Can a CEO be personally liable for a company's compliance failures?

The short answer is: yes, in certain circumstances.

One of the benefits of operating through a company is the separation between the legal entity and the individuals managing it. However, this does not mean that CEOs and directors are always protected from personal exposure when the company faces a significant compliance failure.

There is no general rule making a CEO personally liable for every regulatory breach. The answer depends on the specific legislation, national corporate law, the individual's responsibilities and their conduct.

Where does personal liability come from?

Some regulations place specific responsibilities directly on management.

NIS2 (the EU cybersecurity framework covering companies in critical and important sectors, including energy, healthcare, transport, digital infrastructure and certain technology services) is a good example.

It requires management bodies to approve cybersecurity risk-management measures and oversee their implementation. It also expressly provides that management bodies may be held liable for infringements, subject to applicable national liability rules.

DORA (the EU digital resilience framework for financial entities) takes a similar approach. The management body has ultimate responsibility for managing ICT risk and must define, approve and oversee the relevant risk-management framework.

Personal exposure may also arise under national corporate law and directors' duties, as well as rules concerning financial crime, insolvency, health and safety and, in certain circumstances, competition law.

Privacy works differently.

Under the GDPR, regulatory liability generally attaches to the company acting as controller or processor. A CEO does not automatically become personally liable simply because the organisation has committed a GDPR infringement.

The important point is that management liability does not come from one place and companies need to identify which laws applicable to their business impose responsibilities directly on management.

Where should CEOs start?

A practical first step is to create a simple management liability map.

For each significant regulatory area applicable to the business, management should understand:

◆ whether the law places obligations directly on the CEO, board or management body;

◆ which decisions require management involvement or approval;

◆ which risks and incidents must be escalated to management;

◆ who is responsible internally for managing those risks; and

◆ what evidence demonstrates that management has exercised appropriate oversight.

This does not mean that CEOs need to become lawyers, compliance officers or cybersecurity experts.

The objective is to ensure that management receives the right information at the right time and can make informed decisions when significant risks arise.

Documentation is essential

From our experience, the importance of board minutes and management records can be eat overlooked.

Where a significant compliance risk is considered, records should show, where appropriate, what risk was identified, what information management considered, what decision was taken, who was responsible for follow-up and how remediation was monitored.

Being able to demonstrate that a significant risk was identified, escalated, considered and appropriately addressed can be important when personal responsibility is assessed.

Can D&O insurance help?

Directors' and Officers' liability insurance (D&O) can provide an additional layer of financial protection for CEOs and directors.

Depending on the policy, it may cover certain claims made personally against executives and defence costs associated with regulatory investigations or proceedings.

However, companies should review whether their policy covers the relevant executives and jurisdictions, regulatory investigations and defence costs, and understand the applicable limits and exclusions.

The practical takeaway

For CEOs and boards, a useful starting point is to ask Legal or Compliance for a map of the laws that impose obligations directly on management, the decisions that require management involvement and how the company evidences that oversight.

The next step is to compare those responsibilities against the company's governance processes and D&O.

Knowing where personal obligations arise and being able to demonstrate that management fulfilled them can put executives in a stronger position if individual responsibility is examined.

—

The content of this article is general information, not tailored legal advice for your specific situation. It has a strictly informative and general purpose; the information contained does not constitute legal advice.

Every business is different. For personalised consultancy, schedule a consultation call or write to us directly at 📧 anamaria@legallyremote.online.