What happens when a board member needs to take leave for sickness, childcare or other personal reasons? This article examines the issue in the German 'Aktiengesellschaft' (public limited company) and proposals to address some of the problems this situation can create.
Consider three scenarios drawn from German legal practice:
- The chairman of the board of a large German trading company has been in long-term rehab for several weeks and remains there.
- The board member and founder of a start-up company is expecting a child and has to resign from her position on the board because she wants to take six months 'parental leave'.
- A male board member of an insurance company needs some time off to take care of his sick parents and therefore resigns from his office.
No employee protection law for German board members
In contrast to the legal situation in some other countries, there is no legal entitlement to continued remuneration for members of the Management Board of a German 'Aktiengesellschaft' (public limited company) in the event of illness, maternity leave, parental leave or nursing leave. By way of background information, the board of the German Aktiengesellschaft has a two-tier structure: the 'Vorstand' is comprised of the active executive board members and the 'Aufsichtsrat' is the supervisory board, which convenes a few times per year. Members of neither are considered as employees, and do not have a legal right to a break in one of the situations described above, but obviously, any such private event will be harder to combine with the ongoing daily duties of an executive board (Vorstand) member.
German law makes a distinction: an individual appointed as a board member of a company performs employer functions and is therefore not an employee. There are certain exceptions to this principle for non-majority-shareholder and for no-shareholder Managing Directors of GmbHs. For example, since 1 January 2018, the German Federal Maternity Protection Act also applies to Managing Directors if they perform their activities within the scope of dependent employment (established by the usual criteria such as being subject to instructions from the shareholder / the supervisory board regarding time, place and/or content of their work. This status is generally assumed for Managing Directors without a blocking minority in the shares since they will not be able to prevent unwanted shareholder decisions.
Although discussed as a potential approach, unilateral suspension of the board member is not a solution in the event of unforeseen cases of sickness, car accidents or similar. The idea of temporarily suspending a board member has been discussed in legal literature and older case law. However, the most important application (of the very few cases on the topic) relates to the unilateral, and only very brief, suspension by the Supervisory Board of a board member where there is a suspicion against the board member, not where the board member is asking to be suspended him or herself. Clearly, this is not a legally safe solution.
Looking at existing German statute, s616 of the German Civil Code (BGB) applies to employees and board members alike. Under it, a person with a service obligation who is prevented from performing his or her duties for a relatively insignificant period of time (generally ten days at the most) through no fault of his or her own, has a claim to continued payment of remuneration. However, ten days or fewer is too short a break for all of the scenarios described above and does not solve the issue of continued liability for all members of the board.
To date, cases such as the three mentioned above are usually resolved quietly and internally, but often at the cost of a resignation. There is no clear guidance for these situations that can occur in anyone's life. With regard to illness, the vast majority of Executive Board members' service contracts contain a contractual entitlement to continued payment of remuneration for a certain period of time. There is almost never a contractual agreement made in advance about the other possible circumstances, such as maternity, paternity or the desire for time to provide nursing care. And even a provision about continued payment will not provide a solution to the question of liability during such a break, or the right to return after such a break.
No contractual solution possible
Contractual agreements between the board member and the supervisory board who is representing the company in the negotiations with the board member cannot provide a solution. It is irrelevant whether such an agreement would be made in the employment contract itself or later for a specific reason. A break in the mandate for a limited period of time cannot be contractually agreed. The Supervisory Board has absolute discretion in the task of appointing the members of the Management Board including at the end of such a period of resignation from duties. A legal agreement that restricts the Supervisory Board's freedom of resolution is void.
It is correct that there are several possibilities to limit the liability risks of an AG Management Board member, such as the conclusion of a Directors & Officers insurance policy and the concluding a plan to apportion the responsibilities among the board members. However, the complete exclusion of civil and criminal liability cannot be achieved through this. A board member who is taking a break will still have a duty to supervise the actions of all other board members. And while in practice liability cases against board members are still rare in Germany, they have become more common over the last ten years or so.
Given the above, there is public discussion in Germany about addressing these situations by means of a new legal provision, for example as an amendment to the German Stock Corporation Act. According to this amendment, the board member's mandate and all rights and obligations arising from it would be suspended for a defined period of up to six months. The right would have to be limited to a few types of circumstances. Abuse would need to be prevented and public knowledge of the company's representation must be maintained. Under German law, who represents a company must be made public in the Commercial Register, on the letterhead and the website at all times by listing the names of all board members.
What are the advantages on the company's side?
The advantages of such an arrangement for the board member are obvious. But what would be the advantages from the company's point of view?
The introduction of a family break through an amendment to corporate law would help to broaden the pool of conceivable candidates for board positions at a time of shortage of qualified staff and would make the office more attractive for younger female, but also male members. Especially in the start-up scene, the stock corporation is a popular corporate form. The members of the board of directors, in the beginning usually the founders, are often significantly younger than, for example, the typical listed company (DAX) board member, whose average age has remained around 53 for a long time. The proportion of female board members is also significantly higher than the 14% of female board members named in the DAX board report from 2019.
This type of regulation could also help to increase the proportion of female board members even without a 'hard' statutory quota of women. Statutory quotas for female representation are viewed critically by the business community. There is an ongoing political debate about whether a 'hard 'legally enforceable quota should be implemented. So far, in Germany, a legal change passed in 2015, which provides for a fixed quota of women members for the supervisory board (Aufsichtsrat) of larger corporations but focuses on internal voluntary targets rather than a fixed quota for the executive board (Vorstand) members.
Finally, regulations of this type could help companies to have a clear set of rules to follow in cases such as unexpected illness, parenthood or other 'real-life' disruptions of a career. Instead of trying to find a quiet and not risk-free solution as in the current practice, or the board member in question being obliged to resign once and for all, there would be a clear solution for all parties involved.
Originally published 29 Jun 2020 .
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