Culture in the eyes of the law
Corporations that merely pay lip-service to compliance and culture can expect little leniency from the Courts. Companies can face consequences, from penalties and liabilities, to a fall in consumer confidence, Frank Li and Andrew Ham write.
Corporate culture is crucial to the success or failure of any business, but it is often bumped down the priority list for things that are more black and white in determining corporate accomplishments.
People in industry generally pursue more tangible key performance indicators (KPIs): did we meet our profit targets? Did we stay in budget?
However, it is rare for management to really focus and discuss culture as an indicator of how an organisation is tracking. Admittedly, culture is a nebulous term, but it operates in today's commercial realm as an invisible force that drives both employees' motivations and practices and also consumer confidence in your organisation.
High profile disasters over the past have brought about the attention of executives to the potentially catastrophic risk of poor organisational culture. It should be a part of the strategy and execution of firms, yet criticism of one aspect or another of the culture of organisations where these disasters occur seems to be a regular occurrence.
A financial markets trader dismissed by ANZ last year for breaches of the bank's Code of Ethics has reportedly filed an unfair dismissal claim alleging the bank's culture condoned conduct that was inconsistent with its code of conduct, values and policies. Similarly, an "aggressive sales culture" was blamed by the financial planners at the centre the Commonwealth Bank's financial planning scandal.
These are not new issues. In 2004 four National Australia Bank forex traders were prosecuted after enormous trading losses that had been hidden by exploiting systems failures came to light.
From a commercial and operational perspective, we recognise that good culture saves costs, increases business value and that it develops client confidence and trust — ingredients key to long-term business security. Something often less explored is the role of corporate culture in reducing capacity to breach laws and regulations.
ASIC's powers
In the second half of 2015, discussion surrounding the importance of culture to organisations re-surfaced in the wake of events at the Commonwealth Bank after the Australian Securities and Investments Commission (ASIC) generated dialogue on potentially increasing its power to act against organisations and their officers when legal breaches occur due to poor culture.
ASIC chairman, Greg Medcraft, noted that financial services firms were still lagging in correcting their corporate culture with a clear distinction between public statements of accountability and the internal actions of staff and executives.
Organisations might have frameworks with extensive policies, procedures and codes of conduct but it's not uncommon to find that they are not in sync with the actual behaviours.
The real question posed to Boards and management is whether the actual culture can match the desired culture of a firm. ASIC believes if there is any disjunction then it must be corrected, because only the actual culture truly matters.
If ASIC finds a company's culture is lacking, it is a red flag that there could be broader problems in the company. This means ASIC is likely to focus more of its investigations and intelligence gathering on that organisation.
Likewise, given ASIC's belief in the importance of good corporate culture, the poorer the culture it finds in a business, the stronger the action they will take to rectify the problems.
ASIC already has, for example, powers to enter into Enforcement Undertakings (EUs) with organisations following investigations. These effectively are instructions to parties to complete programs to remedy deficiencies in operational procedures and to improve compliance.
However, in a bid to up the ante for deterrence of corporation breaches, Medcraft has opened debate on further increasing ASIC's powers by calling for civil penalties to be increased and broadened so that companies and their directors can be pursued with a lower burden of proof than is required for criminal prosecutions.
He argues that where the officer of a company breached a law administered by ASIC and culture was responsible, both the officer and the company should be held accountable and be subject to civil penalties and administrative sanctions. This is in line with the top down corporate culture model he advocates for, where senior management really sets the pace for the rest of the organisation to follow. Medcraft argues that these offences should be able to be actioned by ASIC in civil courts just like for other market misconduct.
For ASIC, these proposals are considered to be in line with the context of the Government's broader considerations of the recommendations of the 2014 Financial System Inquiry.
When ASIC spots poor culture, they report the issue to the Board and senior management for corrective action. Should results be unsatisfactory, breaches of regulations can allow ASIC to take corrective action themselves.
Matching culture and law
The importance of creating and maintaining good corporate culture is further highlighted by its significance within our legal system.
Under the Commonwealth Criminal Code (CCC), a company can be held responsible for breach of certain Commonwealth laws committed by its employees if the company's culture encouraged or tolerated the breach.
This concept champions the view that criminal responsibility should attach to organisations where the corporate culture encourages situations which lead to the commission of offences. Hence, companies are held responsible for their general managerial responsibilities and policy.
So, what is ‘culture' in the eyes of the law?
Defined as being about the attitudes, policies, rules, courses of conduct or practices of an organisation, the culture of firms can be used to determine ‘the mind' of the firm and thus prove whether or not a firm has the requisite intention to commit a crime.
Fault can therefore be attributed to corporations by proving that a culture existed within the body that directed, encouraged, tolerated or led to non-compliance or that the body failed to create and maintain a culture that required compliance.
The law will particularly scrutinise the actions of high managerial agents. Has high level management given authority to commit the offence (or those of a similar character)? Has there been a history of this occurring? Do the employees and agents of the organisation believe that management will actually authorise and permit the offence?
This is significant as it means that the fault of any agent in the corporation, no matter how minor or peripheral their role, can be attributed to the corporation where these provisions apply. The CCC invites the Court to consider the reasonably founded perceptions of your everyday employee on the attitudes of management to compliance when drawing conclusions about corporate culture.
In this sense, the idea of ‘fault' for corporate entities is quite distinct from the state of mind of individual personnel within the corporation. Indeed, policies and procedures are held to be the equivalent of the thoughts and intentions of organisations.
So, even if your company has set out solid procedures, frameworks and guidelines to deal with various compliance issues, it would not matter to the Court if these are merely ‘formal appearances' and are never or rarely actioned.
The law recognises that too often compliance procedures are simply established to meet basic legal requirements or to appease investors. The CCC thereby attempts to deter these behaviours. Should your organisation conduct itself with an express or implied policy of non-compliance with a criminal prohibition, then you will be deemed to exhibit criminal intentionality of non-compliance.
There will always be individuals who, for one reason or another, breach the law in the course of their employment. The question is whether these events are found to be the results of the employee going outside the rules "on their own" or whether their employer is seen as "part of the problem".
Case Law
The role of corporate culture has also played a major role in both Australian and international case law.
The idea of good corporate governance and a culture of compliance have significantly impacted domestic Court judgements, particularly in relation to the imposition of penalties.
In considering the appropriateness of certain penalties for contraventions by a corporation of a regulatory requirement, the court will look into the form, content and effectiveness of the policies and procedures adopted by organisations.
In a 2006 judgement by Justice French (as he was known prior to his High Court appointment), it was stressed that Courts, in determining the penalty, ‘[be] made aware of the reasons for the contravention. This may enable it to determine whether there were inadequate compliance systems or whether the contravention involved aberrant disregard by an individual of relevant policies and procedures.'
French goes on to say "the seniority of those in the company who were involved in the contravention is also relevant because it goes to the risk of recurrence and the extent to which their conduct is likely to be noticed by subordinates within the company".
We can clearly see that Courts are not giving any favours to corporations which pay merely lip-service to compliance policies. Indeed, the general trend in judgements is that when companies are in breach of regulations, their level of compliance and the integrity of their corporate culture goes a long way in determining how severe a sentence they receive.
Ultimately failing to maintain a culture with proper commitment to compliance, with insufficient prioritisation to risk management will have significant consequences. From penalties and liabilities of the company and its staff to a fall in consumer confidence in the business, no good comes out of prolonging negative culture and attitudes towards compliance.
Frank Li is a law clerk and Andrew Ham is a solicitor at Holley Nethercote.
AUTHOR
Industry Expert
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