The Board and Risk Management
Along with roles and responsibilities of boards come risks and liabilities. Whether an organization is being governed by a hands-on administrative board or a policy-driven board, board members need to be aware of the legal duties that come with their positions. Directors of non-profit incorporated boards are not usually paid for their work, but that doesn’t absolve them from being liable for the decisions and actions they make.
Some of the items covered in previous sections, such as having clear job descriptions, may help board members stay informed of their responsibilities, but the onus is on the individual to be knowledgeable about risk management. Many volunteers mistakenly believe that if the organization is incorporated they are automatically protected from liabilities, but that is not the case. The governing laws of incorporation do go a long way in protecting boards and board members, but there are duties that fall to the individual.
Board members may also assume that they do not have to assume any liability or manage risk if there are paid staff within the organization that execute the day-to-day operations of the organization. True risk management is the result of teamwork between an agency’s board members and its staff. For more information on boards, through a strong focus on governance, can work with staff to manage organizational risk, refer to What’s the Board Got to Do With it? The Vital Link Between Good Governance And Risk Management from Nonprofit Risk Management Center: www.nonprofitrisk.org/library/articles/board091004.shtml
The language and terms used in risk management and liability policies can be confusing and often mired in ‘legalese’. It is therefore recommended that individuals seek out advice, and possibly counsel, if they are unsure of their personal liabilities or the liabilities of the organization as a whole. Pro Bono Law Ontario (formerly Volunteer Lawyers Service) was launched in 1994 through the efforts of Toronto lawyer Ronald Manes in cooperation with agencies such as the United Way of Greater Toronto, the Ontario Bar Association and many other supporters and contributors. Over 600 volunteer lawyers provide legal services to more than 700 Ontario community agencies, specializing in areas of business law important to non-profit and charitable organizations.
The information provided in this section is not meant to discourage or intimidate individuals from getting involved in non-profit organizations, but rather to assist them in being informed. In the end, using common sense and being honest, knowledgeable and cautious will go a long way toward avoiding risk and liability. The information provided in this section is not legal advice. Any questions or concerns should be discussed with a legal professional.
Both Volunteer Canada and the Canadian Society of Association Executives have published clear-language pamphlets outlining details about risk management, duties and liabilities for directors of non-profit organizations. Briefly, the basic duties of directors are:
The duty of diligence (also referred to as fiduciary duty) — to act in good faith and in the best interest of the organization through such actions as:
- Staying informed by reading minutes, agendas and support material
- Attending meetings regularly and voting on issues brought before the board
- Being knowledgeable about the policies and operations of the organization
The duty of loyalty—to place the interest of the organization first through such actions as:
- Avoiding and/or declaring conflicts of interest
- Representing the organization in a positive manner
- Respecting confidentiality
The duty of management—to act and make decisions in line with the governing policies and bylaws of the organization through such actions as:
- Understanding the scope of authority for staff and directors
- Regularly reviewing bylaws and policies
- Ensuring legal requirements related to governance, incorporation, etc. are met
- Ensuring meetings are held and documented with minutes
- Understanding the requirements of laws and standards related to the clients the organization serves
A board member who does not comply with these duties may be held liable for the outcomes and results that occur. Members can be found liable if the actions and/or decisions that they make (or don’t make) result in:
- A law being broken
- A contract being breached
- Injuries or damage (could be physical, environmental, emotional, etc.)
More information about legal duties can be found in Volunteers and the Law: A guide for volunteers, organizations and boards. As well, Directors’ Liability: A Discussion Paper on Legal Liability, Risk Management and the Role of Directors in Non-Profit Organizations informs board members about their legal responsibilities and provides practical suggestions for managing risks and minimizing personal liability.
Board members of Ontario’s Literacy and Basic Skills Agencies can stay aware of the latest contractual developments required by the Government of Ontario via the Employment Ontario Partners Gateway website at: www.tcu.gov.on.ca/eng/eopg/.
Indemnification is one of those legal terms related to risk management that is necessary but cumbersome. Even trying to understand its meaning can lead to confusion as directors with little board experience may again assume that if they are indemnified they are wholly protected. Incorporated organizations are required by law to indemnify directors which means that if the organization is sued, fined or charged with any legal costs the organization will reimburse the legal fees and/or any financial settlements incurred by the board member.
However, indemnification is only as good as the organization’s ability to cover those financial costs, and members still have to prove that they conducted business and made decisions with due diligence. It should be noted that while indemnification doesn’t unequivocally protect a board member, it substantially lessens the risks as compared to those who are part of an unincorporated board. Unincorporated boards are not required by law to provide indemnification; therefore a director on such a board facing any legal costs would be personally responsible for those costs.
Liability insurance for boards is known as Director’s and Officer’s (D & O) Insurance. This insurance covers the legal costs that an organization is responsible for if liabilities have occurred. While the Canada Corporations Act does not state that boards and their members must have insurance, some funders require it before granting money to organizations, and some organizations have this written into their bylaws and policies as a requirement.
In organizations where D & O insurance is not purchased, individual members may want to look into purchasing it for themselves. The amount of coverage on a policy and the cost of premiums may vary depending on the activity of the organization, but it is generally recommended that organizations be covered for no less than $2 million.
The cost of D & O insurance can sometimes be a financial burden to organizations. It is a cost, however, that should be a priority, and organizations are encouraged to shop around for quotes and even look into becoming members of affiliations or provincial organizations that offer insurance as one of its benefits. A document called Directors’ and Officers’ Liability Insurance: An Overview provides further insight into the issue of insurance.
The issue of risk management is complicated and reaches beyond the scope of governance and this online training module, but there are some key areas that directors will want to be informed about pertaining to risk management and financial and human resource management.
In relation to human resource management, board members should be knowledgeable about:
- Employment insurance and income tax laws and payroll related standards and regulations
- Workplace safety and liability
- Workplace hazardous waste and material handling (if applicable)
- Consultant and non-employee regulations
- Employment legislation and standards
With regards to financial management, directors should ensure:
- Auditors are appointed annually and audit reports are reviewed thoroughly
- Finance committees are in place and financial reports are provided and reviewed regularly
- Safeguards are in place for financial resources, including banking and back-ups of financial reporting documents
- Policies are in place and monitored that are related, but not limited to, investing, use of credit cards, signing authorities and fundraising
- They are knowledgeable about revenues and costs of the organization
Board members also have fiduciary responsibility, meaning that they must exercise a high standard of care in managing the organization. To further prepare board members for their fiduciary responsibilities, refer to 20 Questions Directors of Not-for-Profit Organizations Should Ask about Fiduciary Duty as produced by the Chartered Accountants of Canada.
The Canadian Society of Association Executives provides a risk assessment checklist for boards in its resource Duties & Responsibilities of Directors of Non-Profit Corporations. It cautions that it’s not an exhaustive list or the ultimate shield from liability but can be a good step towards reducing risk.
The list has been adapted and included below as an activity to assess your position in terms of risk management within your organization:
- Do you know your organization’s mandate, mission, vision and objectives, operation policies and bylaws?
- Do you always act objectively and in the best interest of the organization?
- Do you prepare for all board meetings and all committee meetings by reviewing all agenda material and reports?
- Do you attend and participate in all board meetings and committee meetings for which you are a member?
- Do you keep careful notes at meetings and review the minutes of all meetings?
- Do you insist upon the establishment and regular review of operating policies and monitor staff adherence to them?
- Do you obtain outside expert advice whenever necessary?
- Do you disclose all personal dealings and/or conflict of interest as early as practical?
- Do you ensure that official minutes record all disclosures by directors of conflict of interest as well as any dissent to motions and abstention from voting?
- Do you ensure that there are effective internal systems and policies in place in all areas of organizational activity, particularly finance and human resources?
- Do you avoid possible conflict of interest situations?
- Do you ensure that the organization maintains a proper record-keeping system?
- Does the organization undergo an annual financial audit?
- Non-profit Cost Analysis is a toolkit designed specifically to help guide non-profit leaders through a six-step cost-analysis process and offers blank financial templates and concrete examples. bridgespan.org/nonprofit-cost-analysis-toolkit-introduction.aspx
- The Canadian Institute of Chartered Accountants (https://www.cpacanada.ca/en/business-and-accounting-resources/strategy-risk-and-governance/not-for-profit-governance) has produced a series of reports for board directors that poses ’20 Questions’ every board director should ask on several subjects, including those related to risk and liability such as:
- 20 Questions Directors Should Ask about Codes of Conduct
- 20 Questions Directors Should Ask about Executive Compensation
- 20 Questions Directors Should Ask about Internal Audit
- 20 Questions Directors Should Ask about IT
- 20 Questions Directors Should Ask about Privacy
- Questions Directors Should Ask about Risk
- 5 Good ideas for Risk Management for Not-for-Profit Organizations and Charitieshttp://maytree.com/fgi/risk-management.html
- Going Up? Elevator Talk, Risk Management and the Nonprofit Board (newsletter – Volume 19, No. 1, Winter 2010) Nonprofit Risk Management Center https://www.nonprofitrisk.org/resources/risk-management-essentials/vol-19-no-1-winter-2010/
- 20 Questions Directors of Not-for-Profit Organizations Should Ask about Fiduciary Duty cica.ca/focus-on-practice-areas/governance-strategy-and-risk/not-for-profit-director-series/20-questions-series/item12325.pdf
- 20 Questions Directors of Not-for-profit Organizations Should Ask about Risk cica.ca/focus-on-practice-areas/governance-strategy-and-risk/not-for-profit-director-series/20-questions-series/item12324.pdf
- Community Literacy of Ontario’s CAPACITY PLUS: Organizational Capacity Resource Guide for Ontario’s Community Literacy Agencies communityliteracyofontario.ca/wp/wp-content/uploads/2013/08/capacity_plus_book_02.pdf
- Community Literacy of Ontario’s Reducing Risk/Protecting People: An Annotated Guide to Risk Management Resources communityliteracyofontario.ca/wp/wp-content/uploads/2013/08/reducing_risk_annotated_guide.pdf
- What’s the Board Got to Do With it? The Vital Link Between Good Governance And Risk Management, Non-Profit Risk Management Centre, Melanie Lockwood Herman: nonprofitrisk.org/library/articles/board091004.shtml
- Some helpful checklists are available here from the Community Sector Council: http://communitysector.nl.ca/node/54952