Part of the job of a good boss is to distribute tasks. However, the managing directors have to do some tasks themselves, otherwise they face penalties. Which, explains the startup lawyer.
Fiona Schönbohm works as a lawyer specializing in corporate and labor law in the Hamburg office of the Honert law firm. She often advises founders on the topics of founding, financing and business management right through to exit. Founder scene/honert/Caren Detje
The management of a company has a sometimes unmanageable number of obligations. This often requires specialist knowledge that a single person cannot in reality combine.
Delegating tasks to qualified consultants and employees is therefore essential for the managing director in order to be able to fulfill his extensive duties – and thus avoid liability. However, there are a few things to consider when delegating management tasks.
Fiona Schönbohm works as a lawyer specializing in corporate and labor law in the Hamburg office of the Honert law firm. She often advises founders on the topics of founding, financing and company management up to the exit.
IIn this series and on her Linkedin profile, she regularly answers legal questions for startups and provides tips and information.
Today: What do managing directors have to consider when delegating tasks?
Extensive duties of the managing director
In principle, the cardinal obligation of the managing director is to behave lawfully when carrying out his office and to adhere to applicable contractual regulations, such as the articles of association and rules of procedure (so-called Duty of legality). That’s what they come with corporate due diligence obligations. This results in fundamental monitoring and organizational obligations for the managing director and a wealth of individual obligations.
Relevant manager handbooks mention, among others, these key risk areas for managing directors:
Compliance Business opportunities and non-compete agreements Violations of intellectual property rights and violations of competition Product responsibility M&A transactions Grants to third parties Avoiding fines Capital market information Crisis and insolvency Bookkeeping and accounting Antitrust law Tax law Social security law and obligations as an employer Environmental law, corporate social responsibility and human rights violations
In all of these areas, the managing director faces liability risks when delegating tasks.
Problem: Various liability risks
Although the managing director cannot possibly control all of these areas in depth on his own, he is still liable for violations of his duty of legality or corporate due diligence. Particularly tricky: Unlike shareholders, managing directors are, in the worst case, liable for violations with their own private assets. For an overview of the liability risks and the distinction between internal and external liability, we recommend the October issue of this series.
The delegation of areas of responsibility and the establishment of a functioning monitoring and control system is therefore essential for the managing director. A distinction must be made between internal delegation and external delegation to third parties.
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Internal versus external delegation
Typically, in day-to-day business, various management tasks are delegated to subordinate departments and employees within the company. This includes, for example, the preparation of documents or the analysis of decision alternatives, on the basis of which management ultimately makes its decision.
In contrast, with external delegation, management decides within the scope of its business discretion that a specific area of responsibility will be outsourced to external third parties for efficiency or cost reasons. In practice, such decisions are often difficult to implement and difficult to reverse, which is why external delegation must always be carefully considered and planned.
Selection decision: Who can I commission?
Delegation to employees or third parties always requires that management only delegates tasks to suitable people. Therefore, attention should be paid to the following things:
careful selection, instruction and familiarization or provision of information as well as professional suitability and personal reliability.
When commissioning third parties, this also includes carefully drafting the contractual basis. If a circumstance raises doubts about suitability, stricter control measures and a new evaluation are necessary.
Limits of delegation
When delegating, it is always important to assess and decide whether or to what extent a task can actually be delegated. For the board of directors of a stock corporation, for example, original management tasks must remain a “top management matter”. This includes corporate planning, coordination and control.
Whether this also applies to the GmbH managing director is controversial in the legal literature. The shareholders’ right to issue instructions probably has priority. In any case, there are some legal (and possibly contractual) limits for the delegation of certain management tasks. These mainly concern organizational duties of the managing directorfor example to call the shareholders’ meeting, to prepare and publish the annual financial statements or to submit current lists of shareholders.
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10 important duties that hardly any managing director thinks about
Residual responsibility of management: monitoring and supervision
When management delegates tasks, it is never completely free of its responsibilities. There is always one left Residual responsibility the managing director, the employees supervise and monitor.
This regularly includes the obligation to have an internal functioning system Compliance System to set up a system that ensures compliant behavior, includes preventive controls and ensures that violations are analyzed and communicated to the managing director in such a way that the need for action can be identified immediately. When engaging external third parties, it must be ensured that they in turn have such a compliance system.
Legal consequences in the event of a violation: Liability for third-party errors?
Even if the liability risks for managing directors are extensive, they are generally not liable for someone else’s fault, but only for their own fault. In principle, errors made by third parties or employees are not attributed to them.
BUT: The mistakes of others regularly raise the question of management mistakes in the delegation process: Was the task allowed to be delegated at all? Has it been carefully selected and incorporated? Was it checked regularly? Could the error have been prevented or noticed earlier if management had adequately fulfilled their duties?
AND: In principle, several managing directors are jointly liable. Therefore, under certain circumstances you can even be liable for incorrect delegation by a co-managing director.
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Managing director contract: These 10 points have to be included!
Conclusion: Be sure to reduce management liability
In view of these considerable liability risks for managing directors, they should definitely limit their liability as much as possible. Of course, this includes knowing your own obligations and always adhering to the above-mentioned requirements when delegating tasks and documenting this carefully.
But also
a limitation of liability in the managing director’s contract, good D&O insurance and regular discharge of the management by the shareholders’ meeting,
can help reduce liability risks. You can find even more tips and tricks for limiting liability in the second article in this series from October.