Professor Elise Bant, UWA Law School examines the complex and ineffectual laws that currently allow corporations committing commercial fraud to evade justice.
In the aftermath of Patricia Bergin SC’s damning report into Crown Resort Ltd and the corporation subsequently being found unsuitable to hold Sydney’s second casino licence, attention has rightly been focused on those at its helm.
Bergin’s analysis suggests that many of those who would normally be regarded as the company’s ‘directing mind and will’ have failed in basic ethical and legal respects and some important heads have rolled.
Meanwhile, a similar story has been playing out at Collingwood Football Club.
After the leaking of its Do Better Report, which identified ‘systemic’ racism at the incorporated club, senior figures within the club and football communities called for the head of long-serving President Eddie Maguire.
His resignation has been welcomed as an important step forward in the rehabilitation of the club.
But we should be wary of assuming that even a complete overhaul of the leadership teams of both organisations will necessarily fix what appear to be fundamental and embedded problems with their business structures, systems and practices.
My ongoing Australian Research Council funded project into Unravelling Corporate Fraud suggests that overly focusing on board misconduct or incompetence diverts attention from where the corporate mindset is truly manifested on a day to day basis – in its adopted systems, policies and processes.
Once that truth is grasped, the ramifications for corporate giants like Crown and Collingwood are powerful and profound.
Let me explain.
It’s an obvious fact that corporations aren’t ‘people’ like you and me. They are legal and ‘artificial’ people, who can do a lot of things that natural people cannot.
For a start, if all goes well, they never die. They can create dopplegangers of themselves (‘related entities’) for different purposes, often to limit or transfer their liability (like tax liability) to those related entities.
They can also operate simultaneously, 24 hours a day, across borders and increasingly possess wealth and power beyond those of nation states.
Corporations then, aren’t your average human. And that creates real problems for their effective legal regulation and control.
The law was built around natural people.
Consider the enquiry into whether Crown Resort is a ‘suitable’ person to hold its gambling licence. With a natural person, we would ask basic questions: for example, is the person honest? We know an ordinary, honest person when we see one.
Honesty is a basic community standard and it isn’t overly difficult to assess a natural person’s conduct against that standard, in light of what the person knew and intended at the time.
But with a corporation, what does ‘honesty’ look like?
As artificial people, corporations don’t possess a ‘state of mind’. Rather, they act through human agents such as directors, managers and employees. The rules about when it is possible to ‘attribute’ these individual agents’ intentions and knowledge to the artificial person (the corporation) are notoriously complex and restrictive.
Under traditional rules, only the knowledge and intentions of the corporations’ ‘directing mind and will’ (usually, directors and very senior managers) will count.
While this approach works comparatively well for small companies, it quickly breaks down for larger companies.
Larger corporations typically delegate tasks down the chain of command, divide responsibilities amongst its employees and create knowledge and information silos within the organisation.
Indeed, corporations that don’t want to be fettered by the law have every reason to structure themselves to dissipate knowledge and responsibility.
This means that Board members can, with hand on heart, plead ignorance of the misconduct occurring on their watch – protecting their corporation into the bargain.
Courts, parliaments and, most recently, the Australian Law Reform Commission have all tried to suggest ways in which to expand the relevant rules of attribution to capture this problem of ‘diffused’ responsibility. But, arguably, there is a simple and principled way forward, which doesn’t require us to introduce new and complex laws.
If adopted widely, it could mean a revolution in corporate responsibility.
Building on the work of leading philosophers, law reformers and scholars, the simple contention of my research is that the corporate ‘state of mind’ is manifested through its adopted systems, policies and practices.
Just as humans sometimes have to use external supports for their decision-making – a recipe to make a cake, a map to find a new location – so too corporations have to use external decision supports in the form of systems, policies and practices.
It is, in fact, critical for most corporations to have these in place because human employees, agents, managers and directors so frequently come and go.
Based on this approach, we shouldn’t only be looking for responsible, individual humans on which to hang corporate guilt. Rather, we need to look at what a corporation routinely and systematically does, and what are the effects of its systems, if we are to ascertain what it (the corporation) knows, intends or is reckless towards.
My collaborator, University of Melbourne’s Professor Jeannie Paterson, and I have argued that Australian courts have also been developing a similar concept of ‘systems intentionality’ to address ‘unconscionable systems of conduct or patterns of behaviour’ against consumers, who have been the victim of exploitative business models and practices (s21 Australian Consumer Law).
From this ‘systems’ perspective, Commissioner Bergin’s assessment of Crown as an ‘unsuitable person’ appears wholly justified. It also helps us to understand what it means when former-Collingwood footballer Héritier Lamumba alleges that Collingwood is a racist club.
But the new model also explains why, in order to redeem both organisations’ integrity as legal persons, there must first be a ‘root and branch’ reform of their systems, policies and processes.
Crown’s blameworthy conscience lies not only with its Board and senior management. Its guilty mind is revealed and operates within the systems, policies and processes that drive its misconduct.
Collingwood likewise must confront and address its ‘systemic’ racism.
In both cases, the corporate systems not only reveal a delinquent corporate culture (Criminal Code Part 2.5), but the detailed and defective workings of the corporate mind.
An important consequence of accepting this concept of ‘systems intentionality’ is that the all-too-familiar pleas of ignorance we hear from corporations and boards that it is somehow the system’s fault or a system’s error, will be turned on its head.
Powerful corporations will have to start taking seriously their responsibility for the defective and predatory systems that generate real harms, as well as profits.
Professor Bant will be launching her new book, Misleading Silence, on private law norms and
principles that seek to prevent, deter and remedy misleading conduct. Registrations to the event on 4 March 2021 can be made here.