Foundation & Management Board: Legal information on tasks, remuneration and liability

A foundation as a ‘legally independent estate’ also requires management and must be represented externally, similar to associations or corporations, for example. This task is performed by the foundation’s board of directors. This article takes a closer look at the tasks of the foundation board, its remuneration and liability issues.

The Board of Trustees: its tasks

A foundation is a legally independent estate that has legal capacity but is not itself authorised to act.

It needs a body to act on its behalf. The only legally prescribed body of a foundation is the board of directors (Section 81 (1) BGB). Whether the board consists of one person or several people generally depends on the size and function of the foundation and is determined by the founder in the articles of association.

In principle, the position of the board of directors is then comparable to that of the board of directors of an association or the managing director of a GmbH.

The most important tasks of a foundation’s board of directors include

• external representation of the foundation (conclusion of contracts etc.),
• internal business of the foundation (pursuing the foundation’s objectives, convening meetings, managing employees, etc.) and the
• management of the foundation’s assets in order to permanently promote the foundation’s purpose.

Foundation Board or Board of Trustees

In addition to the legally prescribed Board of Directors, other bodies are possible, but only if the foundation statutes expressly provide for this. The function of the foundation board must be defined by the founder in the foundation statutes.

In addition to the Board of Directors, financially well-established foundations in particular often have a Foundation Council or Board of Trustees, which supports the Board of Directors in an advisory capacity, particularly in connection with issues relating to the management of the foundation’s assets. Depending on how it is organised, the foundation council can be comparable to the supervisory board of a public limited company and therefore also fulfils the function of a supervisory body to a certain extent.

The founder himself is not an ‘organ’ of the foundation. However, they can appoint themselves to the foundation’s board or foundation council, for example, and thus continue to influence the foundation’s fate after it has been established.

Foundation statutes: essential for foundation & board of directors

The foundation’s articles of association are decisive for the regulations on who becomes a member of the foundation’s Board of Directors and how this/these person(s) is/are appointed. In principle, the foundation’s articles of association can provide for the following options for appointing the Board of Directors or its members, e.g.

• by the founder personally,
• by other persons who are authorised to do so in the articles of association (e.g. children of the founder after his death),
• by the other members of the Management Board or
• by the Board of Trustees, if available.

The following applies: no foundation without a board of directors! When setting up a foundation, the first board of directors must be appointed by the founder.

Professional qualifications and suitability?

In principle, anyone can become a board member of a foundation. And yet foundation statutes often stipulate which criteria or qualifications future board members must have in order to be considered for this position.

Professional qualifications in particular can be provided for in the articles of association. It is often important and sensible that those responsible for the foundation are also able to manage the foundation’s business due to their professional qualifications. On the other hand, it can also be important that the board is familiar with the foundation’s purpose, for example. All of this can – and should! – be regulated within the framework of a foundation charter.

Volunteering or remuneration?

Depending on the type and size of a foundation, the work of a foundation board is extensive and involves a certain amount of responsibility.

In this respect, the legitimate question arises: How is the work of a foundation’s board of directors remunerated – especially in charitable foundations?

In principle, work as a foundation board member is unpaid (Section 27 (3) BGB), so board members do not receive any remuneration. It is possible to receive the tax- and social security-free lump-sum allowance for voluntary work of EUR 840 per year or a remuneration for the Management Board if there is a provision for this in the articles of association. Only if there is a provision to this effect in the articles of association can the honorary allowance or remuneration be paid to the management board.

In the absence of a provision in the articles of association, a foundation board member or board members can demand reimbursement of their expenses incurred during the performance of their duties as a board member.

Remuneration of the foundation’s Management Board

In principle, it can be assumed that a full-time activity as a board member is remunerated. For less extensive activities, the honorary allowance is usually paid.

However, remuneration must be ‘appropriate’. In this respect, the same standard applies to the remuneration of the Management Board as for all administrative costs of the foundation: the remuneration must be in reasonable proportion to the foundation’s income, just as it must be in reasonable proportion to the size of the foundation and to the responsibility and liability risk to which the foundation’s Management Board is exposed. An arm’s length comparison must therefore be carried out for the remuneration. This shows that the remuneration for this task can be as varied as the activities of a foundation’s board of directors. There are no absolute amounts that are ‘appropriate’; the appropriateness of Management Board remuneration depends solely on the individual case.

Board remuneration risk in the foundation?

When it comes to determining the amount of remuneration for the Board of Directors, it is important to be careful. This is because overcompensation of the foundation’s board of directors harbours considerable legal risks.

Why? If the remuneration is too high, the foundation supervisory authority may be called upon to reduce the remuneration to an ‘appropriate level’.

In the case of charitable foundations, excessive board remuneration can have a more dramatic effect on the foundation as a whole: Here, such a misuse of funds can lead to the foundation being stripped of its charitable status by the tax office. This in turn can lead to high additional tax payments, among other things, because tax privileges are retroactively cancelled due to the loss of charitable status. In addition, the foundation’s board of directors may be personally liable. This is a very unpleasant situation for all parties involved, which must be prevented by carefully reviewing the amount of remuneration.

Personal liability of the foundation’s board of directors

However, it is not only in connection with inappropriately high Executive Board remuneration that the Executive Board or Executive Board members face liability risks:

Similar to the board of directors of an association, the managing directors of a GmbH or the board of directors of an AG, foundation board members are also liable for damages for personal misconduct if the misconduct damages the foundation – in case of doubt with all of their private assets, both internally and externally.

The liability privilege under Section 31a of the German Civil Code (BGB) applies to members of the Management Board who work on an unpaid or honorary basis. According to this, Management Board members are only liable for intent and gross negligence.

Members of the Executive Board who receive remuneration in excess of the honorary allowance are liable for slight and gross negligence as well as wilful intent. However, deviating regulations are possible in the articles of association.

Because even slight negligence can lead to personal liability, board members should protect themselves against excessive liability.

However, board members who work full-time for a foundation and bear considerable financial liability risks in case of doubt should cushion liability risks with D&O insurance.

Advice on the topic

Taking on the role of board member in a foundation involves a certain amount of responsibility and – depending on the type and size of the foundation – considerable personal liability risks. It is therefore essential both for board members and for a foundation (to be established) to seek professional advice and support on the topic of foundation boards and all its facets.

You can find out more on the ‘Foundations, associations etc.’ page.