Limiting the liability risk for members of the board of directors in Switzerland

The board of directors is the supreme operational management body of a company. This task also entails a certain degree of responsibility. This increased responsibility of board members involves risks that may lead to personal liability. Therefore, board members must be aware of these risks and take appropriate measures to reduce them.

The liability risk is strongly related to the tasks and duties of the Board of Directors. The Board of Directors conducts all the company’s business unless it delegates this business to individual members or third parties in accordance with Art. 716b of the Swiss Code of Obligations (CO). According to Art. 716a CO, the board of directors may not delegate certain tasks. Among its indispensable and non-delegable duties are the overall management of the company, the determination of the organization, the structuring of the accounting system as well as the financial control and the financial planning. In carrying out these duties, the board of directors has certain obligations. These are not exhaustively regulated by law. The most important duties include the duty of care, the duty of loyalty, the equal treatment of shareholders, the non-competition clause, and the duty of confidentiality. 

If the board of directors or a member of the board of directors violates one of its duties, the company, a shareholder or, in the event of bankruptcy, a creditor may be obligated to compensate the damage by means of a liability action. In order for a member of the board of directors to be liable for the damage resulting from his breach of duty, the following liability requirements must be met cumulatively:

• Breach of duty: First, the board of directors must be proven to have breached a duty. The duties arise from the law, the articles of association or the company’s resolutions.
• Damage: The company, a shareholder, or a creditor must have suffered damage. 
• Adequate Causal connection: The breach of duty by the member of the board of directors must be the cause of the damage claimed. In addition, the conduct of the board member must be suitable, according to the ordinary course of events and general life experience, to cause the damage that has arisen. Adequacy is denied, for example, if a dutiful conduct could not have prevented the damage.
• Fault: Fault is established if the member of the board of directors did not act in a way that could objectively be expected from another body in the same position. The accused’s personal qualifications of the member of the board of directors and his professional experience are also decisive in answering the question of fault. The same applies to negligent conduct.

To minimize the risk of personal liability, members of the board of directors may delegate certain activities to the executive committee and thus limit the liability risk. However, the board of directors is responsible for the careful selection, instruction, and supervision of the person entrusted with the management of the company. Furthermore, a member of the board of directors can already minimize the risk when selecting his mandates. He should only accept those mandates for which he has the necessary knowledge and sufficient time. Moreover, the board of directors should take formal regulations seriously and avoid conflicts of interest. Finally, the board of directors can take out Directors and Officers Liability Insurance.