Guide to Good Governance: Not-For-Profit and Charitable Organizations SECOND EDITION

GUIDE TO GOOD GOVERNANCE NOT-FOR-PROFIT AND CHARITABLE ORGANIZATIONS 1

Table of ContentsIntroduction to the Guide 2

About the Authors 3

Chapter 1: Framework for Good Governance 9Objective: Good Governance of Not-For-Profit Corporations 9

The Audience: A Broad Spectrum of Not-For-Profit Boards 9

A Framework for Good Governance 10 Condition #1 – The Board’s Role 11 Condition #2 – Board Quality 11 Condition #3 – Board Structure and Processes 11 Boards Responsible for their Own Governance 12

Chapter 2: The Not-For-Profit Corporation 13What is a Corporation? 13

The Not-For-Profit Corporation 13 Creating a Not-For-Profit Corporation 13 Transitioning to the new Canada Not-for-Profit Corporations Act and Not-for-Profit Corporations Act (Ontario) 14 The Range of Not-for-Profit Entities 15 Soliciting Corporations and Public Benefit Corporations 15 Focus of the Guide 16 Not-For-Profit Corporations and the Income Tax Act 16 Corporate Governance Structure 16 Best Interests of the Corporation 18 Understanding Corporate Accountability 18 Factors that Impact Governance 20 Summary 20

Chapter 3: Legislation Governing Charities 27What Directors Need to Know 27 What is a Charity? 27 Becoming a Registered Charity 27 Instructions for Issuing a Charitable Tax Receipt 28 Losing Charitable Status 30 Intermediate Penalties 33 Improper Gifting Arrangements 33 Provincial Law – Ontario 34 Provincial Law – Other Jurisdictions 35 Personal Liability of Directors of Charitable Corporations 35

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Chapter 4: Governance Models 39 Board Accountability and Authority is Broad 39 Constraints to the Board’s Authority 40

Board Chooses its Governance Model 40 Governance Model Changes to Fit Organization 41

Trend Toward a Form of Policy Governance 42 The Line between Board and Management 42 Delegation Challenges 42

Generative Governance Mode 44 Approaches to Implement Generative Governance 45

Chapter 5: Role and Functions of a Board 46Function 1: Approving Goals and Strategic Direction 46 Understanding this Function 46 Implementing this Function 48 Organizing the Board to Perform this Function 52

Function 2: Establish a Framework for Performance Oversight 54 Understanding this Function 54 Implementing this Function 55 Organizing the Board to Perform this Function 57

Function 3: Oversee Program Effectiveness and Quality 58 Understanding this Function 58 Implementing this Function 59 Organizing the Board to Perform this Function 60

Function 4: Oversee Financial Conditions and Resources 61 Understanding this Function 61 Implementing this Function 62 Organizing the Board to Perform this Function 64

Function 5: Oversee Enterprise Risk Management 65 Understanding this Function 65 Implementing this Function 66 Organizing the Board to Perform this Function 69

Function 6: Supervise Leadership 69 Understanding this Function 69 Implementing this Function 70 Organizing the Board to Perform this Function 75Function 7: Oversee Stakeholder Relationships 76 Understanding this Function 76 Implementing this Function 77 Organizing the Board to Perform this Function 77

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Function 8: Manage the Board’s Own Governance 78 Understanding this Function 78 Implementing this Function 78 Organizing the Board to Perform this Function 79 Supplementary Functions of Boards 79

Chapter 6: Duties and Obligations of Individual Directors 99Understanding the Duties of Directors 99 Fiduciary Duties 99 Standard of Care 99 Rules of Fiduciary Conduct 100 Business Judgment Rule 102 Reliance on Others 102 Director Dissent 103

Understanding Director Liability 103 The Principle of Limited Liability and the Importance of Governance 103

Duties of Ex Officio and Non-Voting Directors 104 Duties of Ex Officio Directors 104 Duties of Non-Voting Directors 105

Frequently Asked Questions 106

Chapter 7: Board Quality 127Board Composition and Recruitment 127 Board Size 127 Board Quality and Composition 128 Term 130 Recruitment, Nomination and Election 131

Board Orientation and Education 133 Governance Principles for Board Orientation Governance Principles for Board Education 134

Board Evaluation 135 Governance Principles for Evaluation Processes 135 Guidelines for Implementing Effective Evaluations 136

Frequently Asked Questions 138

Chapter 8: Board Structure and Processes 165Board Leadership 165 Legal Requirements 165 Governance Principles 166 Board Chair 166

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Board Committees 168 Legal Requirements 168 Governance Principles 169 Types of Committees 170 Board Meetings 171 Member Meetings 176

Frequently Asked Questions 180

Chapter 9: Developing Good Governance 225Creating a Culture for Good Governance 225

Adopting the Twelve Best Practices for Governance 226

Assessing Governance Regularly to Promote Development 228

Governance Review Process 228

Turning Troubled Boards Around 229 Signs of Governance Problems 229 Keys to Turnarounds 230 Remedies for Typical Troubles 231

Chapter 10: The Not-for-Profit Corporations Act (Ontario) 240Application of the Not-for-Profit Corporations Act (Ontario) 240 Conflicts with Other Legislation 240

Key Terms and General Provisions of the Not-for-Profit Corporations Act (Ontario) 241 Articles of Incorporation and Articles of Amendment 241 Special Resolution and Ordinary Resolution 241 Method of Holding Meetings and Voting 241 Waiver of Rights 241 Officers 241 Activities and Affairs 242 Corporate Capacity 242 General Authority of the Board and Board Delegation 242 By-Laws 243

Impact of the Not-for-Profit Corporations Act (Ontario) on Boards and Individual Directors 243 Board Size 243 Changing Board Size 243 Qualifications of Directors 244 Election/Appointment of Directors 244 Term of Directors’ Election Consent 245 Director Voting 245

GUIDE TO GOOD GOVERNANCE NOT-FOR-PROFIT AND CHARITABLE ORGANIZATIONS 5

Removal of Directors 245 New Provisions for Directors Meetings 245 Directors’ Duties and Liabilities 246 Conflict of Interest 247 Insurance and Indemnification 247

Impact of the Not-for-Profit Corporations Act (Ontario) on Members 247 Membership and Voting Conditions 247 Members’ Meetings 248 Notice 248 Quorum 249 Member’s Rights 249 Other Provisions 250

Schedule A: Not-for-Profit Corporations Act (Ontario) Non-Delegable Board Powers 265

Schedule B: Matters Requiring Special Resolution under the Corporations Act (Ontario) 265

Schedule C: Matters Requiring Member Approval by Special Resolution under the Not-for-Profit Corporations Act (Ontario) 265 Approve Fundamental Changes – Special Resolution of Members 265

Appendix I: List of Forms by Chapter 267

Appendix II: Resources and References 269 Rules of Order 270 Websites 270 References – By Chapter 270

Appendix III: Glossary of Governance Terms 274

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