Decision-making of the executive director vs. due managerial care

In accordance with Section 159 (1) of Act No. 89/2012 Coll., Czech Civil Code, as amended, the executive director must perform their function with the necessary loyalty, knowledge and due care. However, the Act does not further define the content of these obligations, which is left to case law to explain.

Duty of care: acting in an informed manner

To take an example, the Supreme Court of the Czech Republic interprets the obligation to perform a function with the necessary knowledge in such a way that the executive director is obliged to act in an informed manner, i.e. to use reasonably available (factual and legal) information sources in specific decisions and to carefully consider the possible advantages and disadvantages (identifiable risks) of existing variants of business decisions.

Therefore, the executive director does not have to possess all the professional knowledge, abilities or skills necessary to carry out all activities falling within the competence of the statutory body. If the executive director does not have the necessary expertise for matters falling within the performance of their function, they are obliged to ensure their assessment by a person who does. The executive director personally must recognise which activities they are unable to perform or what knowledge and skills they lack.

How to decide?

If the executive director is unsure about concluding a contract or carrying out a transaction, they should contact experts and seek their opinion – or multiple opinions from various fields. If the opinions contradict each other, the executive director should obtain a review opinion.

Then the executive director should make a conscientious choice and carefully consider the possible advantages and disadvantages of existing variants of business decisions. Were they to decide not to obtain another opinion, they nevertheless should still make a conscientious decision, taking into account all the circumstances.

Case law confirms that the executive director is responsible for the proper performance of the function, not for the outcome of their activities, i.e. whether the chosen solution was ultimately advantageous or disadvantageous for the company.

Liability and damages

If an executive director acts with due managerial care, they are not obliged to pay damages to the company, even if these arise as a result of such conduct.

This does not constitute liability for the outcome of the activity, but a responsibility for due care in the performance of the function, which is fulfilled by obtaining an opinion, i.e. that they have obtained sufficient information (and its analysis). Moreover, a review of the case law on this issue reveals that the letter of the law tends to favour executive directors.

"If an executive director acts with due managerial care, they are not obliged to pay damages to the company, even if these arise as a result of such conduct."

On the other hand, a case where the executive director had the review expert opinion prepared two years after the already completed business transaction cannot be regarded as the performance of due managerial care, as this no longer affected the transaction. On the contrary, if the executive director has a review opinion prepared at a time when the transaction has not yet taken place, it cannot go to their detriment.

If a decision was made correctly, i.e. in the interest of the company, with due managerial care and with the necessary knowledge, from the perspective of the duty of care it is irrelevant whether it was advantageous, disadvantageous or detrimental to the company.

Conclusion

It follows that the executive director is solely responsible for compliance with the legal obligation, i.e. they must act in accordance with the duty of due managerial care. Based on the obtained professional information, the executive director can consider the advantages and disadvantages of the offered solutions and it is in their competence to assess which solution to choose. The executive director does not have to choose the best option, as they are responsible merely for adhering to the duty of due managerial care, not for the result.

author: Eva Purgerová