Do you sit as a director of a not-for-profit corporation? If you do or if this is something you are considering, you should be aware that, just like a director of a for-profit corporation, a director of a not-for-profit is subject to duties and obligations imposed by law.
In an earlier blog post, we spoke about the body of statutory and common law that outline the fiduciary duties of a director, the standard of care expected from directors and the duty to avoid conflicts of interest, most of which is applicable to directors of not-for-profits. You can read that post here. However, directors are not only required to adhere to a certain standard of care in the way that he or she manages a corporation: they are also required to follow certain rules of fiduciary conduct as outlined in the Guide to Good Governance: Not-for-Profit and Charitable Organizations.
Maintaining Loyalty and Acting in the Best Interest of the Corporation
Unlike a for-profit corporation where the best interests of the corporation are intimately tied to enhancing shareholder value, defining the best interests of a corporation in the context of a not-for-profit can sometimes be a bit more challenging. As a result, a board of directors must have a clear understanding of the corporation’s vision, mission, values and its accountabilities. A director acting in the best interest of the corporation is a director that guides the corporation towards the corporation’s vision, mission and values.
The most common example of a director failing to act in the best interests of the corporation is when he or she places the interests of a particular group, for instance a specific class of members over the interests of the corporation itself. Conversely, where a director maintains loyalty to a corporation, he or she acts in the best interest of the corporation and not in the interests of any other party he or she feels that he or she represents.
Acting with Honesty and Good Faith
Acting with honesty and good faith are essentially two sides of the same coin. A director acting honestly and in good faith necessitates that a director use his or her power to the benefit of the corporation and not to elicit some kind of personal gain.
Understanding the duty of confidentiality can sometimes be difficult for a not-for-profit board of directors. However, the general rule with respect to confidentiality is that all matters and discussions in a boardroom are confidential. In addition to this general statement, a director’s duty to respect confidentiality is likely addressed at length by internal board policies.
Respecting confidentiality also relates to the way in which directors communicate to the corporation’s members and the general public. Most boards will have an official spokesperson who is the only director or officer authorized to speak on behalf of the board. It is incumbent on directors to understand their duty of confidentiality and be careful not to disclose any confidential information learned by virtue of sitting on the board, unless authorized by the board to do so.
The Duty of Obedience
The duty of corporate obedience is often the least known and surprising duty which is best described as the duty of board solidarity. In effect, a director that is opposed to a corporate decision that has been validly taken by the board has a duty to respect and abide by that decision. Where a director publically speaks against a decision validly taken by the board, he or she is acting against his or her duty of obedience. The concept is simple: a director has the opportunity to voice his or her opinion against a corporate action during board meetings that are democratic in nature – if it turns out that the board, and by extension the corporation decides to proceed with a corporate action despite opposition, a director who may well have been opposed to that action has a duty to maintain board solidarity and not to disparage the decision.
It is too often the case that the governance of a not-for-profit corporation is taken less seriously than governance of a for-profit corporation. This is a critical mistake that can have a wide range of repercussions for both the directors and the corporation they serve. Corporate governance is not something to be taken lightly, either collectively as a board or individually as a director. Acting as a director for a not-for-profit can be quite challenging but when equipped with the right tools it can also be very rewarding.