Towards Business Accountability

This is the third in a series of pieces exploring what the Labour Centre might offer to the electorate. The first, sketching out some of the broader ideas, can be seen here. The second, which advances some specific policies to reshape the labour market to support self-employment and improve competition, can be seen here. I will come back to those ideas. But I want now to set out some thoughts on how the Party might respond to public demand for better business.

We are awash with narratives of bad business: of environmental destruction, tax dodging, exploitative labour practices, unpunished regulatory breaches. And even as the events of 2008 disappear into history their effects remain political centre stage. Writing here I described the need to reforge the relationship between society and business as “the defining political question of our time” and “perhaps the one great opportunity open to the Left.”

We’re not short of diagnosis. But we need to move to specific prescription. Not a command and control prescription that positions Labour at war with the forces of capital. But one that looks for inflection points and uses them to influence the shape that markets take.

***

Do you own an Apple iPhone? Or search with Google? Or drink at Starbucks? Or run in Nike?

What responsibility do you have for their environmental damage or poor supply chain management or abusive tax practices?

When you choose their products do you own their policies?

Their commercial performance suggests not. Decry the behaviour though we might, we do not deny them our custom.

What if you own their shares?

By investing, you lower their cost of capital. You reward their management’s assessment of the ‘right’ balance of profit maximising/cost externalising.

Still not convinced? But what if you ran those companies?

What if it were you who, as the Archbishop of Canterbury put it, turned a blind eye to your wild lending, knowing that Government stood back-stop; or who targeted an effective tax rate that compelled abusive tax behaviour; or who chose a supplier on the basis of cost alone, ignoring how they achieved it; or who opted for cheaper, unsustainable energy?

And what if you were only doing what your shareholders were rewarding you for?

If you spread responsibility widely enough no one need bear it. But it’s the law that has done this and what it has shared out it can gather together again.

***

Once upon a time ‘who bears responsibility’ was not a question we had to answer.

Until the mid-19th Century we did not have limited companies, not as we now know them. The creation of a ‘legal’ person, separate from its owners, was a rare act effected almost exclusively by Royal Charter.

So there was always a man to carry the can. The owner, in law, was the business. There was no separate legal entity. He ran the company and the staff he employed executed his will.

But today we have two actors. And there are important consequences. Consequences that troubled commentators in the mid-19th Century – but that we seem to have forgotten today.

Moral responsibility is difficult to site.

And criminal responsibility, too, is lost.

Speaking on the Marr Show on 24 January 2016, Rona Fairhead, a Director of HSBC at the time its Swiss unit facilitated tax evasion, said this:

“What happened in HSBC, behaviour that was criminal, behaviour that was against the practices of the bank, we have said as a bank that we accept responsibility and we have said that we are deeply sorry for any reputational damage in what happened.”

Yet no criminal charges have been brought against the Bank – or against Ms Fairhead who chaired the audit committee at the time. And, remarkably, no regulatory action has been taken either – against HSBC or, as far as I am aware, Ms Fairhead. It is difficult to imagine that an individual – as opposed to a company – who admitted criminal behaviour on this scale would escape sanction.

***

The intense political focus on my own field, taxation, has driven some interesting thinking.

Writing in June last year I argued for “measures – likely outside the tax code – which nudge business to become better fiscal citizens through embracing transparency and improving corporate governance.” Would behaviour change if there was an individual whose reputation was on the line? Or if business was compelled to state publicly whether it would adhere to prescribed baseline standards?

Last Summer Government published a Consultation Document entitled ‘Improving Large Business Tax Compliance‘ which asked whether responsibility for tax strategy should rest with a named individual. And whether businesses should be invited to state whether they might sign up to a voluntary code of good tax conduct (similar to that applying to banks).

But business respondents were overwhelmingly hostile to these proposals. And the Conservatives abandoned them.

A perception that a lack of personal accountability for poor behaviour could engender a corporate tolerance of it drove policy thinking in other areas too.

In July 2014, the Bank of England published ‘Strengthening accountability in banking: a new regulatory framework for individuals’ which identified as a contributing cause to the financial crisis the fact that “individual accountability was often unclear or confused.” That framework went on to observe that: “Both the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) (the regulators) believe that holding individuals to account is a key component of effective regulation.”

Companies cannot carry the can. This should not encourage in those who run them any diminution in the care with which they attend to the moral and legal mores society sets down. But history tells us it does.

***

Companies are creations of law. Through our laws we make them, and through those same laws we regulate their uses. There is no need for companies to become a means for the doing of that which a natural person could not. The privilege of limited liability and separate personality is ours to grant. And there is nothing radical in the notion that we should carefully and in our collective interests dictate the terms upon which that privilege is extended.

The law is not a mechanism for regulating morality. As I observed here (writing about the relationship between tax law and morality):

Discrimination on the grounds of “colour” (to use the language of the Act) did not become immoral only on 8 December 1965 when the first Race Relations Act received Royal Assent.

I start with that truism because it is only if we lose sight of it that we can regard the question ‘Does XCo wrongly avoid tax?’ as properly addressed by the response ‘XCo complies with all relevant tax laws in all the jurisdictions in which it operates’. It is only if one loses sight of it, too, that one can conclude… that there is no use to which morality can be put.

The law of corporate personality need not be used to allow to mask moral responsibility.

We should identify the spheres of corporate behaviour which we consider contain a moral element – environmental standards, a tax strategy, labour standards and others – and ask large companies to publish their policy on it and name the individual responsible for achieving that policy. By taking that step we re-establish clear moral linkage between action and actor.

And separate corporate personality should never act as a shield against criminal responsibility.

If we care enough to attach criminal sanction to types of behaviour we should impose upon directors a positive obligation to take reasonable steps to secure that such behaviour does not occur. The converse – that they need not take reasonable steps to prevent criminality – invites directors to regard that behaviour less seriously than society by deeming it criminal dictates.

Let the law join together what it split asunder.

13 thoughts on “Towards Business Accountability

  1. Interesting post Jolyon. I wonder if you’ve thought about whether a senior in-house lawyer should be brought into the approved managers scheme? The FCA, I think, are about to consult on it. Maybe this is a bit beyond your interest, or maybe it dos overlap with tax strategy…

  2. Thanks Richard. It is bit – what should I read?

  3. I think that identifying a common morality on tax is likely to be difficult, to put it mildly. I have taken personal abuse (on two occasions) from (two different) people who believe that claiming gift aid on charitable donations is morally wrong.

  4. Not sure. I’ll have aloof and get back to you. I think there was just a press notice that says this is an issue and a consultation is coming.

  5. From CMS on the proposal to extend the senior managers scheme: http://www.lexology.com/library/detail.aspx?g=8489c2e0-0831-420b-a08f-e83f45563343

    It would only apply to FCA/PRA-regulated entities (i.e. banks).

    Perhaps there should be wider application and/or the SRA’s code of conduct for in-house counsel might need a revamp.

    Looking at the SFO’s recent failures on LIBOR-rigging prosecutions, it is, I think, clear that it is often difficult for prosecuting authorities to get over the hurdles for criminal convictions, and trying to get at the “controlling mind” of a business such as Barclays is well nigh impossible. It might be worth changing English/UK criminal law to extend the notion of vicarious liability so that corporate convictions can be more readily secured. Or, perhaps, having a rebuttable presumption that the directors are personally culpable unless they can show that they had, and enforced, proper policies and procedures designed to detect and prevent criminality.

  6. Which is broadly what the FCA proposed but Government canned.

  7. 1. “And separate corporate personality should never act as a shield against criminal responsibility.”

    I don’t see how it can. Incorporation provides corporate agents with a shield from a contract action (only the company on whose behalf they act assumes contractual responsibility). it won’t provide individual actors with any shield against either criminal responsibility or tortious liability.

    To take an easy, and obvious, example, if a CEO punches you on the nose, that he was acting for the corporation won’t provide him with any defence, in criminal or civil law. The same will be true in fraud cases.

    I suppose what you have in mind is evidential problems caused by having large organisations. Prosecutors/Litigants cannot identify the individual who committed the wrong. This problem would not go away if we abolished corporations: the evidential hurdle would remain.

    In this context corporations operate as a useful target, not a shield. If you can identify that the person responsible was an agent of the corporation, hold the corporation responsible. No need to identify the individual if you have a corporation.

    2. If you are going to think about new and exciting ways of piercing the corporate veil (this has been looked at carefully ever since Salomon v Salomon. You’ll need to think more carefully about whether you want to hold the owners liable (which is what limited liability is really about) or find the agents/directors liable (which is a different concern)

    3. The analogy you draw between discrimination on grounds of race, and not paying tax, is very unfortunate.

    Some actions are malum in se. That means wrong in and of themselves, in all times, regardless of what the law happens to say. Rape and murder are examples. Arbitrarily discriminate against someone on the grounds of race in discriminating a particular good is another.

    Other actions are malum prohibitum. That means wrongful because the law says so. There is nothing inherently wrongful in about driving on the right, or left, side of the road. It is wrongful in the UK to drive on the right because of the law’s say so. (Non-compliance with the law is, prima facie, immoral, but some acts only contravene morality because of the law).

    Not paying income tax is malum prohibitum. I pay tax because the law requires me to do so. it is not a matter of virtue, like despoiling the environment.

    4. The Companies Act 2006 s 417(5) already introduced the kind of reporting on the environment, labour standards, and social community issues that you favour.

    Perhaps unsurpsrisingly, the world carried on much as before.

    The Companies Act also imposed a (new) duty on directors to take into account such matters as the environment and wider community in carrying out their duties (see 172(1)(d).

    This kind of thing sounds lovely, but is in my view counterproductive in terms of corporate governance. In corporations we have an agency cost problem. How do we make directors act in the interests of those employing them, when shareholders are remote, don’t monitor, and may just be temporary investors? The answer is to give them crystal clear duties to act in the corporations interests. If you water this down, and say they are supposed to take into account lots of wider concerns, when they cock things up they become harder to sue. “You can’t sue me, the company only failed because I was trying to do what was best for the wider community”.

    5. Sorry to be negative about your proposals, but I am deeply sceptical about what can seriously be done about the problem you identify, if it is a problem. I suspect it requires a context specific approach, with some sectors (eg banking) requiring closer regulation, and other sectors less so that more competitors will enter the market.

  8. A missed opportunity then.

  9. Well, one way to hold businesses accountable for their behaviour is through consumer power. At least part of the campaign against slavery was waged through boycotting slave-produced sugar, coffee, etc, in favour of products produced by free labour. For that to work properly, some transparency and information is required so consumers can make reasoned choices. Notwithstanding bad publicity, most people seem profoundly relaxed about Apple, Facebook, Google, Amazon, Starbucks, etc, if their sales figures are any guide.

    The reform of the law on corporate manslaughter may be some guide as to the sort of change that can be made to hold companies to account in other spheres. In the past, it was difficult to prosecute if there was no clear single person who was a “controlling mind”.

  10. After many years of studying the behaviour of corporate boards I have concluded that the root of the accountability problem is the impossibility of satisfying 21st century demands for corporate accountability within a regulatory framework designed in the 19th century. Focusing on board independence and diversity is a waste of time and effort: there is no evidence that tinkering with board composition and structure makes a difference. The FRC’s “culture coalition” is unlikely to produce any new ideas.

    Debates about the purpose and role of the corporation in society are taking place within interested groups but these are fragmented. Colin Mayer’s book “Firm Commitment” offers some really interesting ideas but it is difficult to see how these could be put into practice without some strong champions.

  11. Thanks Laura; that’s your reading tip?

  12. Definitely worth reading!

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