Boards could be prosecuted for failing to prevent corporate crime



Experts anticipate ‘biggest change’ in corporate law amid broader crackdown on excessive pay and poor governance

Company directors could face prison if they fail to prevent corruption and fraud among their employees, according to mooted plans that suggest a broadening of prime minister Theresa May’s ongoing focus on corporate excess and malfeasance.

The plans, which are yet to be officially unveiled, would create a new offence of failing to prevent actions that lead to prosecutions for corruption and fraud.

At an event in Cambridge, attorney general Jeremy Wright said: “When considering the question ‘where does the buck stop?’ and who is responsible for economic crime, it is clear the answer is to be found at every level, from the boardroom down,” The Times reported.

Wright said the threat of prosecution would encourage businesses to “take the actions necessary to discourage such offending in the first place”.

Currently, companies are only liable for failing to stop bribery. The new legislation would prevent boards from claiming they were unaware of wrongdoing that was taking place at an operational level, and reflect the harsher approach to white-collar crime in the US. In future, it has been suggested, businesses could be prosecuted for crimes such as the Libor rigging scandal – when former city bankers, who were cleared of helping to rig the lending rate, claimed they had been scapegoated by senior bosses. Only one individual has ever been convicted for the offences.

Barry Vitou, partner in fraud and white collar crime at law firm Pinsent Masons, said a new bill would constitute the biggest change in the history of corporate criminal law in the UK. “The present regime makes it practically impossible to hold corporate boards to account for corporate misconduct because evidence of that misconduct must be found at the highest level. In practice, the evidence trail usually dries much lower down the corporate tree,” he said.

“There is no responsibility for the damage caused by failing to prevent economic crime nor incentives offered that motivate people to do the wrong thing.”

Matthew Gowen, barrister at law firm Birketts, who predicted the plans would face “sharp opposition”, said: “In the past, prosecutors have shied away from pursuing charges against companies in large fraud cases because of the requirement of the existing law to prove a ‘directing mind and will’ of a company was complicit in the offence. New proposals will borrow the criminal liability text already existing in bribery cases whereby companies can be prosecuted for ‘failing to prevent’ corrupt payments even if senior management had no immediate involvement in the dishonesty nor knowledge of it.”

The news comes as May pledges to make executive behaviour and remuneration a key focus of her administration. A report this week from the TUC further fuelled the debate by revealing that Britain’s highest-paid chief executive earned the equivalent of £38,437 per hour.

Sir Martin Sorrell, CEO of advertising agency WPP, was paid £70m in 2015 – more than 2,500 times the average UK salary, according to TUC analysis of FTSE 100 directors’ pay. The study also suggested that median pay (excluding pensions) of top FTSE 100 directors increased by 47 per cent between 2010 and 2015, to £3.4m. By contrast, average wages for workers rose just 7 per cent over the same period.

In 2010, a FTSE 100 boss earned 89 times the average full-time salary, but by 2015 this had risen to 123 times.

TUC general secretary Frances O’Grady said the findings highlighted why May must deliver on her promise to tackle executive pay, by putting workers on company boards and remuneration committees, a topic discussed in this month’s People Management.

She said: “While millions of UK families have seen their living standards squeezed, directors’ pay has reached stratospheric levels. These shocking new figures show why Theresa May must deliver on her promise to put workers on company boards.

“This would inject a much-needed dose of reality into boardrooms and help put the brakes on the multimillion pay packages that have damaged the reputation of corporate Britain.

“Other European countries already require workers on boards, so UK firms have nothing to fear. It improves performance and contributes to companies’ long-term success.”

The TUC also wants the government to require firms to disclose full information about employee pay across the company, and the ratio between the CEO’s pay and the average worker in the business. Organisations with high disparities perform less well, according to academic research.

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