Governing Bodies and Senior Management Face Liability for Risk and Compliance Management Failures

Berlin, Germany - In recent years, high-profile corporate scandals have led to increased scrutiny over the role of governing bodies and senior management in ensuring compliance with risk and regulatory obligations. In Germany, where corporate governance is deeply ingrained, members of boards of directors and senior management are facing growing liability for breach of these obligations.

Liability for Breach of Duties

According to legal experts, individual members of the board of directors may be held personally responsible for damages arising from breaches of their duties, including failure to ensure compliance with laws and internal directives. In cases where tasks are delegated to a specific board member, other members may be held liable if they do not properly supervise the delegated member.

Supervisory Board Accountability

The supervisory board is also under scrutiny, with courts holding them accountable for failing to take action against compliance failures and systematic violations. If damages occur or increase as a result of such failures, members of the supervisory board may face liability.

Senior Management Liability

Meanwhile, senior management below the corporate board level may be held liable by their company for damages resulting from breach of risk and compliance management obligations. However, according to German judicial jurisprudence, employees bear a graduated liability, with liability only arising when they deliberately violate their obligations.

Consequences of Failing to Meet Obligations

The consequences of failing to meet these obligations can be severe. Inadequate supervision by management or owners may result in massive fines against responsible individuals and the company. Senior executives may also face administrative consequences if they are found to have failed in their duties.

Criminal Liability

In some cases, criminal liability may also apply. According to German law, failure to establish an appropriate compliance system or react promptly to evidence of legal infringements can be considered a criminal offence.

Corporate Compliance Defence

While there is no general statutory corporate compliance defence in Germany, courts may consider whether an appropriate corporate compliance system was in place when determining the responsibility of management for an infringement and the level of financial penalty. Additionally, companies that have taken steps to correct deficiencies in their compliance framework may be able to reduce fines imposed against them.

Recent Cases

Volkswagen Emissions Scandal (Dieselgate)

The Volkswagen emissions scandal, known as “Dieselgate,” has been a high-profile example of corporate risk and compliance management failures. The company’s CEO resigned, and German prosecutors launched an investigation into 37 individuals. VW dismissed several top managers, and stock price damage claims in excess of €1 billion are pending.

Truck Cartel Case

The truck cartel case, which involved four European manufacturers, is another recent example of regulatory failure. The companies were fined by the European Commission for participating in a cartel that distorted competition in the market.

Importance of Effective Risk and Compliance Management Systems

These cases highlight the importance of effective risk and compliance management systems in preventing regulatory failures and ensuring corporate governance. As the legal landscape continues to evolve, companies would do well to prioritize compliance and risk management to avoid costly consequences.