Liability Reform Beyond the Board's Control

The head of Germany’s corporate governance commission wants to take some legal pressure off executives by setting limits on their financial responsibility for board decisions.
Manfred Gentz is looking out for beleaguered managers.

When is a manager's salary too high? What constitutes a conflict of interest for board members? In Germany, an official commission looks into these tricky questions of corporate governance and provides guidelines. Manfred Gentz, former manager at automaker Daimler, took over the helm at the commission in 2013. He recently spoke with Manfred Engeser about how a liability limit for managers could benefit business.

 

WirtschaftsWoche: Mr. Gentz, you were a board member at carmaker Daimler from 1983 to 2004, at first responsible for personnel, later for finances. Would you take such a post these days?

Manfred Gentz: Yes, if I were younger. You certainly have to be aware of a lot more legal aspects these days as a board member. The regulation has increased dramatically. Reporting requirements and liability occupy managers much more today than back then.

It’s different for many managers these days: Many feel under pressure from supervisory boards, shareholders, prosecutors and the media. Is that fair?

I can understand at least why executives check more carefully  if they’re fulfilling all the regulatory requirements. What managers today consider operational harassment is a product of stricter controls, which legislators have put to supervisory boards.

Laws in Germany still dictate a clear separation between management and supervisory boards.

The law applies to a partially outdated reality at companies, which has developed along with new legal requirements over the past 20 years. Supervisory board members have more duties than before, including risk management, internal revision, compliance. They can only do that if they can speak to the right people at companies, including those below board level. It has nothing to do with interfering with operative business and it doesn’t have to ruin the trust between the executive board and the supervisors.

Is it asking too much for a manager to be constantly accountable for his or her actions?

No one will complain if management has to be accountable to shareholders. But beyond that, it’s important to ask whether it’s correct to push managers increasingly into the role of recorders and administrators. Instead of making business-driven decisions, many board members are spending more time going through checklists, to make sure everything is legally safe. Managers are very aware these days that even a decision resulting in only a small failure to meet a requirement puts both the bottom line and reputation at risk.

Siemen ex-finance board member Heinz-Joachim Neubürger faced damages of €15 million, but ended up having to pay €2.5 million. Is that unfair?

It’s the responsibility of the entire board here. It doesn't always have to do with individual dereliction of duty. The prescribed amounts often aren’t enough to cover large damages, as they’re used up when a single board member is sued. It’s also unsettling that these cases usually take years and are often only settled with a dubious compromise – mostly civil cases, as well as some criminal investigations that are concluded with a forced deal.

What can be done?

It appears as if managers agree to a civil settlement or to end a criminal probe by paying a large sum of money even if they’re convinced of their own innocence. They can’t face the public pressure weighing on them and their families from a long court case and the media attention – not because a dereliction of duty has been proven.

So we need a new law that better protects managers?

Every legal regulation limits freedom. Firms and managers should not be relieved of their responsibilities. I recommend a limiting of liability that could be proposed by the supervisory board and agreed to at a shareholders’ meeting. That would ensure that the supervisory board and management don’t get off too easy.

 

This interview originally appeared in business magazine WirtschaftsWoche. To contact the reporter: [email protected]