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Liability for politiciansIt depends on the decision-making process!

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Liability for politiciansIt depends on the decision-making process!

As a result of the failed introduction of a car toll under the decisive leadership of the then Federal Minister of Transport, Andreas Scheuer, the German taxpayer is faced with a claim for damages in the hundreds of millions (https://www.faz.net/aktuell/wirtschaft/auto-verkehr/pkw-maut-so-viel-geld-kostet-das-projekt-den-bund-19013351.html). Increasingly, voices are being raised discussing possible personal liability by Scheuer (https://www.tagesspiegel.de/politik/brauchen-minister-bald-eine-versicherung-die-causa-scheuer-konnte-zum-prazedenzfall-werden-10246168.html). The Scheuer case is not an isolated case. Again and again political decisions can be observed that can hardly be rationally explained on the basis of known data. Just think of the cost-intensive distribution of FFP2 masks via pharmacies (Gleißner and Follert 2022) or the decision made within a few days (!) to phase out nuclear power early after the accident in Fukushima, Japan in March 2011 (Follert, Gleißner and Möst 2021).

The obvious comparison to manager liability is quickly drawn. Board members of stock corporations are liable to the stock corporation in accordance with Section 93 (2) AktG for damage caused by their breach of duty. As a standard of care, the German Stock Corporation Act sets the “due care of a prudent and conscientious manager” (section 93 (1) sentence 1 of the German Stock Corporation Act). But the legislature is also aware that entrepreneurial activity is characterized by imperfections, which is why the liability rule is accompanied by a certain amount of freedom (the so-called business judgment rule). According to Section 93 (1) sentence 2 AktG, there is no breach of duty “if the member of the Management Board could reasonably assume when making a business decision that he was acting on the basis of appropriate information for the benefit of the company”. If Andreas Scheuer were on the board of directors of a stock corporation, he would have to prove in particular that he acted “on the basis of appropriate information” and “for the benefit of society”. Although the legislature ascribes a separate interest to the stock corporation, this is to be regarded as problematic from the point of view of methodological individualism. As soon as several owners with sometimes different financial or non-financial objectives hold the shares in a company, the “good of the company” can usually only be determined approximately (Olbrich & Rapp 2013; p. 227). In practice, it will therefore regularly be crucial that there is a structured, transparent and documented decision-making process in which the options for action are evaluated in terms of their expected costs and benefits in a risk-adequate manner (see Gleißner 2021), so that an appropriate information basis can be assumed at the time of the decision. It must always be taken into account that the incompleteness of the information and the uncertainty do not allow optimal decisions (e.g. Hering 2017, p. 11). The preparation of decisions with regard to the procurement and evaluation of information is thus based on the postulate of economic efficiency.

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Liability of the decision-maker is not only a central characteristic for the stock corporation due to the strict separation between ownership and power of disposal. Rather, liability is a central principle of the market economy: “Whoever benefits, must also bear the damage” (Eucken 2004 [1952], p. 279). Due to the fiduciary function of political actors in a democracy and the well-known discretionary leeway resulting from the imperfections of the political process in general (Daumann 1999) and the market for political services in particular (Follert 2020; Stadelmann & Frank 2021; Follert 2023) result, it is surprising that a corresponding institution that subjects political decision-makers to liability has hardly been discussed so far – the fact that it is not yet anchored in law can be rationally explained (Follert 2023). In a current publication, Follert (2023) drafts a concrete liability rule for political decision-makers for the first time, which aims to ensure that decision-makers take appropriate care before making a decision, analyze alternative courses of action (or have them analyzed) according to their risks and opportunities, and the decision-making process and the result intersubjectively verifiable, so that in the best case there is no liability at all, because the decision-maker can prove that he has not violated his duty of care.

The standard of care could be formulated as follows (Follert 2023):

In their political decisions as representatives of the citizens, politicians must exercise the care of a proper representative who conscientiously fulfills the relevant duties. In particular, they must exercise due diligence that is commensurate with their importance as temporary trustees.

If this duty of care is violated, the legal consequence is an obligation to pay damages.

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One Political Judgment Rule would allow release from liability (Follert 2023):

There is no breach of duty where, when making a political decision, the political actor could reasonably have assumed that he was acting on the basis of adequate information presented in a transparent and structured decision-making process.

Of course, there are reservations about such a proposal. For example, that a claim for damages in the millions could threaten a person’s economic existence, so that selection effects would have to be feared and only wealthy people would enter the political arena. However, this is not a unique selling point of the politician, but also applies to board members, auditors, architects, doctors and everyone who carries out commissioned work. In this respect, it should be a logical consequence of the introduction of a corresponding institution that insurance companies open up this market for themselves and offer liability insurance for politicians (Follert 2023). The argument of high bureaucracy costs and delayed decisions is also known from the corporate world (e.g. Gurrea-Martinez 2019). However, it has been shown that the installation of an efficient process organization can help in practice (Gleißner 2021), so that ministries would also benefit from the experience (Follert 2023). The fact that politicians are representatives of the entire people is correct, but in no way does it mean that the comparison with manager liability is “ineffective” (Decker 2023). Rather, due to the heterogeneous preferences within a society and their non-aggregatability (Arrow 1951), it is already clear that politicians’ liability should be conceived as a process-oriented institution.

Note on the current research paper:

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Follert, F. (2023). Learning from corporate governance: First conceptualization of liability for political decision-making. Kyklos, https://doi.org/10.1111/kykl.12351.

More literature:

Arrow, K. J. (1951). Social choice and individual values, New York.

Daumann, F. (1999). Interest groups in the political process: An analysis based on the new political economy, Tübingen.

Decker, D. (2023). A devastating legacy. FAZ.net from 07/31/2023, https://www.faz.net/aktuell/politik/inland/maut-verheerendes-erbe-von-scheuer-und-dobrindt-19071679.html.

Eucken, W. (2004 [1952]). Principles of economic policy (7th edition), Tübingen.

Follert, F. (2020). Improving the relationship between citizens and politicians: Some economic remarks from an agencytheoretical perspective. Munich Social Science Review, New Series3, 171–184.

Follert, F., Gleißner, W., & Möst, D. (2021). What can politics learn from management decisions? A case study of Germany’s exit from nuclear energy after Fukushima. Energies14(13), 3730.

Gleißner, W. (2021). Entrepreneurial decisions. Avoiding liability risks (Section 93 AktG, Business Judgement Rule). controller magazine45(1), 16–23.

Gleißner, W., & Follert, F. (2021). How the expensive FFP2 mask disaster could have been avoided. In Business week online from 03/23/2021. https://www.wiwo.de/politik/deutschland/coronakrise-wie-das-teure-ffp2-masken-desaster-haette-vermieden-werden-koennen/27028752.html.

Gurrea-Martinez, A. (2019). Re-examining the law and economics of the business judgment rule: Notes for its implementation in non-US jurisdictions. Journal of Corporate Law Studies18(2), 417–438.

Hering, Th. (2017). Investment Theory (5th ed.), Berlin and Boston.

Olbrich, M., & Rapp, D. (2013). Some valuation-theoretical comments on corporate law due diligence in corporate transactions. In Seicht, G. (ed.), Yearbook for Controlling and Accounting 2013, Vienna, 223-236.

Stadelmann, D., & Frank, M. (2021). Market failure on the market for political services: A basic evaluation framework. Munich Social Science Review, New Series4, 33–46.

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