Significant Changes to Boards of Directors

By Joel Secter

One of the overarching themes of the Canada Not-for-profit Corporations Act (the "CNCA") is that it seeks to address the balance between the rights and responsibilities of directors and members. One way it does this is by way of section 128(3) of the new Act, which provides that directors are to be elected by the members - and only by the members. The implication is that federally incorporated organizations can no longer have ex-officio directors. Interestingly, putting an end to ex-officio directors might also provide a solution to a not-so-obvious problem; that is, what happens when a director who sits on a board as a representative of another organization has a conflicting duty of loyalty.

By way of background, the Canada Corporations Act (the "CCA") permits the by-laws of not-for-profit corporations to provide for ex-officio directors. These individuals become directors by virtue of their office or position, such as past-President. Frequently, ex-officio directors will qualify as a director of one organization because they hold an office or position in another, often affiliated organization. The salient feature is that the members of at least one organization do not elect these directors.

It should go without saying that directors are subject to the full panoply of director or fiduciary duties regardless of whether they occupy that position by virtue of an election or ex-officio. This includes the duty of loyalty. Thus, doing away with ex-officio directors may have the effect of eliminating the dual loyalties which can occur in a director when the two corporations on which he or she sit are adverse in interest (i.e. in negotiations).

The relationship between director and corporation is a well established category of fiduciary relationship. A fiduciary has a legal obligation to put the interests of the corporation before its own. Whereas the fiduciary duty for directors of federally incorporated not-for-profits stems from the common law under the CCA, this will be a statutory duty under the CNCA. Section 148(1) states:

Every director and officer of a corporation in exercising their powers and discharging their duties shall

a)      Act honestly and in good faith with a view to the best interests of the corporation; and

b)      Exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstance.

Where conflicts do arise, the case law is clear that all directors must put the interests of the corporation first. The only caveat to this principle is the recognition of the business judgement rule by the Supreme Court of Canada in Peoples Department Stores Inc. (Trustee of) v. Wise.[1] In that case, the Court stated that the requirement to consider the best interests of the corporation need not be limited to the best interests of the shareholders and may take into account other stakeholders. Therefore, the only real way for a director to vote in the interests of a stakeholder is to have a reasonable belief that in supporting the position of the stakeholder, he or she is doing so in the best interests of the corporation.

While prohibiting ex-officio directors may be intended to further empower members and eliminate inadvertent conflicts, it presents a challenge for organizations that wish to ensure certain stakeholders are represented on their board. One way to deal with this may be to create a class of members (corresponding to the organization to be represented) with a right to elect a seat on the board, recognizing that making fundamental changes to that class of members would require the support of a two-thirds majority of the members of that class. Another way may be for a corporation to create an Advisory Board that the board of directors can consult on an as needed basis. The appropriateness of these suggestions will depend on the circumstances of each organization.

The change described above is another example of how the CNCA sets out to implement a modern corporate governance regime for not-for-profit corporations. For obvious reasons, boards that currently have ex-officio directors are advised to consider making the necessary changes to their structure.