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Corporate culture has been a particular focus of financial services in recent times and has been one of the main goals of the Hayne Royal Commission. But what are the consequences of a bad culture – and who is ultimately responsible for it?
Corporate culture and criminal liability
The Companies Act 2001 (Cth) does not define “corporate culture”. However, the concept is defined in the criminal business context. Article 12.3 of the Criminal Code Act 1995 (Cth) defines corporate culture as “an attitude, policy, rule, conduct or practice existing within the legal person in general or in the part of the legal person in which the relevant activities take place” .
The question of whether a company, as a legal entity, should or can be charged as a criminal defendant has always been and continues to be a complex and contentious subject.
The Criminal Code addresses the fault elements of an offense using ideas of organizational guilt, taking into account factors such as the culture, systems and operating policies of the company. (See Part 2.5, Sections 12.1 to 12.6.) Although criminal prosecutions in this area are relatively rare, corporate culture has been mentioned in regulatory offenses and investigations as a factor in sentencing. Taking the corporate culture into account at the stage of responsibility encourages corporate self-control and the development of a general culture of compliance. The lack of self-monitoring and the development of a culture of compliance often increases the penalties imposed.
Companies are generally held directly or indirectly responsible for their conduct. Corporations can be held directly responsible in accordance with the “alter ego” theory which attaches responsibility for the acts of the individuals who constitute the ruling “spirit or will” of the corporation.
Alternatively, the company may be found vicariously liable for the acts of an individual agent if he commits the crime in the course of his employment.
Historical framework of direct liability
Traditionally, direct responsibility has only been assigned to a company when the act or omission has been committed by an employee who has been authorized to “embody” the company or is considered a “guiding spirit” of the company. business. A string of jurisprudence explores the “Tesco principle”, derived from Tesco Supermarkets Ltd v Nattrass  2 All ER 127. The Tesco principle is inspired by an earlier case (Bolton (Engineering) Co Ltd v TJ Graham & Sons Ltd  1 QB 159), in which Lord Justice Denning said:
Some members of the company are mere servants and agents who are nothing more than hands to get the job done and it cannot be said that they represent the guiding spirit and the will of the company and control what is at stake. ‘she does. Others are directors and managers who represent the guiding spirit and the will of the company and control what it does. The mindset of these leaders is the mindset of the company and is treated as such by law.
Tesco’s Principle therefore asserts that direct liability tends to be imposed only when the person performing the act or omission was a director, secretary or similarly level person in the corporate hierarchy. The Tesco criterion remains the most frequently used to determine which individual can be identified as the embodiment of the company itself. It was applied by the High Court of Australia in Hamilton v Whitehead 5 (1988) 166 CLR 121. The guilty spirit of the company must therefore be a “vital” organ of the company, an individual high enough in the structure of the company to represent, in a metaphorical sense, the spirit of the company.
This theory is problematic from a law enforcement perspective. The limited number of individuals identified in the spirit of the company severely limits the applicability of criminal law. As a result, this theory applies most to traditional hierarchical societies and less to societies that have flatter structures and a higher rate of delegation to junior officers.
An Australian example
French J. discussed similar concerns in the context of a contravention of the Corporations Act in the case Re Chemeq Ltd (ACN 009 135 264); Australian Securities and Investments Commission (ASIC) v Chemeq Limited (2006) 234 ALR 511. He said that “[i]n considering the appropriate sanction for a company’s violation of a regulatory requirement … it is relevant to determine whether the company has policies and procedures in place designed to comply with those requirements.
It is important to note that French J further stated that:
“[t]The court will review the form and content of policies and procedures as well as measures adopted by the company to ensure that they are understood and applied. A well-written set of policies and procedures won’t make much sense if there is no follow-up in terms of training the company’s executives (including directors) and, if necessary, retraining.
In Chemeq, a “culture of compliance” was declared as a positive obligation. French J described a culture of compliance as “a degree of awareness and sensitivity to the need to view regulatory obligations as a routine incident of corporate decision making”.
Can a good culture help?
The most recent case of Director of Public Prosecutions (Cth) against Nippon Yusen Kabushiki Kaisha  FCA 876demonstrates the power of a good corporate culture (even after driving) to mitigate liability.
The offender was a large foreign company which for many years had shipped motor vehicles to Australia from various manufacturing countries. The offender was charged with giving effect to a provision relating to a cartel contrary to Section 44ZZRG (1) of the Competition and Consumer Law 2010 (Cth). Six major shippers, including the accused, were alleged to be parties to cartel provisions relating to the setting of freight rates, bid-rigging and the allocation of customers (being the manufacturers) between the parties.
In this case, the conduct of the company after the breach was taken into account and mitigated its liability as it was able to demonstrate that it had changed its corporate culture to adopt a culture of compliance, had given up its wrongdoing and had structures, systems and programs in place to prevent recidivism.
The Royal Commission on Banking
The Royal Commission identified standards that should be implemented and monitored within a company. These include obeying the law, not misleading or deceiving others, acting fairly, providing services fit for purpose, and providing those services with reasonable care and skill while by acting in the best interests of others. Culture and governance practices (including compensation arrangements), both in industry generally and in individual entities, should focus on non-financial risk, as well as financial risk.
Recommendation 5.6 states that all financial services entities should take reasonable steps to assess the culture and governance of their entity, identify any issues with them, and verify whether the relevant changes made to address those issues have been effective.
Are the directors responsible?
Regulators ultimately find little use in fining companies for breaches of the law since monetary payments are often insignificant amounts for large players and do not prevent future misconduct.
Instead, they are increasingly willing to try and shift the responsibility to people such as directors and senior executives. For these people, the financial penalties can be significant and the prospect of a jail term has a significant deterrent effect (as does the prospect of being taken out of the industry during this time).
Regulators have therefore increasingly taken an approach of alleging that directors and officers failed in their duty to the company by causing it to break the law and prosecuting them accordingly.
Primary responsibility for misconduct in the financial services industry rests with entities and those who manage and control them. Good governance and corporate culture are fundamentally important.
To avoid liability, management must take an active approach to ensure that the company meets its legal obligations. Developing policies that articulate these obligations will not be enough. These policies should be actively implemented and internalized by the organization. In essence, the behavior of the representatives of the organization should reflect the stated values of the organization. Now more than ever, in the financial services industry, it is important for the board of directors and management to create and maintain a culture of compliance within the organization.
The Australian Law Reform Commission recently announced that it will conduct a review of Australia’s corporate criminal liability regime. This inquiry will examine, among other things, the recommendations of the Royal Commission on Misconduct in Banking, Pensions and Financial Services.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.