Directors’ Liability: What New Directors for Non-Profits Need to Know

We frequently receive questions from new directors elected onto boards of non-profit organizations about the extent of their liabilities, and how they can mitigate the risks and their personal exposure. While serving as a volunteer director on such organizations is a great opportunity to connect with members or give back to your community, few realize the practical implications of sitting on a board.

Purpose of a Board of Directors and Fiduciary Duties

The board of directors of an incorporated non-profit organization is legally responsible for the actions of the organization, including those of its employees and volunteers. The organization itself may also be liable if something goes wrong. Directors owe a fiduciary duty to the organization, which means they are required to exercise their power with competence (or skill) and diligence in the best interests of the organization.

Directors’ Duties

To govern effectively as a director, keep in mind the following duties that boards are generally required to undertake:

1. steering the organization’s activities to fulfill the mission and guiding strategic planning;
2. being transparent, including communicating to members, stakeholders and the public and making information available upon request;
3. developing appropriate structures to carry out the organization’s mandate and comply with the organization’s obligations;
4. ensuring the board understands its role and avoids conflicts of interest;
5. maintaining fiscal responsibility;
6. ensuring that an effective management team is in place and overseeing the organization’s activities;
7. implementing assessment and control systems; and,
8. planning for the succession and diversity of the board.

Types of Fiduciary Duties

Directors’ fiduciary duties can be divided into two main branches:

A. Duty of Care

• A director is not liable for mere errors in business judgment, but they should make decisions affecting the organization based on full consideration of all appropriate material and on the advice of professionals where required.
• While directors may delegate certain functions to key senior management, they must maintain a supervisory role.
• There is an obligation on directors to educate themselves about the organization’s mandate and all aspects of its operations; it is not enough to merely attend board meetings.
• Directors are expected to make an active and concerted effort to be knowledgeable and ready to make informed decisions on issues affecting the organization.

B. Duty of Loyalty

• This duty involves good faith, trust and special confidence, and is the same whether the corporation is a business corporation or a not-for profit corporation.
• Directors are expected to maintain high standards of honesty and good faith in the exercise of their powers and discretions.
• Directors may not abuse their powers by exercising them for an improper purpose; for example, giving themselves an advantage or conferring an advantage on someone else.

Consequences of Breaching a Fiduciary Duty

Directors who breach any of their duties to the organization may be found financially liable if the organization suffers a loss that can be directly attributed to actions or omissions by the director. To protect themselves from such liability, directors should always consider whether their decisions or actions being taken are in the best interests of the organization. They must discharge their duties of skill and diligence and their duty of loyalty, including acting honestly, in good faith, while not improperly delegating their responsibilities and avoiding conflicts of interest.

Good Governance is Important

Non-profit organizations often have directors’ liability insurance in place, which helps mitigate the personal liability of each director. However, insurance should not be considered a substitute for good governance practices, as such insurance policies may have exclusions based on certain conduct or actions.

Governance Resources

For further useful information on this topic we recommend referring to the Primer for Directors of Not-For-Profit Corporations.