Non-profits: Duties of Directors and Managing Directors

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Non-profit corporations have directors, officers and members. That’s a lot of people. What do each of them do?  

Managing directors usually run the organization’s day-to-day operations. They know more about the organization than anyone else and have a lot of influence on it.

What happens if they disagree with the board of directors or question its authority? What decisions can they make without the board’s approval?

This article explains the duties and powers of managing directors and their relationship to the board of directors. 

Note: The rules explained in this article apply only to incorporated non-profits. See the first question below to find out whether your organization is incorporated.

 

Is your non-profit incorporated?

Non-profits that want to incorporate must apply to the government. They will usually apply under either the Quebec Companies Act (Part III) for incorporation in Quebec or under the Canada Not-for-profit Corporations Act for federal incorporation.

How do you know if your organization is incorporated? Check whether you have either letters patent or articles of incorporation. These are documents issued by the government when they accept an application to incorporate. The documents will say whether the incorporation was federal or provincial. 

An incorporated non-profit might also be called 

  • a corporation or legal person having no share capital, 
  • a non-profit corporation, or
  • a non-profit legal person.

 

Where do managing directors get their powers? 

Organizations are not physical people and must act through real people. These people include directors. A director is part of a group called a board of directors. The board supervises the running of the organization. 

The board itself does not run the organization’s daily activities. Instead, it delegates some of its powers. This means it gives other people permission to act on its behalf and make everyday decisions. Here are examples: 

  • appoint a managing director to run the day-to-day affairs of the organization 
  • name a committee of directors to do some things (for Quebec organizations, the by-laws must let the board name a committee which is called an executive committee
    If there is a managing director to run the day-to-day operations, a committee might not be necessary. But an organization that has both should clearly define what each can do. 

Important! There are some powers (called discretionary powers) that the board of directors can’t delegate, such as these:

  • adopt, modify and cancel by-laws
  • fill vacancies on the board of directors

But the board of directors can’t just do whatever it wants. Sometimes it needs permission from the organization’s members, for example, when the board wants to borrow money but the by-laws, letters patent or articles of incorporation say nothing about this. 

 

How are managing directors chosen? 

The board chooses managing directors. They must be officers of the organization, but not necessarily directors or members. 

Managing directors are employees of the organization and usually get a salary. 

The board of directors must make sure its managing director is competent, for example, by appointing a selection committee, posting a job offer or having candidates pass psychometric tests. If the board puts an incompetent person in a position of responsibility and the organization suffers as a result, the board might have to compensate the organization. The incompetence would have to be serious and obvious when the person was appointed.

 

Powers of managing directors 

Managing directors are officers of the organization and have the powers assigned to them in the organization’s by-laws. The powers can differ from one organization to another.

The by-laws can also allow the board to change the managing director’s powers at any time. The board does this by adopting a resolution.

For example, if the board wants to limit an officer’s powers when it comes to hiring employees, the directors must vote on the issue. If a majority of directors vote to limit this power, the decision is written and signed by the directors. This is called a resolution.

If there is any doubt about the managing director’s powers, the board should either adopt a resolution or change the by-laws to clarify them.

 

Duties of managing directors 

These are some of the responsibilities of managing directors:

  • fulfill their duties
  • act within the limits of their powers
  • act with care, diligence, skill, honesty and loyalty
  • avoid conflicts of interest
  • not use, for their own benefit, any information or property they receive or are responsible for as part of their duties, unless authorized by the organization. Otherwise, they might have to compensate the organization for any harm it suffers or give back any profits they made. 

 

Supervision of managing directors 

In federal non-profits, the board of directors must actively supervise the managing director. 

But if there is any reasonable doubt about how the managing director is running the operations, the board of both federal and Quebec non-profits must investigate. Sometimes, they must also take action. If not, the board might have to compensate the non-profit. 

For example, if the board notices that the managing director has a much higher standard of living that her salary can provide, it must investigate to see if any money was stolen from the organization. The board must also take action if a series of events would raise suspicions.

Important! This doesn’t mean the board must constantly monitor the managing director.

 

What if the managing director refuses to answer the board’s questions? 

The board of directors can dismiss a managing director for insubordination for not answering its questions satisfactorily. The board can also take other action, such as giving a warning or taking other disciplinary action.

 

How can the board of directors ensure that the managing director gives it reliable, correct information? 

The law is silent on this. But the board must act with care and diligence. This means that before taking any action, it must get the information it needs to make informed decisions and minimize the risk of error.

So, it seems reasonable that the board of directors can question a managing director to ensure that information he gives is correct and reliable. 

But the board doesn’t have to do anything unless it suspects the information given by the managing director is incorrect or unreliable. 

 

Can the managing director disobey the board of directors? 

Not in theory. Because managing directors act on behalf of the board, they can’t challenge the board’s decisions or policies. The board can dismiss a managing director for insubordination.  

Managing directors have a lot of influence on the organization since they are responsible for its day-to-day operation. 

To the public, the managing director represents the organization. But he is still an employee who must answer to the board of directors.

A managing director can disobey the board of directors if, for example, the board asks him to do something illegal.

 

What if managing directors don’t fulfill their duties? 

The board of directors can only take action against managing directors when they intentionally do something wrong or are very careless.  

The legal consequences might not be as serious for managing directors who are volunteers.

Some federal and Quebec laws impose duties on managing directors. For example, federal and provincial tax laws require organizations to deduct tax from employees’ salaries. Managing directors must learn what their legal responsibilities are and even consult a professional if necessary.

Some laws that impose duties on managing directors: 

  • Act respecting labour standards 
  • Professional Code 
  • Consumer protection Act 
  • Bankruptcy and Insolvency Act 
  • Immigration and Refugee Protection Act 

 

Who is responsible when a managing director’s decision harms someone? 

The organization, and not the directors, are responsible for the managing director’s actions. 

But managing directors who act in their own names or exceed their powers can be sued for the harm they caused.
 

Important !
This article explains in a general way the law that applies in Quebec. This article is not a legal opinion or legal advice. To find out the specific rules for your situation, consult a lawyer or notary.