Ensuring good governance – 4 critical pitfalls Swedish board members must avoid
To drive sustainable business growth, Swedish board members must negotiate a complex web of legal and ethical responsibilities. Board members play a crucial role in managing the company, ensuring proper accounting and financial control and implementing risk management systems. Exercising diligent oversight is essential for ensuring compliance and operational excellence. So how can Swedish board members steer clear of common governance pitfalls and prevent costly mistakes?
In Sweden, the board of directors is responsible for managing the company’s affairs and for overseeing accounting, asset management and financial operations. The board must ensure that the company’s structure supports effective financial control – this includes implementing robust internal controls and risk management systems, where certain tasks are delegated to one or more members of the board. The board must act with due care and continuously evaluate whether responsibilities are being upheld.
In private companies with more than one board member, the chairman is appointed by the board of directors. The chairman is responsible for managing the board’s activities and ensuring that meetings are held, minutes are kept and decisions are made with a quorum and majority. The chair also convenes meetings upon request and ensures that board matters are adequately prepared and presented.
Board member liabilities and common pitfalls
Board members carry significant legal responsibilities and failure to meet them can result in personal liability. Here are four governance pitfalls Swedish board members must navigate with care:
1. Making risky or uninformed decisions
Board members and managing directors can be held personally liable for damages if their actions – be they intentional or negligent – cause harm to the company. A board member can be held liable for acts or omissions, even if tasks have been delegated to others.
However, if a board member acts with due care and diligence, considers the risks and the prevailing environment and makes the decision in the company’s best interest, they won’t be held liable.
There are two conditions for liability:
- Causality – a causal link must be established between the act and the damage
- Adequacy – the damage must be a reasonably foreseeable consequence of the act
In short, board members must ensure that they exercise due diligence, are transparent in their actions and prioritise the company’s interests. This includes avoiding conflicts of interest and ensuring that their decisions are based on reliable information. By adhering to these principles, board members can minimise the risk of liability and protect the company’s reputation.
2. Overlooking financial warning signs
Equity deficit is potentially the biggest risk for board members – according to Swedish law, companies are not permitted to operate with insufficient equity and board members are personally liable for the company’s debts. When a company’s equity falls below half of its registered share capital or when the Swedish Enforcement Agency’s (Kronofogden) debt enforcement fails, the board must immediately prepare a trial balance sheet, known as a “control balance sheet for liquidation purposes” (CBS), and ensure it is reviewed by the company’s auditor.
Overlooking early warning signs can impact a company’s financial stability. To avoid this pitfall, board members must closely monitor the company’s financial health and implement mitigating measures when necessary.
To restore capital, board members can:
- Sell assets at a higher value than recorded in the balance sheet or accounting revaluation of assets
- Reduce share capital as far as possible
- Secure contributions from shareholders or other parties, either in the form of a new issue at a premium or through capital contributions
By understanding and adhering to these guidelines, board members can ensure the company’s stability and compliance with Swedish law.
3. Failing to fulfill tax obligations
As the company’s tax representatives, the board of directors can be held personally liable for unpaid taxes, whether the oversight was unintentional or deliberate. For example, the board can be held accountable if it doesn’t follow up on tax payments or doesn’t apply for bankruptcy or reconstruction by the tax due date in the case of insolvency. This is considered gross negligence and the board may be held liable as a result.
4. Failing to secure discharge from liability
Discharge from liability is a crucial agenda item at the Annual General Meeting, where board members and the CEO can be discharged from liability under certain circumstances. This discharge pertains solely to the company and does not release third parties or shareholders who have voted against it from liability. If discharge is not granted, board members may be personally liable for negligent actions.
Discharge from liability is an important mechanism that protects board members from potential claims. However, it is not a blanket immunity – board members must continue to act responsibly and in accordance with their legal obligations. By maintaining high standards of governance and transparency, board members can build trust with shareholders and stakeholders. It’s important to note that discharge from liability does not cover matters that were concealed, such as omissions in the annual report.
Key takeaways for board members
- Ensure you understand the duties and responsibilities of the board of directors
- Establish effective procedural rules for smooth operations
- Ensure diligent decision-making by requesting critical information
- Delegate effectively while monitoring progress
- Use the business judgment rule to protect decision-making processes
- Engage external experts to support informed governance decisions
Talk to us
If you need help understanding or managing director liability under Swedish law, get in touch with the TMF Sweden team. Our experts can provide comprehensive support and guidance to ensure your board operates effectively, confidently and within clear legal boundaries – contact us for strategic solutions tailored to your business’s unique needs.
