British Columbia’s new Societies Act came into force at the end of November 2016. In addition to requiring that all 27,000 or so B.C. societies transition in the next two years, the legislation has brought changes that affect societies’ governance and operations. We will highlight some of the more important issues in a series of bulletins, covering topics such as conflicts of interest, indemnification, record retention and access, and financial matters. In this bulletin, we will discuss the qualifications required of directors and senior managers under the Societies Act.
Directors are primarily responsible for governing or running a society. They come by many names (e.g. governors or trustees) and may manage the activities or affairs of a society directly, or delegate some of the management tasks to senior managers or other employees. Depending on the size and sophistication of the society, the board of directors may be actively involved in management, or they might choose to take a more supervisory approach, following the long-standing “noses in, fingers out” principle. Even though this principle has been criticized in this post-Enron world, it encapsulates a sound approach to governance. It requires that the board exercise active and attentive oversight of the society, know what is going on, ask probing questions of management, investigate anything suspicious, and take action if it discovers malfeasance. The board should not try to insert itself into day-to-day activities, however, or it risks usurping the role of management. To put it bluntly, if management had to wait for board approval before carrying out routine tasks, the society would grind to a halt.
In comparison, the “senior managers” of a B.C. society are responsible for managing those day-to-day activities of the society assigned to them by the directors. They do so under supervision of the board, and are accountable to it. “Senior managers” is a defined term that was introduced in the Societies Act. A senior manager is roughly equivalent to an officer of a business corporation. Under the new legislation, anyone who has been appointed by the directors to exercise their authority in managing the activities or internal affairs of the society as a whole (for example a CEO, president, or chair) or in respect of a principal unit (for example a CFO or treasurer) is considered a senior manager. It does not matter whether the senior manager is a volunteer, an employee, or a contractor.
Directors and Senior Managers are Fiduciaries
Directors and senior managers owe fiduciary duties to their societies. This means that they owe both a duty of loyalty and a duty of care. The duty of loyalty requires that directors and senior managers act honestly and in good faith with a view to the best interests of the society. In addition, directors and senior managers must act with a level of skill and competence that a reasonably prudent person would exercise in comparable circumstances. These duties are expressly set out in the Societies Act. If you would like to learn more about directors’ fiduciary duties, please read Fasken Martineau’s guide to non-profit governance: “The Well-Governed Non-Profit.”
New Qualifications for Directors and Senior Managers
There are many attributes which may qualify a person to govern or run a society — such as subject area expertise, fundraising ability, financial literacy, or strategic vision. Until recently, it was entirely up to a society’s board to determine the qualifications to be met by its directors or senior managers. This has changed under the new Societies Act. While societies may still set out their own qualifications for their directors in their bylaws, now all board members and senior managers will also have to meet certain minimum qualifications. Directors and senior managers:
- Must be individuals (as opposed to, for example, corporations) and must be at least 18 years of age. However, as long as the majority of the directors are 18 years or older, a society’s bylaws may permit directors or senior managers to be 16 or 17 years old.
- Must not have been found by a court to be incapable of managing their affairs.
- Cannot be undischarged bankrupts.
- Cannot have been convicted, in Canada or elsewhere of an offence connected to the promotion, formation, or management of a corporation (such as a society) or another entity.
- Cannot have been convicted, in Canada or elsewhere, of an offence involving fraud.
A conviction will not disqualify individuals from acting as director or senior manager forever. If five years have passed since the imposition of a fine, completion of a prison sentence, or a period of probation or expansion, or if a pardon has been granted, such individuals may act as directors or officers again. The Supreme Court of British Columbia can also waive a disqualification.
Do these new qualifications apply right away?
The directors and senior officers of all new societies incorporated under the Societies Act must meet the minimum qualifications described above. For societies established before the new legislation came into force, there will be a two-year moratorium until November 28, 2018 before the statutory qualifications apply. This should give societies enough time to find qualified directors if replacements are needed.
What happens if you do not meet the statutory qualifications?
An individual who does not meet the new qualifications cannot become a director or senior manager. But what happens if a director was appointed without being qualified, or if a senior manager ceases to be qualified (under the legislation or the bylaws) while serving his or her term? In those situations, the director does not automatically cease to hold office (unless the bylaws say otherwise). Instead, the Societies Act requires the director to resign promptly. Individuals will generally know first and best whether they are, or continue to be, qualified to be directors or senior managers.
Perhaps as an oversight, the new legislation does not expressly require senior managers to resign. However, since it is an offence to become or act as senior manager or director without being qualified under the Societies Act, it will be in the best interest of both senior managers and directors to step down immediately upon being disqualified.
If a disqualified director refuses to resign, the society can remove him or her by special resolution, or by another mechanism if it is built into the bylaws. Societies in this predicament can also apply to the B.C. Supreme Court for a compliance order against the disqualified director. Another approach is to state in the bylaws that a director who is not or is no longer qualified automatically ceases to hold office. Senior managers can typically be removed by the society’s board.
Even if a disqualified director or senior manager continues to be involved in the society’s activities or affairs (because he or she does not know of the necessary qualifications, for example), the disqualification alone will not invalidate his or her actions. This is primarily meant to protect the members of the public who deal with societies and rely on the capacity of directors and senior managers to act for their organization. But it will also help to protect societies by freeing them from having to worry about whether or not a disqualified director’s or manager’s actions were valid.