1 of 27

Bullet-Proofing Directors

A primer to avoiding directors’ liability

Document #

2 of 27

The issue – Duty and Liability

Directors of all organizations (for-profit and not-for –profit) are now subject to greater scrutiny and potential liability.
How should a director respond?

Document #

3 of 27

What is a Board?

A group charged with the responsibility of managing the affairs of an organization for the benefit of its members and others.

Document #

4 of 27

What is a Director?

An individual who is a member of the board.
These individuals are responsible to ensure the board meets its obligation to manage the affairs of the organization.
It is a relationship of trust and that’s were the potential for liability arises.

Document #

5 of 27

Duties of a Director

Directors have 3 basic duties:

Diligence
Loyalty
Obedience

Document #

6 of 27

Duties of a Director

They are owed to:

the organization as a whole

the members
other directors
those who may be affected by the board’s decisions.

Discussion Point: “The cover-up”

Document #

7 of 27

Duty of Diligence

Act honestly and in good faith with a view to the best interests of the organization
Exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

Document #

8 of 27

Duty of Diligence

Act cautiously
Try to anticipate consequences
Be well informed
If you have a special skill (e.g. a lawyer or accountant) maintain standard of care that corresponds to professional standards

Document #

9 of 27

Duty of Loyalty

Put the interests of the organization first
Avoid conflicts of interests

Disclose if they exist and don’t participate in decisions relating to the conflict

Support the decisions of the Board

Document #

10 of 27

Duty of Obedience

Comply with organization’s governing documents:

Constitution
Bylaws
Policies
Rules and Regulations

Document #

11 of 27

Duty of Obedience

Comply with external laws

Employment Legislation
Environmental
Lobbying Legislation
Health and Safety
Human Rights

Document #

12 of 27

Liability of Directors

Arises in 3 Situations:

When a law is broken
When a contract is broken
When an act, or failure to act, whether intentionally or unintentionally, causes harm to another person (tort)

Document #

13 of 27

Statute

Variety of federal and provincial statutes impose obligations on organizations
Directors, who manage the affairs of the organization, are responsible to ensure those obligations are met

Document #

14 of 27

Contract

Directors are responsible to ensure an organization meets its contractual obligations

Document #

15 of 27

Tort

Directors are responsible to ensure an organization and its personnel do not act negligently

Duty to act reasonably.

Document #

16 of 27

Indemnification/Insurance

Almost universal practice to for organizations to indemnify directors for liability
Understand the limitations

Financial capacity
Legal bars to indemnity

Directors Insurance

Document #

17 of 27

Avoiding Liability through Risk Management

3 Part Activity:

Indentify risk and possible harm
Indentify practical steps to avoid/eliminate/reduce risk/harm
If harm occurs, identify measure to mitigate the impacts

Discussion: Embezzlement

Document #

18 of 27

Incorporation

Establishes the organization as a legal entity
Exists independently of its members/directors
Limits liability of directors but doesn’t remove it.

Document #

19 of 27