Board liability – the opposite of good is well-intended: Volunteer work in foundation’s committees and a rude awakening

Often, work on a foundation's committees is undertaken as a favour to the founder alongside one’s main occupation – often free of charge as volunteer work or for a small reimbursement of expenses. What is overlooked here is that the member of a member of the board must exercise the diligence of a prudent manager in the management of the foundation, § 84a BGB (German Civil Code). The foundation's board of directors is therefore ultimately liable in the same way as the managing director of a limited liability company or the board of directors of a stock corporation. If a board member violates legal and statutory requirements, they are liable to the foundation for damages with their private assets. This liability exists regardless of whether the founder himself or a third party assumes the position of a board member. Despite the reduced liability in the case of low remuneration, the board of directors is liable in cases of intent and gross negligence.

A breach of duty triggering liability can occur sooner than one would generally assume. Examples from our practice:

• Sounds so simple: preservation of the foundation's assets
  The legal layman will assume that he would be complying with the aforementioned obligation if the foundation's annual financial statements show the original amount of the endowment assets over the years. This is a widespread misconception, as foundation statutes do not usually refer to the nominal value principle, but stipulate that the foundation’s core assets must be maintained at their real value. The real value principle means that the inflation rate must be offset.

The founder should specify in the foundation's statutes whether the foundation’s core assets are to be maintained in nominal or real terms.

• Executive board in a dilemma: return of invest vs. risk
  The board of directors faces a conflict of objectives: First, it is required to ensure sustainable returns from which the purpose of the foundation can be realized. As a rule, it will not be able to generate the necessary returns from gilt-edged investments. On the other hand, if it invests in riskier assets, such as stocks, it exposes itself to the risk of being liable for damages.

This can be remedied in some circumstances by investment guidelines, which ideally should already have been established by the founder.

• And when the well runs dry...
  The board of directors may also be liable if the income from the foundation's assets is insufficient to cover running costs (e. g., auditing costs for the annual financial statements). This issue arises in particular in the case of long-established foundations, where the foundation authorities required a lower level of capital when they were established. However, this problem can also arise if the original financing concept (e. g., a museum covers the costs of an art collection that is exhibited) fails. The board of directors must not stand idly by and watch this happen – it must take proactive measures.

Depending on the individual case, possible solutions could be conversion into a consumable foundation or an additional contribution.

Courts apply strict standards. For example, the board of directors cannot invoke the contributory negligence of another body of the foundation (e. g., advisory board). The members of the board of directors are also jointly and severally liable, regardless of their area of responsibility. It is not possible to sweep breaches of duty under the carpet, as the foundation supervisory authority is required to point out any breaches of duty. If this happens, the advisory board is obliged to assert the foundation's claims against the board of directors, otherwise it will be held liable itself.

Recommenation: How can you avoid sleepless nights for the board of directors?

As the founder, decide whether the foundation's basic assets are to be maintained in real or nominal terms and clearly state this in the foundation’s statutes.

1. The foundation’s statutes should include provisions on the extent of liability of the board of directors and, if necessary, liability relief.
2. In order to allow room for manoeuvre, the possibility of an additional contribution or a conversion into a consumable foundation should be provided for in the foundation’s statutes – under very strict conditions, if necessary.
3. The founder can use guidelines to set a framework for future investment decisions. This can also be done retrospectively.
4. To protect the board of directors, it is advisable to obtain D&O insurance, the costs of which should be covered by the foundation.

Regardless of whether the foundation already exists or is still being established, it is advisable to take appropriate measures to protect the board of directors. We will be happy to assist in all relevant matters.