Directors of non-share capital corporations (non-profit organizations) must be aware that they have as much of an exposure to liability as fellow directors who sit on business corporations.

The exposure to liability is not minimized because the service to a non-profit corporation is voluntary.

Directors and officers of non-share capital corporations are subject to most of the same statutory liabilities imposed upon directors and officers of the corporations governed by various business corporation statutes of Canada and the provinces, states Hugh M. Kelly, QC, of Miller Thomson LLP in Toronto, in his booklet, Duties and Responsibilities of Directors of Not-For-Profit Organizations, published by the Canadian Society of Association Executives.

Directors provide governance function to an entity whose members rely on the directors as their fiduciary, and expect them to be prudent in making governance decisions.

Also, various legislations expect directors to act in certain manners and assume certain responsibilities. If a director allows the corporation to cause breach in its obligations, a director may personally assume personally certain responsibilities or obligations.

This article is not exhaustive discussion on the topic, it is however intended to caution directors of non-share corporations to remain cognizant of the fact that it is not a function to take lightly.

Being a part time director may not also make a difference in one’s obligation to perform in a prudent manner.

There are risks and directors of all kinds need to learn how to manage those risks.

It is common to find a non-profit organization formed as a corporation without share capital.

Commercial corporations are always formed with share capital.

So, what are the special characteristics of a non-profit corporation without share capital?

First, it is a separate legal person, as any business corporation.

Second, in a business corporation there are shareholders, and in a non-share capital corporation, there are members.

Just as shareholders appoint directors in a business corporation, members appoint them in a non-share capital corporation. The process of electing directors is identical.

Third, there is a distinction between the corporation and its members in both types of corporation.

In non-share capital corporations, bylaws may allow ex-officio members of other organizations to sit on the board as ex-officio members.

Kelly writes, to start with, one of its obligations of the board of directors is to call the annual meeting of members of the corporation, fixing the date, time and place within the limits authorized by the bylaws.

Kelly reminds us that it is the members and directors who hold the meetings--the non-profit corporation does not call meetings.

The business of a meeting is prescribed by law and in part by the bylaws.

It is customary for the board of directors to convene for the purpose of organizing, including the election of officers and the composition of standing and other committees.

I am often asked if incorporating a non-profit entity would relieve directors of their personal liability.

Kelly warns that although the protection from personal liability flowing from the activities of the organization may have been the initial motivation for incorporating, members of the board of directors still face exposure to liability for any of their own actions that are inconsistent with the duties owed by directors to the corporation they serve.

Many people who serve on non-share corporations are volunteers, persons whose experience in the world of business or commerce is more likely to be that of a consumer or an entrepreneur.

They tend to make independent decision unilaterally.

They are usually less sophisticated than their commercial counterparts.

It is unfortunate that some believe they are shielded from liability because they act for a corporation as volunteers.

There are statutory liabilities and common law liabilities that can attach them personally.

When I say directors of non-share corporations need to manage risk, I am only suggesting that if you are a director, you take the time to understand the risks associated with your role as director and consider all relevant factors—#8212;you must only react with sound judgment.

I will discuss some relevant concepts which should assist directors in the governance of their actions.

If directors apply the concepts to govern their actions, they may have a good due diligence defence if any action were to be brought against them.

In other words, managing risk means shielding against potential attacks resulting from their actions.

Kelly writes that the statutes providing for incorporation require directors to manage or supervise the management of the affairs of the organization.

The defining culture of the corporation and the role of directors is formed by statutory restraints and conditions, bylaws, and policy guidelines as to the conduct of directors.

The documents generally outline the fundamental purpose for the existence of the corporation.

Directors must always be aware of the purpose of the corporation and what it does in practice--how it puts its purpose into action.

Directors’ actions should be governed by the internal governance mechanism (bylaws) by which the corporation operates.

They must make it a point to review these documents frequently so as to have them in mind when making each decision, but in any event, at least annually.

Learn the best practices of the corporation. Review its mission, vision, objectives, bylaws and previous board minutes, develop an understanding of how they have previously been put into action.

As you read bylaws, do understand that some of them are prescribed by the law of the incorporating jurisdiction--they provide stability, and you should be careful about tinkering with it lightly or hastily.

A director must always comply with what is in place whether they like it or not unless that can cause a change through a majority decision.

This applies not only to the substance of the particulars, but also to the timing as outlined in the bylaws, writes Kelly.

Provincial jurisdictions have codified an objective standard of care similar to that found in the legislation governing business corporations.

The Society Act of British Columbia provides “a director of society shall act honestly and in good faith and in the best interests of the society and exercise the care, diligence and skill of a reasonably prudent person in exercising his powers and performing his duties as director.”

Kelly writes that where no objective standard is codified by a province, directors of a non-share capital corporation must discharge their duty by meeting a standard of care that has been defined by the courts. This more subjective standard that must be met is the “conduct that may reasonably be expected from a person of such knowledge and experience as the identified director.” (Re City Equitable Fire Insurance Co. [1924] All E.R. Rep. 485.

Kelly writes that “what emerges from this is that a director with more skill, sophistication and experience will face a greater standard and greater risk of personal liability than another director who might lack such specific expertise. Thus a lawyer, accountant or other professional must be aware of the higher standard that will be expected of someone with such qualifications.”

Kelly referring to the corporation which is a charitable organization states, that “an even higher standard of care may be exacted. Directors of charitable organizations are generally held to the same standard of care as a trustee in managing a charitable trust. It is trite law that trustees have a higher duty to the organization than would be the case of a person who does not serve in that capacity.”

A director who acts honestly and meets the standards of conduct and care will not be liable for simple errors of judgment that occur while the director performs the duties of office, write Kelly.

In future columns, I will discuss director’s duty of skill and prudence, of diligence, to manage, fiduciary duty, as trustee, to avoid conflict of interest.