Shortly after a Not-for-Profit Corporation is first incorporated, an organizational meeting of Directors is held for the purpose of what might be called “internal housekeeping”. Quite commonly, after each annual meeting has selected the Directors for the coming year, a further “internal housekeeping” organizational meeting is held by the Directors to name signing officers for the coming year (among other things). Particularly when one or more new Directors come onto the Board, there may be pressure to change the signing authorities for the corporation.
Consider the following as an example:
An unfortunate past experience (where funds were embezzled) had previously generated the incentive for greater involvement of the members of the Board of Directors in the signing process. As a result, there is a long-standing Board-approved policy on signing authorities for various items, i.e. cheques, contracts, etc., and various appointed officers had authorities at different levels. The levels have varied over the years but in general terms, at the higher dollar levels, there are both greater controls and greater Board involvement. For example, for an expenditure over $200,000, the signing authority requires one internal staff signing person (one of the Chief Executive Officer, Chief Financial Officer, Controller, and Corporate Secretary), and one external Board of Director signing officer (one of the Chair of the Board, the Vice Chair, Past Chair, and the Chair of the Finance Committee). This system is seen as safeguarding the Board of Directors in terms of its fiduciary responsibility.
After a change in the composition of the Board one year and the selection of new officers, the new Chair suggests removing the Board of Director signing officers, leaving all signing authority at the staff level. It is not clear whether there is any appropriate reason in principle for making such a change, other than that the process would then be easier and more convenient for the Board of Director signing officers.
So the question then becomes whether there are legal requirements, or best practice rules or policies, as to what signing authorities should be adopted.
Although it is not an uncommon provision in corporate by-laws to find provision for Directors, as such, holding signing authority (both for documents and for banking), there is no requirement in corporate law that a Director must be a signing officer. In larger commercial corporations it is less likely that a Director is authorized to sign cheques. In smaller organizations, both commercial and non-commercial, because of the lack of resources and perhaps because of the more simple requirements, Directors are more likely to be “hands on” and to perform some of the operational functions required to keep these organizations going. Equally, as non-profit organizations grow in size, more staff persons are needed and employed to undertake the increasingly complex administrative obligations and in the financial sphere, more financially trained personnel are employed. Accompanying such growth is the decreasing need for reliance upon volunteer Directors to undertake the required administrative functions, including financial functions such as signing cheques.
Regardless of the size of the entity, the Board of Directors has the ultimate responsible for the good government and management of the organization. It is the Board of Directors that must set up the necessary checks and balances in order to ensure that the resources of the organization are well managed. Their fiduciary responsibility demands no less.
But there is a wide variety of mechanisms that the Board of Directors has at its disposal to accomplish this responsibility. Which are appropriate to the needs of the organization will vary considerably, from relatively simple and informal limits, to much more complex and stringent requirements. Within this broad range, the Board of Directors must select the mechanism(s) that provide for efficient and effective operations, but at the same time, include reasonable protection against avoidable loss.
The Board of Directors will have to rely upon a combination of common sense on the one hand, and advice received from both its own Chief Executive Officer and its Auditors on the other hand, as to what controls in the signing authorities should be put in place to ensure adequate protection against loss. One of the most common and least sophisticated requirements is the separation of two or three levels of authority:
- authority to approve expenditures;
- authority to requisition cheques for such expenditures; and
- authority to sign the cheques for such expenditures.
In the end, it is a judgment call by the Board of Directors as to what checks and balances must be put in place to safeguard the resources of the organization, while still providing for efficient operations.
Before an organization makes a change in its cheque signing processes, we strongly suggest that a Board of Directors should obtain the appropriate recommendations from both its own Chief Executive Officer, and from its Auditors, as to what signing authorities will balance efficient operations and safeguarding of resources.