According to Swiss law, operational management is typically a shared responsibility of all members of the Board of Directors. For delegation to individual members or third parties (such as the management), organizational regulations are required. These rules regulate the management of the company’s business, stipulate the bodies required to carry the management out, define the duties of the management and, in particular, regulate the company’s internal reporting.
The following article provides insight into when organizational regulations are beneficial and what the implications of their introductions are.
Fundamental Principle: The Board of Directors as the Governing Body
Without any delegation, the law assumes that all members of the Board of Directors jointly undertake operational management and are thus responsible for it. If the Board wishes to delegate this to individual members of the Board or a management team, organizational regulations are required. However, not all tasks can be delegated to a management team.
The following tasks, as stated in Art. 716a Swiss Code of Obligations (CO), can inter alia not be delegated:
- Overall company strategy (Art. 716a, Para. 1, Item 1 CO): This includes strategic alignment, company structure, and creating a framework with directives within the company.
- Determination of the company’s organisation (Art. 716a, Para. 1, Item 2 CO): This relates to the internal organization and structuring of the Board, work processes, defining management responsibilities, hierarchies, introducing reporting systems, and defining task areas and duties of the Board and the management.
- Organisation of the accounting, financial control, and financial planning systems (Art. 716a, Para. 1, Item 3 CO): The Board is responsible for overall financial management, ensuring a functional accounting system, and introducing efficient financial controls.
- Appointment and dismissal of persons entrusted with managing and representing the company (Art. 716a, Para. 1, Item 4 CO): The Board exclusively handles the selection and dismissal of management team members. However, other roles can be delegated to the management.
- Overall supervision of the persons entrusted with managing the company (Art. 716a, Para. 1, Item 5 CO): The Board ensures compliance with laws, statutes, and other internal regulations. The Board members also oversee business efficiency and implement internal reporting and control systems.
- Compilation of the annual report and preparation for the general meeting (Art. 716a, Para. 1, Item 6 CO): The Board exclusively manages the creation of the annual report and is responsible for executing the decisions made during the general assembly.
- Submission of an application for a deferral of bankruptcy and notification of the court in the event of over-indebtedness (Art. 716a, Para. 1, Item 7 CO): Notifying the judge of over-indebtedness and the duty to report as per Art. 725b, Para. 3 CO, are also non-delegable tasks.
Organizational Regulation Explained
The Organizational regulations are a set of rules that govern the management of the company’s business, stipulates the bodies required to carry this out, defines their duties and, in particular, regulates the company’s internal reporting (Art. 716b, Para. 3 CO). Typically, organizational regulations cover the following:
- Organization/Constitution: This includes defining roles, their tasks, and reporting. It also contains rules about the Board's constitution.
- Board meetings: Companies are advised to have at least four yearly meetings, and topics should be listed in invitations. Such details and related organizational topics are determined in the organizational regulations.
- Decision-making capability: The organizational regulations can also stipulate attendance requirements and deviate from the majority principle and define voting requirements.
- Board responsibilities and delegation: The organizational regulations should clearly define non-delegable and delegable tasks and outline the individual responsibilities of the management and the Board.
- Information Rights: The organization regulations can detail the rights of Board members to access and request information.
- Confidentiality and Obligation to return items: Often, the regulation includes explicit confidentiality clauses and a mandate to return documents upon ending a Board membership.
- Compensation: The organizational regulations typically outline the basic principles of Board compensation.
- Regulation of possible conflicts of interest and procedures in case of conflicts of interest
- Basic principles of the internal control system
Some regulations also contain a so-called function diagram which is a matrix that defines responsibilities and outlines who is responsible for what.
Consequences of Delegating Management
Organizational Benefits
Organizational regulations offer not just legal, but primarily practical advantages. In the process of drafting them, the Board often identifies organizational weaknesses and redundancies. A well-crafted function diagram can further clarify responsibilities and prevent potential conflicts.
Legal Consequences
From a legal perspective, delegating management limits civil and criminal liability. Board members and others involved in management are liable for any damage they cause the company, shareholders, or creditors due to intentional or negligent breaches of duty. However, the Board can exempt itself from liabilities caused by the management if it proves due diligence in selection, instruction, and supervision. This requires:
- Delegation of the management base on written organizational regulations.
- Delegation limited to delegable tasks.
- Application of the necessary diligence in selection, instruction, and supervision of the management.
Further, if, in the case of a criminal act within a company, no perpetrator can be identified, law enforcement agencies can hold the company itself subsidiarily accountable. This is the case when the actual offender within a company cannot be identified, and this circumstance is attributable to the company's inadequate organizational structure.
This risk of the company's criminal liability can be reduced by having organizational regulations with clear responsibilities and decision-making structures, as well as structured processes. In this context, the organizational regulations act as a defensive measure.
Conclusion
- The implementation of organizational regulations is essential when there's a clear division between strategic and operational leadership within the company. Further, if some or all members of the board are not operationally active in the management, the implementation of board regulations is essential.
- Upon request, the Board is required to provide shareholders and creditors with a legitimate interest, and information about the business management organization, either in writing or electronically. Such a request can be answered by presenting the organizational regulations.
- Organizational regulations must be regularly updated to match the actual circumstances. If they are not updated, they will not provide the liability protection mentioned above
- The organizational regulations should always be in writing.
Disclaimer: The information contained in this article is for general information purposes and does not constitute legal or tax advice. In specific individual cases, the present content cannot replace individual advice from expert persons.
