Foundation boards face similar challenges in managing foundations as the managing directors of commercial enterprises. Consequently, the need for a binding code of conduct for foundation bodies when implementing the foundation’s purpose is also increasingly being discussed in the foundation sector in Germany. Such a code of conduct for foundations is known under the terms
- Principles of good foundation management,
- Foundation Governance and
- Non-profit Governance.
It can be established in the foundation’s articles or in special rules of procedure for the foundation’s bodies.
Advantages of introducing principles of good foundation management
In the following, we would like to present some selected reasons for the introduction of “principles of good foundation management”:
- Self-control of the foundation’s board of directors
Unlike commercial enterprises, foundations are legally independent and have neither owners nor shareholders. Thus, there is no owner interest that disciplines the board of directors. As far as foundations comply with the legal model, they have only one organ, the executive board. There is no internal control of the foundation board by a controlling body.
The introduction of “principles of good foundation management” provides the executive board with a recipe for success – the so-called best practice – for good foundation management. They serve as a guideline for the executive board and enable it to exercise self-control in the implementation of the foundation’s purpose. However, even in cases where a controlling body exists in the form of a board of trustees, foundation council or administrative board, the “principles of good foundation management” can be a benchmark for monitoring the responsible and economic actions of the foundation’s bodies. If the foundation’s management board violates this standard, it may be liable to pay damages in the event of a claim.
- Lower liability risks for future management board members
The boards of directors of smaller foundations and family foundations often have their first contact with the foundation system when they are appointed. It is in the nature of things that an inexperienced foundation board lacks the necessary expertise to properly manage a foundation. Here, the introduction of “principles of good foundation management” can be useful in order to provide the board of directors with the necessary orientation framework. In this way, a possible liability risk can be made clearer and thus controllable for the executive board and effective foundation work over generations can be ensured.
- Principles easy to change
The will of the founder is manifested in the statutes of the foundation. After the foundation has been recognized by the foundation authorities, an amendment to the statutes can usually only be considered if this is permitted by the foundation statutes or by law. However, the founder can transfer the foundation management he wishes to have into an external document, which – depending on the regulation made by the founder – can be adapted later in an uncomplicated way. In this case, neither the high legal requirements for an amendment of the foundation’s statutes have to be observed, nor do they have to be discussed and negotiated with the foundation authorities.
- Profitability through investment principles
The formulation of investment principles makes it possible to ensure a certain “standard of professionalism” in pursuing the foundation’s purpose in the long run. At the same time, investment principles in a document that is independent of the articles of association offer greater flexibility, so that market changes can be reacted to more specifically and quickly without coming into conflict with the founder’s will.
Have you already set up a foundation or are you considering setting up a corporate or family foundation? Our experienced attorneys for asset and succession planning will be pleased to support you in setting up a foundation and introducing principles of good foundation management. Please do not hesitate to contact us should you have any questions.