Opinion
Cornelius Brandi 22 Dec 2017 10:47am

Can you future-proof against corporate scandal?

In 2017, we are unsurprised when a story of corporate scandal breaks. Whether it is allegations of fraud, corruption or tax evasion, we no longer wonder at the failures of senior public figures and companies to be entirely compliant and transparent

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Caption: How can corporates mitigate for scandals?

A recent example was seen in the Paradise Papers, leaked from an offshore law firm last month, where it appears no crimes have been committed, although those involved have certainly been indicted by the court of public opinion.

Governments and regulators now hold corporates to higher professional standards than ever before. The UK Bribery Act 2010 made it a crime for commercial organisations to fail to prevent bribery and authorities throughout Europe have been equipped with greater powers to confiscate assets relating to crime. It appears that no industry is immune from this type of scandal, and all are faced with greater scrutiny in public, political and regulatory spheres.

Current responses

Changes to legal and regulatory environments have led corporates to improve their compliance structures. Sometimes this is required by law; the French parliament adopted the Sapin II law in December 2016 which dictates the anti-corruption measures that large companies must implement. These include a code of conduct and an internal alert system for employees when they perceive any wrongdoing. In 2017, Poland and the Czech Republic have been developing legal requirements for firms to establish anti-corruption frameworks.

These types of measures are a priority for many companies even when they are not legally required. A survey of German companies carried out by CMS in 2016 found that an increasing number now have their own compliance department, rising from 28% in 2015 to 36%.

Moreover, two-thirds of the surveyed companies also had a training programme around mitigating risk of corporate crime, based on a code of conduct.

Firms are ensuring they are able to respond adequately in the event of wrongdoing.

Preparations for crises have taken a higher priority, with firms establishing defined clear lines of responsibility in the event of an incident.

Further to go

Despite these meaningful reforms, corporate scandals will continue to be a concern in today’s business world until further, more drastic steps are taken by management to prevent compliance failures. In a 2016 Kroll/Ethisphere Institute report, which surveyed 270 senior executives working in ethics and compliance worldwide, 40% believed that their organisation’s corruption risk would increase within 12 months.

The threat of fines for wrongdoing is a concern for corporates; there has been an upward trend in fines that can be levied in recent years. Sapin II includes provision for fines of up to 30% of the company’s turnover in certain circumstances, while many jurisdictions have introduced greater powers of confiscation of assets implicated in a crime.

Establishing a functioning compliance system is particularly challenging where corporates have global business operations. It is clear that different jurisdictions require their own specific anti-corruption measures. In some jurisdictions, bribery is perceived to be a necessary part of doing business, an action which carries serious penalties elsewhere.

Furthermore, while steps have been taken to equip employees with the tools they need to mitigate risk, compliance managers remain concerned. Of the German companies surveyed by CMS, 86% said that the biggest internal challenge remained establishing genuine awareness and acceptance of compliance issues among employees.

Solutions

Christopher Hodges, professor at the Oxford centre for Socio-Legal studies and keynote speaker at a CMS conference on international corporate crime in 2016, advised that achieving a globally applicable compliance culture requires an ethical approach to business. His research suggests that risk is mitigated most effectively among employees by appealing to their personal values and emotional responses to fairness and proportionality. Economic and other punitive measures rarely affect future behaviour.

Conference delegates thought however that a blend of both incentives and punishment were effective in practice to reduce risk of corporate crime. Richard Thomas CBE, member of the Committee on Standards in Public Life, noted that “regulators are far more tolerant where there is evidence of good ethical behaviours”.

A recent Federal Court of Justice ruling in Germany confirmed that a fine can be influenced by the extent to which a company satisfies its duty to prevent infringements through an efficient compliance management system.

The way ahead seems simple. To avoid liability in the future, management should demand and achieve the highest standards of ethical conduct at all levels within their organisation. This is the most effective way to safeguard against compliance failures.

Cornelius Brandi is executive chairman of international law firm CMS

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