Legal Personhood and Liability for Flawed Corporate Cultures

Legal Personhood and Liability for Flawed Corporate Cultures

Jennifer Hill

January 30 2019

Although the phrase, ‘corporate culture’, has been described by commentators as ‘inherently slippery’, it has become part of the global regulatory zeitgeist. It is now a central feature of a range international discussions about corporate governance and risk management. Numerous international regulators, such as the Basel Committee on Banking Supervision, the UK Financial Reporting Council, the Central Bank of Ireland and the Australian Securities and Investments Commission (‘ASIC’) have promoted the need for a positive corporate culture. It is also currently a major theme in the British Academy’s Future of the Corporation Research Program and in Australia’s high-profile Banking Royal Commission. The importance of culture is also becoming increasingly important in corporate governance codes, such as the 2018 UK Corporate Governance Code, and proposed amendments to codes in Australia and Germany, which stress, respectively, a listed corporation’s ‘social licence to operate’ and its ‘role in the community and its responsibility vis-à-vis society’.

In my recent study, ‘Legal Personhood and Liability for Flawed Corporate Cultures’, I examine the issue of liability arising from defective corporate cultures.  I discuss a number of recent corporate law scandals (including the Wells Fargo fraudulent accounts scandal, the Volkswagen emissions scandal, sexual harassment claims at Fox News and CBS, and various banking scandals under investigation in the current Australian Banking Royal Commission), which epitomize the danger posed by flawed corporate cultures. These scandals demonstrate that such organizational cultures can inflict damage on stakeholders, communities and society as a whole.

Legal regimes need to respond adequately to serious corporate wrongdoing. My study explores two potential types of liability for wrongdoing that arises from defective corporate cultures: (i) criminal liability of the corporation itself as a legal person (‘entity criminal liability’); and (ii) personal liability of directors and officers for breach of duty to their company.

The study examines these forms of liability from a comparative perspective, focusing on the legal regimes in the United States, the United Kingdom and Australia. As my study shows, there are significant differences between the law in these jurisdictions concerning both entity criminal liability and personal liability of directors and officers, which, in some cases, make these forms of liability ill-suited to achieve accountability for misconduct arising from flawed corporate cultures. For example, it is much easier to target the corporation itself for criminal liability under US law than under either UK or Australian law. On the other hand, Australian corporate law poses far greater risks of liability to company directors and officers for good faith oversight failure and breach of the duty of care than either current US or UK law.