General Manager Safety Rules

The General Director is a person who is absolutely responsible for everything that happens in the company, from violations in the preparation of tax documents to failure to fulfill a business plan. How to insure yourself against emerging risks and protect yourself from personal bankruptcy as much as possible, says Vladimir Fokin, Managing Partner at Fokin & Partners Law Firm.
Vladimir Fokin, Founder and Managing Partner, Law Firm Fokin & Partners. A lawyer with over 15 years of experience. PhD in Law. Expert in tax planning, legal security of business and other legal aspects of entrepreneurship.

Fokin & Partners Law Firm has been operating in Russia since 2003 and provides services in corporate, tax, real estate, and intellectual property law.

www.fokinlaw.ru

Before the CEO of any, even a small company, a whole group of risks arises. We list them by their importance: tax risks, criminal risks, corporate and administrative risks. The latter are the least significant because they are associated with fines for offenses such as non-compliance with fire safety standards, and are described in detail in the Code of Administrative Offenses. CEOs sometimes don’t even suspect the existence of other risks, although they can turn into dramatic consequences, so it’s worth telling more about them.

Tax risks

In the case of a tax investigation, the first suspect is always the CEO, so the most obvious tax risk that arises before him is the responsibility for the work of accounting. In order not to pay for the mistakes of each employee, it is necessary to competently delegate responsibility to the staff. Firstly, the company should have a provision on accounting and separately on the chief accountant, which describes in detail all the responsibilities of the chief accountant and states that these duties must be carried out in strict accordance with tax legislation. Secondly, there should be job descriptions, with which each employee is obliged to familiarize themselves with the signature. Thirdly, a contract should be concluded with each employee, where a link to job descriptions is mandatory. If all this is and is correctly executed, in case of tax violations, responsibility is transferred from the General Director to the officials. In case of serious misconduct, they may be fined, but in most cases, investigators refuse to punish anyone specifically (with the exception of the CEO), since this requires determining the guilt of each employee individually, and the guilt is proved with great difficulty. Often in such cases, everything ends with formal fines for the organization as a whole.

The CEO also bears the brunt of a tax audit. Don't naively assume that if the tax authorities come to your company, they won't find anything. Tax inspectors always come to uncover violations and impose additional taxes, which means they're bound to find something. You need to be prepared for this and accept it as a fact of life in Russia. However, the burden placed on the company by the inspectors can be eased. First, the CEO should prepare employees for an audit so they avoid common mistakes—panic, disclosure of information not officially requested, and obsequious behavior in hopes of a "pardon." In the event of a tax audit, the company must take a strong legal stance and adhere to the established legal process: inspectors don't like to waste a lot of time and effort on such companies. In addition to being briefed on audits, it's also a good idea for employees to be aware of the company's optimization schemes. Employees must know why they perform their duties the way they do. Furthermore, all documents must comply with stated business processes, even to the point of being signed by the CEO in the city where they are located. In my experience, regulatory authorities annulled two out of three contracts because they were drawn up in out-of-town branches of the company and signed by the CEO on the same date. Clearly, the CEO couldn't visit all three branches across the country in one day, but the accounting department didn't take this into account. Finally, the CEO must be mindful of the danger posed by dismissed, disgruntled employees: their testimony remains relevant to inspectors even five years after their dismissal. This is why it's so important to terminate employees without violating their rights. If an employee commits official misconduct and is subject to dismissal, this must be documented in reports from their managers and colleagues. An explanatory note should be obtained from the employee, and if they refuse, a report should be drawn up. If an employee admits to misconduct and is willing to compensate for the damage, this should be documented in the report. If they refuse to compensate, the case must be formally pursued. While it's not worth hoping for "special results" from the investigation, the company will have confirmation that the employee is untrustworthy and their testimony is worthless.

The adoption of all these precautions can save the company from accruing excessive taxes, and the General Director from paying fines and penalties for tax violations. The constant combat readiness for a tax audit has become especially important now, when tax inspectors began to issue a collection order on the third day after the entry into force of the tax decision, and not after the court decision. Unfortunately, the arbitral tribunals completely refuse to allow taxpayers to enforce the tax decision before the end of the court. Now the company must first pay all accrued taxes, fines and penalties, and then gets the right to sue them, even if the extra charge "sucked from the finger." The trial takes at least six months, and, until a positive court decision, the company may simply not survive. Therefore, you should not wait for the decision of the tax authorities, and objections to the accrued taxes should be filed before the inspector has issued a collection order.

For details on how to behave during a tax audit, read the article by Vladimir Fokin, “Stop who's walking: 8 comments about inspections,” published in Shoes Report magazine No.106. Don't have this number? Buy it from us at a special price! Call: 8 (495) 925-75-03

Criminal risks

Criminal risks are closely related to the tax and corporate responsibility of the CEO, and most often involve two types of crimes - tax evasion and fraud, in particular embezzlement and embezzlement.

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Basically, law enforcement agencies come to the company with an audit for three reasons: by applying to the tax inspectorate, to investigate the case of a one-day company, and to investigate a company that is engaged in cashing out funds (illegal banking). In this case, the decisive role is played not by documents, but by the testimonies of witnesses, therefore, all ways to protect themselves from criminal risks are associated with the collection of information about contractors. Each partner company should have a separate dossier with a copy of its charter, extract from the register, order for the appointment of the director, certificate of registration, as well as with the names and contacts of employees known to you. It is also advisable that you meet the supplier side at least once. So you have the opportunity to give more detailed evidence. You need to go to interrogations only with a lawyer, even if it seems to you that you are as innocent as a baby. Very often, witnesses recount a story which, in their opinion, is safe, but which in 9 of 10 cases ends with a criminal investigation against them. All employees should also be allowed to be interrogated only accompanied by a lawyer. So they will be less susceptible to fear and pressure from investigators.

In order to protect himself from paying fines that may exceed his annual salary, the CEO can insure his professional responsibility, including at the expense of the company. This service is useful not only to the director himself, but also to the company, because if there is a real need to compensate for the damage, the company has a chance to receive the full amount of losses from the insurance, rather than pulling it from the general director.

Corporate Risks

This group can also be called property risks, since the CEO is fully liable for losses incurred by the company by him or his employees as a result of management errors. Such losses include fines and penalties accrued as a result of tax offenses; damage caused by the director, in the opinion of the shareholders and the board of directors, as well as any other losses incurred through the fault of the general director. Moreover, the Director General is considered guilty in all cases, with the exception of those when his involvement was proved: for example, there are job descriptions and orders that the employee openly violated. In general, the responsibility of the CEO is so voluminous that no precaution will be superfluous. In particular, one of the most reliable ways to protect your family from personal bankruptcy is a prenuptial agreement, in which the property of the spouses is divided so that, in the event that the wife and children of the CEO are not left without a livelihood, and the director himself was where to live .

The CEO also has risks that arise from his relationship with the company's founder and shareholders. If possible, you should keep the official tone of communication with the owners of the company, receive all their instructions in writing - at least in the form of e-mail, and transfer potentially dangerous powers to the board of directors. Such powers include contracting for more than 1 years, forgiveness or restructuring of debts to the company, management of subsidiaries and affiliates, major financial obligations of the company, and encumbrance of assets - rent, pledges, mortgages, taking loans and granting loans.

Dismissal is another risk that always hangs over the director. Under the law, the owner can dismiss the CEO at any time without explanation. A far-sighted person insists on including in his contract a “golden parachute” - a clause on payment of compensation in case of dismissal in the absence of violations or unfulfilled obligations. According to the Labor Code of the Russian Federation, the minimum size of a “parachute” is the sum of three monthly salaries. However, a “golden parachute” is disclosed only when the quality of the work of the general director is considered satisfactory. There is only one way to evaluate the quality of his work: by analyzing the implementation of a business plan. That is why the business plan is the most important document for the CEO in the company. In order to be valid, the business plan must be executed as a separate legal document, signed by the Director General himself, accompanied by an order and, most importantly, approved at the annual or extraordinary meeting of participants (in the case of LLC) or the board of directors (in case of ZAO), which will be recorded in the minutes of the meeting. Also, a business plan should become mandatory for employees: a link to this document should be in all job descriptions and employment contracts.

Corporate risks include working with counterparties. Since the shareholder of the company or participant (in the LLC) has the right to challenge any transaction that he considers harmful, the company must have a clear algorithm for working with suppliers. It is important not only to collect dossiers for each partner, but also to regularly check their model contracts, as internal lawyers, in view of insufficient judicial experience, do not see those gaps that could lead to further losses. It is recommended that you periodically order a service of legal analysis of the company’s activities (due diligence), during which professional lawyers and attorneys will check all the firm’s contracts for civil and tax risks. This should be done at least once a year, since tax laws are constantly changing, and schemes that are acceptable two or three years ago today are often dangerous.

In more detail about how to minimize the risks of the CEO, as well as other pitfalls of the work of the head of the company, it will soon be possible to read in the book by Vladimir Fokin, “Director General: a workshop on survival.” While the book is being prepared for printing, you can familiarize yourself with its contents in the author’s video of Vladimir: http://www.fokinlaw.ru/present/praktikumGD/