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LEGAL ENFORCEMENT OF CORPORATE AND PROFESSIONAL MORALITY
DEAN LETCHER, QC*
“(Holmes was) an isolated phenomenon, a brain without a heart,
as deficient in human sympathy as he was pre-eminent in
intelligence”.
Dr. Watson in “The Greek Interpreter” by Conan Doyle1 expressing a view
commonly held about business corporations and some lawyers.
INTRODUCTION:
A society may not be able to legislate morality but any just society will try to have
laws encouraging equity and discouraging inequity.
The role of legal sanctions in promoting the one and punishing the other is
examined in the context of the corporate and professional life of 21st century
Australia with recent examples. Some sanctions are contained in legislation
while others arise from a new emphasis given by the Judges.
Usually moral pressure is assumed to emanate from the public and that will put
pressure on public figures. Legal sanctions represent “top down” pressure
towards a just society.
Two examples of legal sanctions having an effect on business morality:
1) Bankrupt barristers operated at the highest levels of Australian law
without any difficulty. Sir Garfield Barwick as a barrister went bankrupt
in the 1930s and later became Chief Justice of the High Court without a
murmur.
However, when it became known within the past few years that
barristers were failing to file tax returns for 20 years, and going serially
bankrupt 2 or 3 times yet were still free to make millions of tax free
dollars in their profession, the Bar Council acted.
It was legal but morally repugnant. The New South Wales Legal
Profession Act was later amended2.
It is now commonly accepted that compliance with tax obligations is a
professional responsibility.
2) A publicly listed company, James Hardie Industries Limited made
millions from selling asbestos materials while it knew there was a risk to
health for the users of the goods. It paid judgments in successful cases.
The James Hardie Group decided to restructure and move offshore to
the United States supposedly to save withholding tax, but this also had
the effect of cutting off funds for claims of future asbestos victims. In
proceedings before the New South Wales Supreme Court to approve the
scheme, a judge was informed by counsel for the company that
sufficient provision had been made for a trust fund sufficient to pay all
likely future claims.
That assertion was later shown to be quite false. Actuaries were asked
the wrong question and the nature of the answer was wilfully
misinterpreted. The provision was about one quarter of what may be an
adequate figure.
The State Government in New South Wales set up an enquiry, proposed
legislation to lift the corporate veil and trace the funds not because of the
original sin, but because of the corporate shuffle. More pointedly, the
Chief Executive Officer and Chief Financial Officer were recommended
for criminal prosecutions.
Is an outcome that is a mere populist witch-hunt or an expression of
public morality?
One thing is certain. Once it is proved that a judge has been misled by
untruths or misstatements from professionals, the public gives the
professionals a hard time. James Hardie Group lost all the public and
political support it had attracted before its manoeuvre was revealed.
There are a number of truisms that are not so true these days:
1. MORALITY CANNOT BE ENFORCED BY LAW.
ANSWER
1) The enforcement of a law changes the public’s perception of the
behaviour from morally neutral to immoral, disapproved or
reprehensible. Because it is punished, people will think it is punishable
e.g. drink driving, collecting child porn off the net.
2) Ninety percent of the community is law abiding and it will abide by the
law if it is enforced even if they perceive the law as unnecessary or silly,
e.g., 50 k.p.h. traffic zones, quarterly Business Activity Statements for
the tax office.
If it is not enforced then a law will be seen increasingly as obsolete and
not to be observed, e.g., until recently harbourside jetties and drivers
using mobile phones
3) If there is a carrot as well as a stick, the community will make a virtue
out of a necessity.
If there is a benefit shown from compliance as well as a detriment from
not complying, the public may conceive it as a good and virtuous thing to
do, e.g. smoke free zones, car seat belts, "insider" trading in listed
securities.
2. PROFIT RULES ALL.
ANSWER
1) The Jeremy Bentham principle that man exists to maximize pleasure
and minimize pain and will act logically towards that goal means that
profit will be maximized only to the extent that the profit taker does not
suffer adverse consequences at the same time. However, some studies
of human decision making tend to undermine the theory that people act
logically in making economic decisions.
People are keener to avoid a loss than they are to make an equivalent
gain. This explains why money share traders keep their bad shares
rather than crystallize the loss. This applies to companies just as much
as individuals.
2) “He took my cheese.” A whole book3 was written about nursing a hurt
rather than moving on and mitigating the loss. Just as true for
corporations.
3) Very often the impulse is to minimize loss rather than maximize gain. A
lot more money is laid each way on the favourite rather than straight out
on the outsider.
4) If the probable gain is very small but the possible loss likely to be
occasioned is very large, then profit will not be seen as the most
important factor.
3. THE ENFORCEMENT/PUNISHMENT MATRIX.
By this I mean that a high likelihood of being caught but a minor punishment
resulting may be just as discouraging to a potential wrongdoer as a low likelihood
of being caught but then a severe punishment being inflicted.
This sort of matrix is used in policing around the world so that in some south east
Asian and Middle Eastern countries the likelihood of being caught is very small
but the punishments are very severe, whereas in western European countries the
likelihood of being caught is high but the punishments are much less onerous.
On a 2x2 matrix low risk high penalty may be equivalent to high risk low penalty
objectively and possibly also subjectively
ANSWER
1) In practice we define our own significance of particular punishments and
the awareness of the consequences tends to vary with individuals. The
“Bali Nine” drug mules were objectively aware of capital punishment if
they were caught for drug smuggling yet were prepared to risk it for a
tangible free holiday and a payment of about $10,000.00.
Most business executives involved in trade practices’ breaches cared
little about public revelation of wrongdoing or the potential of jail if that
potential did not appear to be great.
However, in recent times we have seen both the likelihood of being
caught (risk) and the likelihood of severe punishment (penalty) both
rising dramatically in this area. This is so In Australia and the United
States of America.
4. “WHERE THERE IS MUCK, THERE IS BRASS”.
ANSWER
This old English saying used to mean that if you got down and got your hands
dirty then money could be made. More recently, this has meant that wrongdoing
was profitable, e.g. illegal discharges to the environment, "insider" trading in
listed securities. The days when dirty dealing was profitable appear to be coming
to an end. I wrote this before the Steve Vizard4 case came to light but I would
still maintain it is correct. Vizard, while a director of Telstra Corporation Limited,
set up an investment company, which dealt in securities based on his knowledge
of intended Telstra deals.
This time the Australian Securities & Investments Commission ("ASIC") acted,
but only to seek a civil penalty rather than a criminal prosecution (a decision
which was highly criticised in political and business circles as well as in the media
and wider community).
It was true in the days when white collar crime was barely enforceable and
modestly punished but the mood has changed and a lot of companies are now
seeing practical profit in being good moral citizens. This is partly because major
purchasers of their shares are superannuation or other funds whose fund
managers are amenable to pressure from activist groups.
The high point in freedom from liability of companies for their subsidiaries and
freedom for directors from liability for the company’s acts has been reached and
in fact overtaken. Doctors have always had direct liability but now company
directors are increasingly held to account directly for the misdeeds of their
companies. They are gradually sliding into jeopardy and becoming dangerously
close to strict liability for the company’s debts.
There is still a great reluctance by Courts to lift the corporate veil but this is
changing. Class actions in the Federal Court of Australia against GIO Australia
and its directors, against the directors and lawyers of Australian Mineral
Explorations and against HIH directors signal a shift in sentiment.
CONCLUSION: ENFORCEMENT CHANGES PERCEPTION:
Company directorships were once largely risk free sinecures but recently ASIC
has taken:
civil proceedings for compensation if the company traded while insolvent
(John Elliott and Water Wheel, Jodie Rich and One-Tel);
• launched prosecutions for breach of duties (Alan Bond and now Tony Oates
for Bell Resources, Brad Cooper and others in HIH);
• action for civil penalties for circumstances involving insider trading (Steve
Vizard); and,
• criminal proceedings for insider trading (Rene Rivken and Bart Doff).
Financial advisers are now under keen scrutiny for liabilities arising from tax
schemes where the tax-payers have been given substantial financial penalties
and penalty interest bills but the promoters of the schemes have taken their fees
and remain immune. The recent revelations of schemes promoted by Swissbased
lawyers combined with the draconian penalties being handed out in the
USA (Mr. Ebbers of WorldCom receiving a sentence of 25 years).
Returning to the James Hardie Group, views have been expressed that Meredith
Hellicar (Chairman of James Hardie Industries Limited) could be sued to the limit
of her assets for her role in the off-shoring and that criminal prosecutions could
be taken against the ex-managing director, Mr. McDonald. In Australia these are
still threats in the future but the American experience is altering the perception of
how close these possibilities may be to reality.
Governments are intervening on a moral basis in the James Hardie saga. The
New South Wales government has taken a leading role enforcing a revision of
the trust fund while the Federal Treasurer was highly critical of the company in
public and in private discussed particular mechanisms which could be used to
disadvantage the company.
“ECONOMIC” HUMAN RIGHTS:
As well as formal human rights, economic justice is a value in society so that
shareholders do not see their savings wiped out and small traders are not
coerced into unfair agreements or bullied out of competition by large
corporations. Not so long ago directorships were valued because of the insider
trading opportunities given and the “in club” information about risky companies
exchanged in confidence.
Today, there is a determined effort to change this situation. The duty of
“continuous disclosure” of financial prospects to the market means telling the
Australian Stock Exchange ("ASX") of any unexpected downturns – e.g.,
Multiplex, Telstra. It is now being considered a breach of law to fail to keep the
ASX informed.
Section 674 of the Corporations Law5 requires continuous disclosure of
information that could have a material effect on the price of listed shares or
debentures. Under section 1311(1) failure to do so is a criminal offence and
under section1317E such failure can also attract a civil penalty.
Now, such provisions are seen as being important and morally significant. This
affects the Authority which enforces the law as well. The adverse public
response to the way in which the Steve Vizard matter was handled means that
the Australian Federal DPP is highly unlikely to make another Steve Vizard
decision to accept a civil penalty instead of taking a criminal prosecution.
SUMMATION:
Legal enforcement alters public perception. Business and professional life were
once seen as divorced from usual rules of personal morality. This seems to be
undergoing a shift with an increasing emphasis on taking into account wider
public interests whether economic, environmental or social. The impact on public
life is an element of growing importance in law enforcement.
The cynical 19th Century saying still has an element of truth but (to up-date to the
words of Bob Dylan), the times they are a changing:
The law doth punish man or woman
that steals the goose from off the common
but lets the greater felon loose
who steals the common from the goose.
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