Foundations, both charitable and private family foundations, typically have both a board of directors and a foundation board. The latter is often also referred to as a board of trustees, supervisory board, administrative board or similar.
Strong and weak foundation boards
The competencies of the foundation board vary across different foundations in Germany. For instance, some foundation boards merely provide advice to the executive board, while others are tasked with supervising the management board. The latter is generally a good practice in terms of corporate governance, as it allows the founder to establish an effective counterbalance to the management board, especially for the future when they are no longer present themselves. While the management board is responsible for the operational business, i.e., managing the day-to-day business and representing the foundation to third parties, the board of trustees operates internally and monitors the work of the executive board as part of a successful “checks and balances” system.
Therefore, there are strong and weak foundation boards – depending on the founder’s preferences. Strong foundation boards often have the right to request information from the board of directors and to inspect the foundation’s books. The right to issue instructions to the board of directors is also commonly found with strong foundation boards.
Ineffective foundation board
Lastly, there are foundation boards that are strong in theory but weak in practice because their hands are tied in critical situations and they cannot effectively fulfill their supervisory function. Such a “toothless tiger foundation board” becomes a strong foundation board when it finds itself in conflict with the board of directors but has no budget rights of its own. For instance, if such a board of trustees wants to review what it perceives as a breach of duty by the board of directors with an external lawyer, it will quickly realize that this is not feasible because it cannot instruct the lawyer, or at least not pay them. This is because only the executive board has access to the foundation’s account.
For obvious reasons, it is virtually impossible to ask the board of directors to enter into a mandate agreement with a lawyer tasked with legally assessing the board of directors and its behavior, and also to order the board of directors to pay the lawyer’s invoice.
Even more unfortunate are cases where a foundation board is composed of volunteers who only meet once or twice a year, while the executive board works full-time for the foundation. In such a scenario, it is clear who has the upper hand: the board, which, if in doubt, is well-advised by its own lawyers (paid for by the foundation). In these cases, effective supervision by the foundation board is often lacking.
Foundation supervision is often ineffective
Conflicts between the board of directors and the board of trustees are usually very dynamic and fast-paced. A well-advised board of directors will immediately create facts and thus drive the voluntary foundation board before it. Seeking help from the German foundation supervisory authority in such a situation is rarely fruitful. For one, the pace at which the supervisory authority operates is often too slow to be of any help in the dynamic exchange of blows with the board. Additionally, the authorities are also unable to remedy deficiencies rooted in the foundation statutes. The foundation board finds itself in its current situation not because of a passive supervisory authority, but because the articles of association have not been thoroughly thought through.
Separate budget rights empower the board of trustees
The only effective remedy is a separate budget right for the foundation board. Therefore, the founder should stipulate in the articles of association that
- The foundation board acts as the representative of the foundation in case of a dispute with the board of directors,
- The foundation board possesses adequate funds to secure legal and tax consultancy for the execution of its duties, and
- The foundation board indeed has accessibility to these funds – thus, it is not reliant on the benevolence of the executive board.
A significant majority of statutes do not acknowledge such a budgetary right. In such scenarios, this equates to a complete failure in overseeing the individuals who administer the foundation’s assets. If inappropriate individuals occupy board positions, this could potentially endanger the survival of the foundation.
Our foundation professionals are always ready to offer you extensive guidance on all queries related to the powers of the foundation board and the proper formulation of foundation statutes in Germany.
Continue reading:
German Foundation Statutes: Content, Design, and Adjustment
German Family Foundations with Foreign Beneficiaries: Beware of Tax Traps!
