Liability Traps in Corporate Organisations with a Business Structure
This concerns the grouping together of product or production lines across all global locations of a corporation, which is frequently undertaken with the goal of simplification and enhancing efficiency. Yet precisely this simplification can prove problematical for nationally operating companies and their corporate bodies: For example, if a global change of product composition, materials used, or just production parameters is undertaken without attention to approvals granted by the local national regulatory authorities and general statutory conditions. In addition to problems relating to administrative law for the nationally operating company, the responsible managerial staff may also be liable to criminal prosecution.
The nationally based companies, to which the individual locally registered subsidiaries of a globally operating enterprise undoubtedly belong, have to comply with locally applicable national legislation.
Thus, for example, a German plant manager and managing director is responsible for the exclusive use of substances approved according to German law as materials for production. But does that person have any influence at all on the production process and the use of particular substances and starting materials within his corporate organisation? He is frequently deprived of this possibility within a business unit structure. Production specifications are issued directly to the production department of the nationally operating (in this case German) works by the business unit manager employed by another foreign-based member company of the multinational corporation. The plant manager and perhaps managing director of the respective nationally operating company has no influence on the course of events in his own plant. To this extent the company organisation is imposed from outside. Yet what form should company organisation actually take? A maze?
Organisation – Line vs. business structure
Let us first consider the principal differences between classical line organisation and organisation within a business structure: Regarding the hierarchical distribution of tasks, classical line organisation is characterised by top down stepwise delegation of task, area of remit, and responsibility. Summarised in brief form, the manager will select suitable employees for the tasks to be delegated and will delegate the task at hand as well as the appropriate and necessary managerial responsibility and clearly defined areas of authority, say of an economic or geographic nature, depending upon the actual task at hand. The selected employees will be appropriately instructed. How the work is executed and the way in which the delegated responsibility is exercised are monitored (Fig. 1).
Management in a business structure is very different. Grouped, for example, according to product or production line, production instructions will be centrally issued by a line manager, who will as a rule belong to another, frequently foreign affiliate. That may not initially sound particularly spectacular, but often gives rise to problems in everyday practice, specifically when business line and local line organisation do not match. And that is very often the case.
As in the introductory example, for instance, production instructions impact the local line organisation directly as lateral influences. The procedures for which the line managers bear responsibility are dictated by others (Fig. 2).
Does this constitute a problem? Does local management have to assume responsibility for externally dictated procedures of which they may have had no knowledge? Let us consider as example what German law requires of a properly organised company, which will resemble what is required in most other European states:
Jurisdiction concerning organisational culpability
In Germany, the principles enshrined in the law concerning so-called organisational culpability have to be observed. In summary, the law requires a transparent and documented company organisation with unequivocal definitions of company structure and delegation of task, area of remit, and responsibility and the logically ensuing organisation of procedures with predefined duties of selection, instruction, and monitoring.
Liability for damage caused by organisational culpability: This law on organisational culpability developed by the Supreme Court of the German Reich is essentially applied to this day by the Germany Federal Supreme Court, both in civil and in criminal cases. The consequences of liability differ: Civil law is usually concerned with the assessment of liability in questions of compensation. Here the company is liable as a legal entity. In criminal law, however, the managers, i.e. individual persons, are themselves held liable. Convicted persons face fines, punitive damages, and imprisonment. Apart from legal costs insurance, which essentially covers just the cost of a legal defence, no other insurance is possible.
Reversal of the burden of proof: In the case of an incident, such as an industrial accident, an operational breakdown with external impact, or also the use of product components that are not permitted by national law, to return to one of the examples cited above, the responsible manager concerned must demonstrate compliance with these organisational principles for himself and for the company within the corporate span of control. These are the parameters of interest to the public prosecutor‘s office and subsequently to the court in the case of a criminally relevant incident. Here the burden of proof is reversed: The managers in a company have to prove that they have done everything possible and reasonable to prevent the occurrence of an incident. If they are unable to furnish proof then they are presumed to be culpable.
Liability for business structure?
Against this backdrop let us return to the question raised above. Is local management liable for externally imposed procedures, of which they may have had no knowledge? We have already confirmed the fundamental responsibility in the sense of line management. But does „ignorance“ with regard to the specifications of the business unit and their implementation within the local line organisation offer any defence against a possible penalty? The answer is almost obvious: A manager must be aware of what is happening in his area of management – in legal terms he is legally responsible for ensuring that no criminally relevant damage occurs. We are responsible not only for what we do but also for what we omit to do if we could have prevented damage by taking action. In the case of legally required action we have a duty to act. The German legislature has standardised this by means of the so-called correlation clause in § Section 13 of the German Criminal Code.
Maze of liability traps?
What is to be done? Task, area of remit, and responsibility should be delegated top down, i.e. starting from the domestic company management and proceeding stepwise from top to bottom through the corporate hierarchy (Fig. 1). Instruction and monitoring duties rest with the respective line managers, and will have to be demonstrated in the case of an incident to avoid personal liability. The task at hand is to rebut allegations of a criminally relevant organisational culpability. But can this work within a business structure? Instructions from the business unit have a direct lateral impact at various levels of the hierarchy (Fig. 2).
The national manager, for example the plant manager who is a member of the management board, may have no knowledge of these specifications and their implementation within his local production set-up. He is nevertheless responsible according to national law for ensuring that production at his plant complies fully with national regulations corresponding to the operating permit. A liability trap? Preventative action is important here. The organisational fog generated involuntarily by the business structure must and can be dispersed. It is necessary to establish organisational guidelines ensuring that the specifications issued by the business unit are scrutinised within the national corporate organisation. A so-called „court-proof“ organisation can be helpful here. The goal is to generate legal certainty for all persons involved.
Preventing organisational culpability – Legal certainty through „court-proof“ organisation
The concept of a „court-proof“ organisation implies compliance with the jurisdiction of the German Federal Supreme Court regarding organisational culpability, as derived from Sections 823, 831, 31 of the German Civil Code (BGB). This gives rise to special obligations for managers concerning selection, instruction, and monitoring and control of work performance by staff directly answerable to them. Execution of these obligations is always to be documented in such a way that court-admissible evidence exists.
A very similar legal situation exists in most European states, meaning that the German example outlined here should be basically applicable elsewhere.The above legal principles relating to organisational culpability can thus be integrated into the corporate organisation as a preventative measure.
Demarcation of responsibilities
How can this be successfully accomplished? One prerequisite is to first put one‘s own house in order, i.e. to be organised transparently according to the principles presented here. Shielding against laterally impacting demands of the business unit can then be achieved, for example, with the aid of responsibility/accountability matrices. A possible alternative is also offered by a matrix organisation, in this case a side-by-side representation of line delegations. In any case it is essential to unequivocally assign responsibilities and accountabilities and make a clear distinction between them.
Conclusion: In cases of doubt, the „Highlander principle“ freely adapted from Russell Mulcahy must serve as the ultimate decider: There can be only one! In view of the liability situation outlined here, it is essential for a national company within a global business structure that the „Highlander“ should be unequivocally stipulated within the national line organisation by the management board, purely for reasons of self-protection.