Winterkorn: Peak salaries no longer without liability

by Prof. Dr Eberhard Hamer

The difference between a single owner enterprise and an equity company is that the entrepreneur must always accept total liability for his business, but the owner of a corporation has limited (limited liability company) or no (incorporated company) liability for “his” company.
In this limitation or exclusion of liability lies the great attraction of corporations compared to the individual companies. Limitation of liability also includes the main difference between an entrepreneur and a manager. The latter is – even in top positions – only an employee of his company, and his liability for his entrepreneurial activity is therefore limited to breaches of the “care and attention of a prudent businessman” or to cases of “intent or gross negligence” in the line of duty.
In this way, the disproportion developed that in the top positions, salaries amounted to millions and trillions according to the international model, and yet in Germany, the higher personal liability common in international management did not apply for managers. Again and again, management mistakes were corrected by the companies, without holding the managers personally liable. And even in the case of most corporate bankruptcies, the managers could not be held personally responsible because it was impossible to prove malice, and even gross negligence was rarely demonstrable.
In this situation, the US criminal charges against Winterkorn have hit like a bomb. So far, VW has had to pay more than $ 25 billion in penalties and fines to US customers and dealers and, through the judiciary, especially to the US state, for mistakes which their management rather than their employees had engineered and executed, which they were responsible for. Nevertheless, this same management was in most cases discharged and royally paid. The company itself would not have come up with the idea of demanding compensation from its management for the damage done.
One may argue about the the US judge’s reasoning of “conspiracy” and the alleged risk of absconding (because the defendant does not reside in the US) being appropriate or only politically determined. The fact is, however, that American judges can use arbitrary reasons to punish any manager for management mistakes and take him into liability. Thus managers’ lives have suddenly become more risky. They no longer assume no or only limited liability, but they are now personally liable, at least in the US, for company mistakes.

SME research has always pointed to the contradiction that top executives with super-top salaries should not be personally liable for their mistakes, while every mittelstand small and medium business owner is completely liable for all errors of his company and is responsible for the performance of all orders, even without any personal fault – even with his personal assets. And what is more, this liability is even the longest-termed in our liability law (30 years). The one gets a top-salary with no responsibility at all, the other earns little but assumes an over-the-top liability. This could now be corrected by the Winterkorn case – not only for top managers, but also for the middle management, depending on their own share of the mistakes. The unrest among German managers because of the charges against Winterkorn and because of their fear of the US judgment to be expected is accordingly great. The fact that these judgments as parts of the American trade war against Europe are not delivered without political reference plays a lesser role in generating this unrest than does the substanciation of a new level of international liability, and therefore of a new risk for management. The American judiciary may be politically controlled and thus hostile, as it is an instrument of commercial warfare, but of course the German judiciary will also get busy with the Winterkorn case. Only then will it be decided whether the American manager liability also spills over to Germany or if the old limited liability for managers continues to apply.
But why should managers remain unscathed for errors of their corporations, if every entrepreneur is liable for every least mistake of his company, even if it occurred without any fault of his own?
As early as ten years ago, surveys conducted by the SME institute Niedersachsen revealed that most managers do not want to become entrepreneurs, because they would then have to take on personal liability for their actions in the company. So managers prefer to remain employees because they fear the risks to the self-employed entrepreneur. It follows that the difference between managers and entrepreneurs is inappropriate, not only in terms of management return, but also concerning the difference in their liability.     •
(Translation Current Concerns)