Corporate Governance: Where are we now

01 Jan 2018

Commercial and Regulatory

Gerard Forlin QC considers the latest developments in corporate governance.

Although the current news is heavily Brexit driven, many other areas of Corporate Governance responsibility are also quickly gaining traction.

The recent global work I have undertaken has reinforced the interconnectivity of corporate responsibility especially for the Boards and CEOs across both various areas of Corporate Governance and globalisation.

Firstly, it is now crystal clear that the legal test is an objective one; namely, what the Board ought to have known rather than what it claims it knew.

Secondly, for example, recent cases involving the UK Bribery Act again reiterate that an organisation’s audit must be operational and be seen to be working on the ground. Rolls Royce was fined in terms of fines and costs £671 million for a recent D.P.A. and the investigation into senior individuals continues.

Thirdly, two recent cases in both the Civil and Criminal arenas reiterate that what occurs abroad to an organisation affects litigation in the UK and elsewhere.

In the first case, an American petrochemical company incurred a double fatality in its Californian plant. Many years later its subsidiary had a similar accident in England. The English Court of Criminal Appeal stated:

“… the serious aggravating feature in this case was that a similar incident has led to the death of two employees at a HIP plant operated by another company in the same group that occurred in May 2001 in Tarzana California. These two employees had also died from asphyxiation as a result of inhaling argon and nitrogen. That may have prompted the appellant to either adopt or to expedite the introduction of its present system, but, as the prosecution was able to show, not with the rigour that the dangers demanded and the appellant allowed the other defaults in its safety procedures to continue or to get worse.

… the other aggravating features of particular note were that there had been two deaths, and the appellant had not adequately heeded the warnings from the failures in the Californian plant.”

In a recent civil case where the executors of an employee financial analyst of a local hedge fund based in London successfully sued his employers after he died in a chartered helicopter crash in South America. The High Court found that the company had filed in its duty to ensure the flight was safe. Leave to the Court of Appeal has been refused.

Both these cases indicate the geographical spread of corporate liability and responsibility. The recent ISO 37001 Standard on Corruption and the draft International Standard on Health and Safety 45001 due to be introduced this year will also intensify these duties. In essence, an organisation must operate globally to the same standard wherever their undertaking is located. This might need to be higher than an ISO level. These new standards require global organisations to modernise, harmonise, reorganise and customise their undertaking.

If a major event does occur, the way the crisis is handled, especially in the first 24-48 hours, is of huge and long lasting significance.

Recent research shows that 66% of CEOs felt they had been involved in a major crisis in the preceding 3 years. Perhaps one person’s crisis may be another’s bad hair day but this is further evidence that there are increasing pressure points on Boards and certainly the great majority of Boards recently surveyed felt that the risks of doing global business were increasing. Many felt that the risks of cyber-crimes involving sensitive data were the main threat to the business.

Although this area is of critical importance, ignoring other risks such as health and safety, corruption and environmental could be naive and dangerous to the future very existence of the business.

In my experience, having worked in over 60 countries, if one area of corporate governance is compromised the whole spectrum is infected, as it is impossible to segregate these responsibilities into neat sectors.

In health and safety, since the new sentencing guidelines came into effect on the 1st February 2016, there has been a major rise in the level of fines of approximately 1000%. Large fines are now being handed down even in non-fatality cases.

On 9th September 2016, Merlin Entertainment was fined £5 million plus costs for the Smiler accident at Alton Towers and the trend is increasing and accelerating.

There has also been an increase in the numbers of directors being prosecuted and imprisoned for health and safety offences. Recent figures show that 46 directors and senior managers were prosecuted in 2015-16 compared to an average of 24 over the previous five years. Of these, 34 directors were found guilty or pleaded guilty. Twelve of these were imprisoned.

Finally, a very recent judgment handed down last week has cut a huge inroad into legal professional privilege. In Director of the SFO v Eurasian Natural Resources Corporation Limited (2017) EWHC 1017 (QB), Andrews J has held inter alia that until a criminal case is actually commenced or once it was discovered that there was ‘some truth’ in the allegations or ‘some material to support the allegations of corrupt [illegal] practices’, then no LPP can attach to documentation created by an organisation, even if they strongly suspected they would be raided or investigated. Further, she has made clear that in-house lawyers must be acting as lawyers rather than “as men of business” if LPP is to attach to their advice and the documentation generated.

In conclusion, as Bob Dylan once sang, the times they are a changin’!