Bennett Financial Services

The directors and officers that make up the board of directors in any organization or business are a vital part of the success of the venture.  To attract the best possible people to fill those roles organizations and business must provide those board members with the appropriate legal protection that will allow them to perform their functions.  Directors and officers have a duty to exercise due diligence in overseeing the activities of the organization that they serve.  They are required to act reasonably, in good faith, in the organization’s best interest, place the interest of the organization before your own, act within the scope of the organization, within applicable rules and laws. Directors and officers have very specific duties and obligations that must be known and practiced by all directors and officers.

Directors may be liable for failing to act as stated under a statute.  For example, if a statute requires directors to file a report or maintain certain records, and these reports and records are not maintained, then the director may be liable for an offence under that statute.  In addition, the non-compliance of the organization with a statute may become an issue.  For example, directors may be liable for mismanagement, financial losses, wrongful dismissal, employee discrimination or failure to remediate environmental damage.

It is also important to note that directors can be held personally liable. Ignorance is not a defense and the resignation is not necessarily a defense. In addition board indemnity may not be enough.  Moreover, directors may be liable for non-performance.

Consult a lawyer and an insurance agent competent in this area for more information on directors’ and officers’ legal liability.

How can businesses manage this risk and avoid liability?

Companies should provide awareness training in negligence and liability to all directors and officers.  Directors and officers should be given all the appropriate information that they require to perform their duties effectively.  Ensure directors are aware of the risks associated with being a director of the organization, the various statutory and civil liabilities, their various obligations, other rules associated with the organization’s business for which directors may be liable due to acts or omissions of the organization and other responsibilities (including understanding finances and knowing the organization and its charter).

Ensure there is no conflict between the duty owed to the organization and the director’s self-interest.  Avoid outside employment/business that may interfere with or influence the organization’s duties.  Handle confidential and sensitive information carefully (prevent release of information).  Follow guidelines on the appropriateness of public statements (i.e., what and when information can be released).  Do not accept gifts, favors or services relating to company duties.

Ensure directors are aware of the organization’s operations and affairs.  Maintain formalized operating policies and procedures for all activities within the organization’s control.  Implement a financial management policy. Establish clear financial reporting guidelines.  

Store confidential materials and sensitive information in a proper place.  In this regard, determine who has access. Encrypt all electronic confidential materials. Ensure only those with passwords have access. The system should require that passwords be changed frequently.  Implement firewalls to prevent hackers from accessing information

Create a human resources policy by preparing formal job descriptions for all employees and document the experience and training required for those positions.  Document specific aspects of unacceptable employee performance and advise employees of it well before termination

Ensure all employees, visitors, customers, clients and other stakeholders are protected from harm.

Establish a formal information reporting system. Generally, a director is entitled to rely on information provided by officers or employees/volunteers of the organization, unless the director knows that relying on the officer/employee/volunteer is unadvisable.

Directors should have a clear understanding of all the activities in the organization and should question anything that is unclear. Directors should also clearly communicate their decisions.

Document decisions and how they were made.  Work closely with legal representatives in making decisions. If the director has provided full disclosure to counsel, requested counsel’s advice as to the legality of the proposed action, received advice that the action would be lawful and proceeded in reliance on the advice, this may demonstrate that the director acted with due care.  Implement a “whistle blower” policy that is communicated to staff and volunteers, and that lets people know that they can contact a specific board member or representative to advise of any situation of which they feel the board should be aware.

Implement a director’s indemnification policy that clearly states the rights and obligations of directors and what protection is provided to them by the organization.

Handling a Claim:  In spite of your best efforts, claims may arise.  To eliminate or minimze liabiltiy, document all information related to incidents and report the incident to your insurer. Provide them with the details of the incident; and information about steps that had been taken to avoid the incident.  There are very strict reporting requirements under Directors and Officers insurance policies.  Contact your insurance representative immediately upon becoming aware of a situation that could potentially give rise to a claim.  Investigate and consider how future incidents may be prevented.

Contact an insurance agent to discuss managing this risk.