Directors do not have all-seeing eyes

Last week the Attorney General, Jeremy Wright, confirmed that the Government intends to introduce a new criminal offence for corporations that ‘fail to prevent’ economic crimes, such as false accounting and fraud.

This will be the latest in a series of ‘failure to prevent’ offences. The first, relating to bribery, has been law for a number of years; and a second, relating to tax evasion, is expected to become law early in 2017.

In his speech, the Attorney General identified two objectives of these offences: to ‘encourage better governance within large companies’ and to make it possible to ‘bring corporate bodies to justice for the criminal acts of those who act on their behalf’.

The UK Bribery Act became law in 2010. The first conviction of a company for failing to prevent bribery was in February this year, over five years later. Optimists may see this as evidence of a stunning success as regards the first objective. Pessimists may see it as evidence of the difficulty of achieving the second.

What is it reasonable to expect the board and senior management to know about what goes on in their company? With every corporate scandal there are cries for senior heads to roll because ‘they must have known’. But must they?

There is a big difference between systemic misconduct – for which it may perhaps be a reasonable assumption that the board or senior management must either have condoned or connived in it, or been derelict in the duty by not uncovering it – and individual misconduct.

In large, complex businesses the opportunities for individuals to misbehave are almost limitless; the resources available to even the most diligent directors and managers, on the other hand, are strictly finite. It is not remotely realistic to expect them to know everything that happens within the company, no matter how good their control systems and management information may be. The law should not presume or pretend they can.

If ‘failure to prevent’ offences mean that directors or senior managers are properly punished for the most egregious cases of widespread misconduct which they knew or should have known about, and that companies are prompted to pay more attention to their internal controls and to red flags alerting them to possible misconduct, that will be a good outcome.

But introducing these new legal responsibilities will not suddenly mean that directors and senior managers acquire all-seeing eyes. It would be completely unrealistic to pretend that creating a criminal offence will somehow stamp out all misconduct within companies. The promoters of these laws would be doing themselves and companies a disservice if they fail to prevent the public believing that they will.

Before joining ICSA's policy team as a consultant, Chris Hodge was the FRC Director of Corporate Governance.

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