By Magnus Brorsson
During the early 1990s a debate about the responsibilities of board members of corporations raged in Sweden. The debate had been caused by the extensive litigation, which derived from the massive crisis the Swedish economy, and especially the financial sector had endured. In some of these cases, compensation claims were brought against board members in collapsed corporations. No liability for damages were, however, imposed and in the general debate the rules about board members liability to pay damages were described as toothless. This question has now been addressed in the ongoing revision of the Swedish corporate legislation. The answer has to some extent been new legislation, but it is obvious that the legislature has been of the overall opinion that the present legislation is rather good, but that the duties of the board could be clarified and more exactly defined.
The first conclusion drawn by the legislature was, thus, that there was nothing in and of itself wrong with the rules governing when a board member or managing director incurs liability to pay compensation. The rules say that a board member or a managing director is liable to pay damages to the company if he, when performing his duties for the company, intentionally or by negligence causes damages to the company. He is also liable for damages caused to a shareholder or anybody else, if it is caused by his breach of the Limited Companies Act or the corporate bylaws. These rules are, thus, unchanged. However, the legislator found that the rules would be more efficient if the duties of the board were more exactly defined.
In order to achieve this, a number of new regulations are introduced in the Limited Companies Act. The board shall have an express duty to continuously review the financial situation of the company, something that was not formerly stated expressly. This duty was also considered to exist under the old legislation. It will now be expressly stated in the new legislation. This is because in a famous Swedish case concerning the collapsed company "Fermenta" (which was on the stock market), it was evident that the board members had not continuously reviewed the financial situation. Instead they had trusted an active major stockholder who also held the position of managing director.
The board will also have an express duty to issue written instructions for when and how information needed for this review shall be collected and reported to the board. An exception is made for small companies where such instruction would fill no purpose. The board is also required to issue written instructions with regard to the distribution of the work between the board on the one hand and the managing director and other corporate bodies on the other. The purpose of this is to ensure that the board issues instructions, so that there can be no question about who is responsible for what. At the same time, it is also clearly stated that it should not be possible for the board to issue instructions whereby the overall responsibility of the board to supervise the operations of the company is delegated. It is also clearly stated that the board cannot delegate its responsibility in connection with questions that, according to the law, is incumbent on the board to deal with.
Finally, all boards with more than one board member are ordered to adopt a program for their work. In this program any allocation of work and responsibilities among the board members is to be defined. The purpose of the program is to provide a framework to the work of the board and to facilitate the assessment of the responsibility of individual board members. The program is further to state how often board meetings shall be held and to what extent deputy board members shall take part in the work of the board. It is also a duty of the board to continuously follow up on any such allocations of work so that control over that which has been allocated can be maintained. The program is to be adopted annually. The reason is to assure that the board members are aware of the program. The consequence of failure to adopt a program was initially proposed to be criminal sanctions. However, this proposal was not implemented in the legislation. Instead it is stated that the main purpose of the program is in the accountability of individual board members for the carrying out of their responsibilities. If no written program has been adopted and a board member, despite this, claims that an allocation of work and responsibilities has been decided, the burden of proof will fall hard upon him. It is therefor considered to be in the best interest of the board members themselves to actually adopt a detailed program.
The new legislation has been adopted by the Swedish parliament and will come into force on 1 January 1999. The legislative number is SFS 1998:760 and the legislative history is primarily to be found in the government's legislative proposal prop. 1997/98:99 "Aktiebolagets organisation".
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