Part 1: The foundation board as a key organ
The Board of Trustees is given the essential role in the administration of the private foundation. So far, so good, if it can and may fulfil its role. Indeed, in practice, an agreement between the acting persons has resulted which can hardly be reconciled with the legal requirements: Many boards of trustees do not make any decisions on the content, but formally implement the founders’ guidelines. Given the number of mandates held by individuals, this is hardly surprising: Those who sit on the board of directors of a dozen foundations, advise the foundation companies (we will not go into the problem of conflicts of interest further here) and also advise other clients on the side will hardly have the time to always be up to date with the latest developments in all their foundations and to be able to make well-founded decisions.
So how is the problem solved? One makes use of the founder’s factual decisiveness. In many foundations in recent years, the founder has given more or less concrete instructions or recommendations to the foundation board, from far-reaching entrepreneurial decisions to the choice of individual shares. This leads on the one hand to the problem that the recommendations of the founder are legally irrelevant and cannot exonerate the board of directors in case of wrong decisions. On the other hand, however, the foundation’s board of directors has to make unprepared decisions alone if the founder is no longer available one day.
Most foundation deeds do not give the board of directors enough scope to shape its activities without constantly forcing it into a personal liability risk. If foundation boards are unable to fulfil their tasks, the operative management becomes largely independent and the strategic control of the assets is lost. After all, what entrepreneur would not reserve some fundamental, strategically important decisions for himself, control the work of his management, request meaningful reports and read them? In larger corporate groups, there may be a supervisory board for these tasks. In hundreds of medium-sized companies, however, this function is traditionally performed by the owner family – today, the foundation has taken its place and must therefore play this role actively, because: the foundation is the new entrepreneur.
Part 2: Foundation management is stakeholder management
Prior to any discussion of foundations, the goal must always be to create a construction – valid for several decades and several generations – that is considered meaningful by all those involved and will work in practice as planned. It is particularly relevant to consider not only the perspective of the foundation, but also the operational needs of its companies. This is already a challenging task, which has often been neglected in the past and places the highest demands on the foundation board, also as a mediator between opposing interests and across generations. After all, a foundation deed is not a will, but rather a social contract that is valid for decades, which unfortunately cannot be changed if necessary.
The first step towards a functioning foundation is therefore a – not only legal! – correct structuring of the deeds. Although in some foundations the right to amend is (already) lost, most foundations are still (!) in a situation that allows them to adapt to new framework conditions and experience gained in the first years. This “window of opportunity” should definitely be used. Over 60% of Austrian foundation declarations have not been changed since their establishment. If one considers the changes made by legislators and, above all, case law, this is an alarmingly high number, which probably does not correspond to the current legal status!
At the same time, one should also think intensively about the tasks of the foundation’s executive board: The executive board of a corporate foundation will have to have different skills and scope of action than the executive board of a foundation that owns real estate or financial assets and manages these assets relatively directly. In this context, it may be helpful to allocate responsibilities within the foundation’s board of directors, since the foundation board of directors is basically a collegial body. This means that the liability risk is split, which often increases the decision-making ability of the members of the board of directors in their core areas.
Especially in the case of foundation assets with different asset classes, it is advisable to purchase expertise as required. What is common practice for financial assets – whether through private banks or investment advisors – and for real estate assets – through external property management companies – will also become common practice for corporate investments or other atypical investments. It is de facto impossible for a foundation’s executive board to conclusively assess all transactions that it should at least approve on the basis of its own expertise. If external consultants are consulted, the liability of the board of directors is reduced to culpa in eligendo; this is reasonable.
It is important, however, that the founder or his family also develop an understanding for the fact that the foundation’s board of directors cannot make all decisions on its own and should also be personally liable for them. Increased tasks for foundation board members will be accompanied by a professionalization of mandates, which will also entail a focus on real competencies.
Part 3: Active foundation management
Some foundation boards manage foundation assets according to the motto: “I let the operative management prepare decisions in such a way that they are a yes/no question – I can handle that”. Even if one will hardly doubt this basic competence, the question already arises whether the foundation should place itself so far into the hands of its employees. We doubt that a founder who has put his company into a foundation in order to preserve it for the next decades would agree with such a passive interpretation of the role of a partner. In fact, any strategic control of the company would be completely lost. In foundations in which there is a supervisory board for the subsidiaries, it may make sense to shift the strategic guidelines to this board. In hundreds of medium-sized companies, however, the foundation fulfils this role as the main or sole shareholder. Incidentally, the same applies to assets in real estate or financial assets: outsourcing decisions completely to third parties, who also take care of the operative implementation, seems risky to us.
The duties, competencies and responsibilities between the foundation’s executive board, advisory board and the founder’s family must be clearly defined in the foundation declaration and any division of responsibilities. However, the framework conditions alone are no guarantee for successful foundation management. The governing bodies must also have appropriate instruments at their disposal in order to make well-founded decisions or to exercise their controlling function. The prevailing view is that the Business Judgement Rule applies to the liability of the board of directors – the board of directors acts with sufficient care if it makes business decisions free of extraneous interests and in good faith on the basis of appropriate information. For “appropriate information” at least a reporting system tailored to the foundation is necessary.
Actually, every foundation board should have knowledge of all assets and their development at all times. At the very least, they should be able to access this information. As with the management of a company, the foundation’s board of directors has the task of defining the relevant key figures, information and reports, as well as the frequency with which they are to be collected, which will give it a comprehensive picture of the current status, but also an outlook on the potential development of the foundation’s assets. As with the establishment of a controlling system, operational and strategic components must be taken into account. A pure past or present consideration is not sufficient.
However, even with a functioning reporting system, in some situations the foundation’s board of directors can never replace an entrepreneur or owner. Accordingly, the foundation’s board of directors should be allowed a healthy degree of consultation with external opinion and expertise if it does not possess the specific competence itself. The descendants of the founder must be prepared for this and be prepared to accept it.
For the implementation of these processes, it is advisable to consult a consultant who does not only focus on specific issues, but can cover all interrelated topics.
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