Legal Accountability
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In this section:
Public Trust
Trusteeship
Legal Responsibilities
Conflict of Interest
Confidentiality
The Corporations Act
Worksheet
Non-profit agencies incorporated under provincial or federal legislation enjoy significant legal and financial benefits. Incorporated non-profit agencies do not pay taxes on income and they are able to receive and use public funds to serve a public good, as defined in their constitution. By incorporating, an agency provides limited liability coverage to its members and board of directors. (However, it should be noted that there are legislated exceptions to the concept of limited liability coverage to members of a non-profit corporation, as well as its board of directors.) In return for these benefits, incorporated non-profit agencies are legally and morally responsible to serve a public good. The law requires that these agencies be governed by boards.
Collectively, a board of directors is the legal entity that is the corporation or agency. This means the board, as a group, is responsible for the proper conduct of the agency’s affairs. When an individual becomes a board member he or she commits to help run that agency to the best of his or her ability. In addition, the new member agrees to learn about the agency and the responsibilities of a governing board so that sound decisions are made which ensure the agency is run effectively and efficiently.
Public Trust
Public Trust is the obligation of each board member to maintain, preserve, and further develop agency resources and to ensure services remain available to the public now and into the future. This means the governing board, made up of individual members, accepts the obligation to implement programs and services for the benefit of the public and to provide for the responsible governing and management of the agency’s resources.
Trusteeship
Individually, board members do not represent themselves; they are the trustees for the organization’s membership and the community that supports it. Their responsibility is to participate in and ensure the proper conduct of the agency’s affairs on behalf of this "public". This implies the safeguarding of agency assets in the interest of the funding sources and an obligation to the funding authority. The importance of this accountability is emphasized by the increasing service and reporting requirements associated with the receipt of funding.
Trusteeship also includes accountability of programs and services to the community. The accountability to the community pertains primarily to the quality of the programs and services rendered to clients.
Legal Responsibilities
The law treats non-profit and profit corporations in a similar way. Specifically, the board member is a trustee responsible for the funds which the agency raises, accepts and disburses. As with for-profit organizations, when losses occur the board is accountable and cannot claim ignorance of the transactions or an unawareness of the potential implications of its action. Simply put, the board member is legally obligated to exercise judgement that a reasonably prudent individual would exercise in regard to his or her own funds. Individual members are not normally liable for paying a corporation’s debts since a corporation is not a sum of its members but a separate legal entity. This is the principle of limited liability.
However, it is possible in unique circumstances for an individual member to be found liable by the courts. A member may be liable if it is proven that he or she knowingly directed a wrongful thing be done and, as a result, acts in bad faith under The Corporations Act. A board member may also be held liable for specific debts of the corporation if he or she agrees to sign personal guarantees on behalf of the corporation. Under Canadian law, directors can be jointly liable for all financial obligations to the agency’s employees up to a limit of six months unpaid wages for services performed. The issue of director and member liability is very complex and is in a state of flux. For specific situations and before signing any personal guarantees, a member of the legal profession should be consulted.
Fiduciary
The relationship between a board member and the agency which he or she serves is called a "fiduciary" relationship. A fiduciary acts in the interests of the agency. This means the member holds a position of trust and must act honestly, in good faith and in the best interests of the agency. A board member has an obligation to act loyally and uphold the integrity of the agency. A fiduciary may be directly liable for a breach of his or her fiduciary obligations.
Duty of Care
A board member accepts the responsibility to become informed about the business and services of the agency. The member has a duty to ensure that the agency is properly managed and its assets and property are properly cared for. "Duty of Care" is the term used to refer to the responsibility a board member has to exercise the same degree of care in the activities of the agency that he or she would on behalf of his or her own affairs. As a board member of an agency, one controls the activities of the agency and is the trustee of its funds and assets and are not entitled to engage in high risk ventures.
Conflict of Interest
A board member must pay particular attention to conflict of interest. A member must not let personal interests or the interests of a third party conflict with the interests of the agency. The following discussion of conflict of interest is adapted from The Board a Winning Team by Herb Perry.
When a person becomes a board member, he or she has a duty to vote and act in the best interest of the agency on whose board he or she serves. Conflict occurs when a member’s own personal interests are not compatible with those of the agency.
Consider the following cases, all involving a board’s decision on the purchase of a minivan for the transportation of disabled people:
Case A - One of the directors owns an automobile dealership from which the van might be purchased.
Case B - The spouse of one of the directors owns the dealership.
Case C - The son of one of the directors has a weekend job washing used cars at the dealership.
Case D - One of the directors is a shareholder in the corporation that manufactures the van.
Most people would agree that Cases A and B constitute conflict of interest and that Cases C and D do not. In actual fact, there are many shades of grey--situations that a court might or might not consider to be a conflict.
The best advice is, when in doubt, declare! No one was ever harmed, fined, embarrassed or imprisoned for declaring a conflict of interest where, in fact, no conflict existed.
In a meeting, board members who declare a conflict of interest should do so at the first opportunity, that is, as soon as they become aware of the nature of the business to be discussed. Their declaration of conflict of interest should be clearly recorded in the minutes. The director who declares should take no part in the discussion and must not vote on any motions concerning the subject of the declaration. The safest, and most prudent action, is to leave the meeting room as soon as the declaration is made and recorded and remain out of the meeting until the matter has been dealt with.
Board members who are in any way, whether directly or indirectly, interested in a contract or service agreement with the agency, must declare their interests at a board of directors meeting and must not vote on the subject if it is determined that an actual, potential or perceived conflict exists.
Conflict of interest situations go beyond discussions in meetings, and in an effort to address this, the Department of Families has a conflict of interest policy and guidelines document for boards of directors and employees of external agencies. Board members should ensure they have this document and become familiar with its contents.
The intent of the guidelines is to increase the awareness of board members and employees to situations of perceived, potential or actual conflict of interest. They provide a general framework to guide the conduct of board members and employees regarding conflict of interest situations. The guidelines also make provision for disclosure, appeal and disciplinary action regarding non-compliance of failure to disclose.
External agencies receiving tax dollars to deliver services are perceived by the public as extensions of government and they are particularly vulnerable to charges of conflict of interest. The guidelines reflect the government’s responsibility to balance the protection of the public interest with the interests of board members and employees.
Confidentiality
Another very important responsibility of a board member is that of confidentiality. Simply stated, board members are not permitted, either during their term on the board or after, to use any confidential information they receive, or are privy to, for their own purposes. The intent of this responsibility is to ensure that improper uses of information do not occur.
It is critical that within each agency policies exist that will clarify the role and responsibility of the board member in the areas of conflict of interest and confidentiality.
The Corporations Act
Most non-profit organizations in Manitoba will incorporate under The Corporations Act. This provincial legislation governs an agency’s operations within Manitoba. To operate in more then one province, an agency must incorporate under a federal statute which governs national non-profit organizations, or register in each province where the agency is doing business.
Under The Corporations Act, the organization has a number of obligations it must adhere to. The following is a discussion of those obligations as adapted from the guide Understanding the Law: Beginning and Incorporating a Non-Profit Organization by the Community Legal Education Association.
Annual Meeting
The corporation must have at least one annual general meeting of members. At this meeting the membership participates in the affairs of the corporation by:
- voting to confirm or reject by-laws
- proposing new by-laws
- electing new representatives to the board of directors
The annual general meeting usually occurs shortly after the end of the fiscal year so that the past board of directors may report on the financial status of the corporation. They must present to the members an approved annual audited financial statement and an auditor’s report.
All members of the corporation should be given at least 21 days’ notice of general meetings.
Annual Return
Each year the corporation must file an annual return with the Manitoba Companies Office, along with a nominal fee payable to the Minister of Finance. The filing deadline depends on the month in which the corporation was incorporated. The corporation may be dissolved and would cease to exist if annual returns are not filed.
Change of Directors
The corporation must keep the Corporations Branch advised of any changes of its directors by filing within 15 days of the change two copies of a Notice of Change of Directors.
Change of Registered Office
The registered office of the corporation identifies where its books may be readily available. This address may change annually when the secretary or treasurer of the corporation changes as it usually reflects their home address. At any time that the normal place for the books is changed, two copies of a Notice of Change of Registered Office must be filed with the Corporations Branch. Make certain that the books and records are in fact moved to the new location.
Minute Book
The corporation must have a minute book containing:
- the Articles of Incorporation
- by-laws and resolutions of the corporation and all amendments
- the originating minutes of the corporation
- minutes of all meetings
- a list of all members of the board of directors, with addresses occupations and dates of service
Membership List
A membership list should be kept, and members may be accepted through recording the acceptance in the minutes of meetings. The membership list should be kept up-to-date and should be reviewed at the annual meeting so that members who are no longer active are no longer notified of meetings.
Members have the right to examine the membership list during usual business hours at the registered office of the corporation.
Personnel Management
Staff may be hired on a temporary or full-time basis. In all cases, legislation relevant to employment must be considered. Such legislation includes: The Human Rights Act, The Employment Standards Act, The Payment of Wages Act, The Workers Compensation Act, The Workplace Safety and Health Act, The Health and Post Secondary Education Tax Act and the Income Tax Act. Other matters such as Canada Pension and Unemployment Insurance are also important.
All legislation relevant to employment should be followed by the agency and the agency’s personnel policy should be reflective of these laws. The Board/Staff Relations section discusses personnel policy in detail.
Note: This section on the legal accountability of a board does not identify every legal responsibility of an agency and its board, but is meant to increase the awareness of some of the major responsibilities. The Manitoba Law Foundation, Public Legal Education Activities, published a booklet entitled Liability of Directors of Non-Profit Organizations. For copies of this handbook contact the Community Legal Education Association.
Worksheet
Legal Checklist (PDF)