Manager liability in Germany: between departmental and overall responsibility

Max Mustermann was in disbelief: as a member of the Management Board, he had successfully and conscientiously managed the German business of Muster AG for many years. He was unaware that his colleague, Sabine Untreu, was systematically engaging in corrupt practices in the Southeast Asia business. And yet he was now expected to pay for the damage together with his colleague and two other members of the Management Board?

Over the past ten years, many managers in Germany had to learn that compliance is the overall responsibility of the Management Board. The responsibility for developing a company-wide compliance system cannot be delegated to another department. Board members of one department are liable for shortcomings in the compliance organisation of other departments. This was made clear by Munich Regional Court I in 2013 as part of the investigation into the Siemens corruption scandal.[1]

However, under German law, the overall responsibility of the Executive Board extends far beyond the topic of compliance. In fact, overall responsibility is the rule. Only in exceptional cases can members of the Executive Board absolve themselves of liability by assigning tasks (i.e. allocating responsibilities along Executive Board departments). But where is the line to be drawn?

1. Standard case: overall responsibility

In principle, each member of the Executive Board is responsible for the entire management (in accordance with Section 76 (1) German Stock Corporation Act - AktG).

Overall responsibility therefore comes into play in particular in situations and decisions that have an impact on the entire company and its future development.

Example 1: Mergers, sales and acquisitions

A group is planning to sell several foreign subsidiaries as part of a strategic reorientation. The Executive Board as a whole must decide on the disposals and their conditions. Each member of the Executive Board must form their own judgement of the transactions on the basis of the information available and make their own independent assessment for the benefit of the company. No member of the Executive Board can, for example, claim that neither finance nor the respective subsidiary falls within their area of responsibility.

Example 2: Decision on major financing

A group that has previously operated exclusively in Germany is planning to take out a large investment loan in order to internationalise its business (e.g. by building production facilities and sales offices abroad). The amount of the loan poses a financial risk to the continued existence of the company if the investment fails.

In this case, no member of the Executive Board can absolve themselves of liability because the CFO and the CEO negotiated the loan terms and the decision was made by the CFO.

Example 3: Selection of personnel directly subordinate to the Management Board

The second management level, which reports directly to the Management Board, often has far-reaching operational powers and can usually have a significant influence on the company's fortunes. The selection of these managers can therefore not be left solely to the board member responsible for the department. The decision on the appointment of management personnel must be made by the entire Management Board.

Example 4: Reporting to the Supervisory Board

The Supervisory Board can only monitor the Management Board in accordance with its duties if the Management Board provides it with all information on business developments in a complete and truthful manner. The scope and frequency of these reports is governed by Section 90 AktG.

A member of the Executive Board who blindly trusts that his fellow Executive Board member responsible for preparing the reports will compile the required reports completely and truthfully is liable for any omissions - for example, if the fellow Executive Board member fails to disclose critical issues and decisions to the Supervisory Board.

Example 5: Filing for insolvency

A member of the Management Board receives feedback from suppliers that large invoices have not been paid. Now at the latest - even if he is not the CFO - he is obliged to obtain information internally about the reasons for the late payments.

In liquidity crises, all members of the Executive Board, not just the CFO, are responsible for ensuring that the company's liabilities are met. If a member of the Executive Board has reason to believe that the company is insolvent, they are obliged to file for insolvency in accordance with Section 15a InsO. This obligation applies equally to every member of the Management Board, regardless of the assessment of the situation by the other members of the Management Board.

2. Department-related duties

Management boards regularly allocate specific areas of responsibility of the Management Board as a whole, such as finance, human resources or legal affairs, to individual members of the Management Board by means of an internal allocation of responsibilities. The principle of comprehensive overall responsibility can be modified by such a division of responsibilities into departments.

2.1 Formal requirements

A mere ‘de facto allocation of responsibilities’ without a basis in the articles of association or the rules of procedure of the Management Board does not provide any liability-limiting protection for the members of the Management Board who are not responsible for the respective department. In order to be effective under liability law, the allocation must fulfil certain formal minimum requirements. This includes a clear written regulation of the internal allocation of responsibilities of the Management Board in the rules of procedure, in the articles of association or by a formal resolution of the Management Board.[2] In addition, the individual areas of responsibility must be allocated in such a way that they are clearly distinguishable from one another.

2.2 Central duties within the department

The respective member of the Executive Board assumes full responsibility for their area of responsibility. This responsibility essentially comprises supervisory, organisational and reporting duties.

Supervisory duties

The Management Board member responsible for a department generally does not carry out the tasks of their department themselves, but delegates them to subordinate employees. The main responsibility of the Executive Board member is therefore to supervise and monitor these employees.

The supervisory duties of the Executive Board member responsible for a department include the careful selection of qualified and reliable employees, their induction and training and the monitoring of their activities.

Organisational duties

The Management Board member responsible for a department must also ensure that organisational processes run smoothly, provide sufficient human and material resources and intervene in good time in the event of irregularities. Within their department, they are also responsible for defining a clear allocation of responsibilities and issuing specific instructions in the event of problems.

Reporting duties

The Executive Board member responsible for a department also has a duty to inform the other Executive Board members about significant events in their area and to report regularly. These reports are submitted at the Executive Board meetings.

Example: Responsibilities of the Chief Sales Officer

The member of the Management Board responsible for sales therefore oversees all aspects of sales and customer relations. He develops and implements sales strategies to achieve the company's sales targets and ensures that the sales staff are well trained and that the sales processes run efficiently. The Management Board member reports on sales results at Management Board meetings. This may include, for example, the sales figures and sales targets achieved, the resources utilised, market shares achieved and customer feedback.

3. Control between board members

Members of the Management Board are therefore not directly responsible for the duties within the remit of other Management Board members. However, they have a duty to control and monitor their fellow board members - and are liable for errors in other board members' departments if they themselves violate their control and monitoring duties.

These ‘horizontal’ control and monitoring duties primarily comprise a duty to provide information, which can extend to a duty to monitor and, in times of crisis, even a duty to act in the event of suspected irregularities in another board member's department.

3.1 Usually only duty to inform

In line with the reporting obligation of the Executive Board member responsible for the department, the non-departmental Executive Board members must inform themselves about the processes in the other departments. The extent of the duty to provide information varies depending on the importance of the department, the type, size and structure of the company and the experience of the responsible Management Board member.

The Management Board is free to organise the information system as it sees fit. In practice, it is usually sufficient for the members of the Management Board to report on the most important events in their area at meetings. The non-departmental members of the Executive Board receive this information and ask questions if necessary. Apart from times of crisis, there is a principle of trust: as long as the reports of the responsible Executive Board member do not reveal any irregularities, the non-executive members of the Executive Board can assume that business is being conducted properly[3].

3.2 Increased monitoring obligations in the event of irregularities

The responsibilities of non-executive board members increase if there are indications of irregularities in another department. In the event of suspected irregularities, they are obliged to investigate these and take countermeasures if the suspicion is confirmed.[4]

It is easy to see that a grey area has opened up here in practice: When is the threshold crossed at which a board member must intervene in the portfolio of a colleague? How serious must the suspected undesirable developments be in order to justify intervention at all? And what measures are proportionate and necessary to investigate a specific case? For example, a board member could question employees from another division and request documents from them - but if it then turns out that indications of undesirable developments have not materialised, the trust between fellow board members will often be irreparably damaged. In practice, the duty of supervision between fellow board members is therefore often like riding the razor's edge.

4. Consequences

The principle of overall responsibility leads to comprehensive liability for each individual member of the Management Board in Germany. By allocating responsibilities, it is possible to achieve a limited delimitation of responsibility and therefore also liability between the members of the Executive Board.

However, each member of the Executive Board must nevertheless realise that even by delegating duties and dividing responsibilities into different departments, it is not possible to achieve a complete discharge of liability under German law. This is because each board member must monitor the activities of their fellow board members and take action if there are indications of irregularities. The problem is that when such indications were recognisable is often a question of subsequent interpretation by the courts.

Paradoxically, the way D&O insurance works in Germany exacerbates interdepartmental liability. This is because the D&O insurer often denies a board member insurance cover due to an alleged knowing breach of duty. In order to nevertheless receive compensation from the insurance company for the damage, the company then focuses on its fellow board members: If the misconduct of one manager bordered on wilful intent, shouldn't his colleagues have noticed something? Did they therefore breach their duty of control and supervision? Claiming damages against the rest of the management board then becomes all the more attractive.

For managers, this means: trust in colleagues is good, documented control is better. And in addition to sustainable and adequate D&O cover for the company, additional personal cover (D&O and criminal law cover) can be useful.

Author: Dr. Mark Wilhelm

This is the translation of an article that was first published in: Die VersicherungsPraxis 10-2024, S. 34 ff.

References:

[1] LG München I, „Neubürger“-decision of 10th December 2013 - 5HK O 1387/10

[2] OLG Koblenz NZG 1988, 953; BFH ZIP 1984, 1345.

[3] BGH NJW 2000, 2364, 2366.

[4] BGH NJW 1997, 130, 132