Many documents, especially older ones, stipulate that the members of the foundation board are appointed for an indefinite period. In most cases, the foundation board also has the right to appoint the new and additional members of the foundation board itself (co-optation).
The main reason for such provisions is that founders assume that they may dismiss the members of the foundation’s executive board at any time for factual reasons. In practice, it has been shown that, despite theoretical co-optation, the founder himself still decides on the appointment of the foundation’s executive board. Thus, as long as the founder is alive, it is usually not apparent that the founder’s family actually has no influence on the composition of the foundation’s board of directors.
However, the case law of the Supreme Court shows that beneficiaries, i.e. mostly the founder family, are only entitled to dismiss the members of the foundation’s board of directors for good cause. In principle, such a reason is only given if the founder has committed a gross breach of duty or is incapable of performing his function, both of which will only rarely be the case.
The negative effects of such provisions are already becoming drastically apparent: For one thing, the possibility of co-opting the foundation’s board of directors has already led to private foundations moving further and further away from the founder families. After all, the foundation’s board of directors has the administrative monopoly over the foundation’s assets and is largely free of instructions. Without the family having any influence on the composition of the foundation’s board of directors, the foundation’s board of directors can in principle act at its own discretion. In practice, this has already led to the complete separation of foundations and foundation assets from the founder family, which is rarely desired.
On the other hand, we are increasingly experiencing that board mandates secured in this way do indeed have a market value. After all, the incumbent members of the foundation’s board of directors can decide at their own discretion who will succeed them in their board position. It should not be forgotten that such a position is usually associated with prestige and appropriate remuneration, but even more often – especially in independent foundations – it opens up lucrative additional business for members of the board of directors. This practice has recently found its “crowning glory” in the offer of existing foundation boards to co-opt successors in return for a corresponding share of their expected income.
It is hard to imagine a more obvious abuse of a fiduciary relationship.
We therefore recommend that the foundation deed be checked for such old provisions and, if necessary, adapted. If you have a foundation director who is appointed for an indefinite period of time and co-opts himself, please contact us. We will be pleased to advise you objectively and independently.
