On 30 September 2021, the Finnish Financial Supervisory Authority (“FIN-FSA”) issued a Supervision Release regarding the liability and participation in decision-making of deputy members that serve on the boards of insurance companies.
When can a deputy member be held liable?
The release notes that deputy board members ordinarily serve on the board on behalf of an ordinary board member only when the ordinary member is temporarily or permanently prevented from discharging their duties. A deputy member of the board accordingly has the rights and obligations of a member of the board when serving in the stead of an ordinary member.
However, the release further notes that if a deputy board member attends a board meeting even when the deputy member is not serving as a replacement for an ordinary member, the status of the alternate member must be considered on a case-by-case basis based on the circumstances affecting the decision-making process.
A deputy member may be deemed responsible for the decisions made if the deputy member behaves in the manner of an ordinary member at a board meeting. This means that they exercise real influence over the company’s affairs, for example by participating in drafting proposals or by influencing the final text of the board’s decisions by exercising the right to speak at the meeting.
The FIN-FSA’s recommendations
With consideration to the clarity of management systems and the supervision of those responsible, the FIN-FSA recommends that only ordinary members of the board and any deputies serving in their absence participate in the decision-making discussions of the board.
The FIN-FSA recommends
- that deputy board members attend board meetings only when serving in place of ordinary members, or
- if a deputy member is attending a board meeting in some other capacity than as a replacement for an ordinary member, the minutes of the meeting should clearly indicate the content of the spoken contributions made by the deputy member and disclose the other manners in which they contributed to the meeting.
This recommendation applies to non-life, life, and employee pension insurance companies.
Implications of the FIN-FSA release
The FIN-FSA supervises e.g. the decisions made by the boards of insurance companies in addition to the other activities undertaken by these companies. The FIN-FSA’s most recent recommendation expressly states that it only applies to certain kinds of insurance companies.
The entities supervised by the FIN-FSA include insurance companies and pension companies as well as other companies operating in the insurance sector in addition to banks, investment firms, fund management companies and the Helsinki Stock Exchange.
As such, the recommendations issued by the FIN-FSA are widely monitored and, consequently, the impact of the recommendations issued in the most recent FIN-FSA release may extend beyond the insurance companies primarily targeted with the release and the related recommendations.
Concerns and questions regarding liability
The FIN-FSA’s recommendation and its underlying arguments raise some concerns and questions concerning the apparent extension of liability for deputy board members in situations where they do not formally serve in place of ordinary members. Some have also questioned as to whether the same recommendations and arguments could apply to informal board observers.
The traditional view, expressed in Finnish legal literature and in the precedents handed down by the Supreme Court (e.g. 2017:117), is that deputy members are ordinarily responsible only for those decisions they have contributed to while acting in the stead of an ordinary member.
The Supreme Court has also ruled that liability cannot solely be based on presence at a board meeting (ruling 1978 II 56). In exceptional cases, however, liability may arise for deputy members that have not taken part in the decision-making process, for example if the deputy member has neglected their duty of care by e.g. withholding information that is pertinent to the decision-making.
Will the recommendation affect board observers?
Whether or not the new FIN-FSA recommendation will have more extensive ramifications remains to be seen, but a particular area of interest is its implications on board observers. It is not uncommon for private equity backed companies to have observer members regularly attend board meetings. These observers are not elected board members.
Traditionally, Finnish legal scholars have held that board observers must not be equated, as a rule, to board members, but their liability for the decisions made by the board may be assessed in the same manner as that of board members if they de facto exercise powers belonging to a board member (this is akin to the “shadow director” concept under English law).
If the FIN-FSA’s recommendation becomes more widely applied, the threshold for determining as to whether a board observer is exercising the powers of an elected board member may be lowered as any weighing in on any matter being discussed may be deemed as influencing the final text of the relevant decisions and may, as such, be considered to carry potential responsibility for the board observer.
Takeaways and recommendations
The Supreme Court ruled in its precedent 1997:110 that, although the deputy member had the right to speak and had participated in the preparation of the credit decision, the deputy member was not liable for the damage caused by the resulting credit losses. In comparison, the FIN-FSA’s release and recommendations seem to set a stricter rule for deputy members’ liability.
Although the recommendation is stated to apply only to certain kinds of insurance companies, its broader impact on the interpretation of deputy members’ liability should not be disregarded.
As such, minutes taken at meetings should clearly indicate to which extent deputy members (or board observers) have weighed in on the topics discussed at the meeting and to which extent they have influenced decision-making. The minutes of the meetings can also be used to release deputy members and board observers from liability if they show that the deputy members (or board observers) in question did not influence the decisions made by the board of directors.
If you have any questions regarding the matter, please feel free to contact any of Borenius’ attorneys listed in this alert or those with whom you usually work.