:
• Refrain from voting on the transaction;
• Obtain approval of the court to proceed
with the transaction; or
• Resign his or her position as director or
trustee.
Duty to Account
Directors and trustees are required to ensure that
the charity keeps and maintains proper records. As well, they have a duty to account for
the trust funds of the charity. All charities must file financial information with the
CRA. In addition, some jurisdictions require incorporated charities to file annual audited
financial statements.
Duty to Manage the Charity's Assets
The ability of a director or trustee to delegate
his or her duties is described in the charity's governing documents and applicable
legislation. This enables employees to manage the charity's day-to-day operations, as long
as the directors or trustees control and supervise the employees' work.
Responsibilities of Directors
Directors must carry out their responsibilities in
accordance with the charity's governing documents and any applicable legislation governing
the charity. Several laws also impose specific offences and penalties for acts or
omissions of directors.
Responsibilities of Trustees
Additional responsibilities of trustees may be set
out in the Trust Agreement, including the powers of investment. The liability of trustees
is limited only by the Trust Agreement and any limitation of liability under the relevant
trust legislation of the particular jurisdiction.
Directors' and Officers' Insurance
Many provinces provide for directors' and
officers' insurance (D&O insurance). D&O insurance generally indemnifies a charity
that is organized as a corporation, and its directors and officers for wrongful actions
that cause financial harm to a third party and result in a lawsuit. The insurance covers
legal costs, lawyers' fees and any damages that may be awarded, as specified in the
policy. The purpose of D&O insurance is to protect the insured in situations where the
directors and officers have acted in good faith. It will not indemnify gross negligence or
criminal activity. The cost of insurance, where permitted, will vary and is available
through private insurance carriers.
Talk to Your Chartered Accountant
This article provides a brief overview of some of
the many matters you need to consider before accepting a position as a director or trustee
of a charity. Be sure to talk to your chartered accountant to ensure you are fully
informed of the rules that govern charities and the best practices for fulfilling your
stewardship role.
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