Criminalisation of the Boardroom… I am too small a fish for it to happen to me…Right or Wrong?
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Earlier last month, I attended a legal update organised by the Institute for Turnaround and kindly hosted by Macfarlanes, a London-based law firm. The subject aptly titled “The Criminalisation of the Boardroom – is this a real threat to directors, or mere puff from the regulators?” was analysed by Neill Blundell (https://blog.macfarlanes.com/u/102f23y/neill-blundell), Head of Corporate Crime and Investigations at the practice.
My choice of the words ‘aptly titled’ above, reflects the relevance of the subject matter, given the various financial and accounting scandals dominating the newspaper headlines over recent years. Companies such as Tesco, BHS and Patisserie Valerie to name but a few, have seen their Directors in the dock and have had to deal with the fallout from any wrongdoing.
Such events can prove very damaging to firms both from a reputational and financial perspective, with many companies not only having to settle a hefty fine but also having to rebuild their corporate image. A reputation takes years to build and can be destroyed in very little time. For some companies, such scandals have even led to their complete collapse.
Small or big fish, we must abide by the law
So, it was good to see an update on how the law is evolving and tackling rogue Company Directors/Officers, and how bona-fide Directors acting in the best interest of a business can handle and mitigate the risks of getting it wrong. This is an important update as it only takes one complaint to land a business (small and large alike) in hot water.
So, what was the update about and why does it matter for small businesses?
As businesses of any shape, size and form are now blamed for the activities of its employees and its agents, the speaker gave an overview of where the criminal risk has increased. This is mainly described in the form of tougher regulation on:
- Bribery
- Manslaughter provision
- Money Laundering
- Terrorism financing
- Sanctions
- Tax Evasion
- Pension Reforms
The law aims to target the “controlling mind” of the company (generally its director(s)), with a consultation on the way to extend its power to prosecute failure to prevent wrongdoing (and to include advisors).
The Serious Fraud Office (SFO), the body in charge of “white collar” criminal investigations and prosecutions, has a new director. The newly appointed Head is not only embracing smart technology and AI to tackle financial fraud, corruption and crime, but interestingly, is looking deeper into the makeup of a company. Considering doctrines, culture, behaviour, process systems and control, giving a more holistic approach to prosecution.
Other bodies that have the power to investigate and prosecute include (but are not limited to) HMRC, the Secretary of State under the Department for Business, Energy and Industrial Strategy, the Financial Conduct Authority (FCA) and the Information Commissioner’s Office (ICO).
So, what are the 3 key concerns and issues that small business directors/owners need to be aware of:
1- Director’s liability is alive and well, so understanding Director’s duties is paramount. Just in case we need a reminder, here are the General Duties of Directors under UK Company Law (https://www.legislation.gov.uk/ukpga/2006/46/part/10/chapter/2 )
- Duty to act within powers
- Duty to promote the success of the company
- Duty to exercise independent judgment
- Duty to exercise reasonable care, skill and diligence
- Duty to avoid conflicts of interest
- Duty not to accept benefits from third parties
- Duty to declare interest in proposed transaction or arrangement
2 - Another concern is the Director’s failure to understand both the risks within the business as well as the risks within the sector(s) the business operates in.
Risks within the Business includes (but not limited to)
- Failure to appreciate establishing and following internal systems of controls within the business, such as Anti-Money Laundering checks, policies and procedures preventing bribes and fraud, and more importantly defining what the culture of the business is, its values and integrity with supporting policies that allow employees to speak up.
Risks within the sectors the business operates includes (but not limited to)
- Failure to appreciate establishing and following internal systems of controls, such as solid policies and procedures concerning customers in riskier jurisdictions which are subject to sanctions, dealing with (and checking) 3rd party engagement, gifts & hospitality, government contracts, facilitation of payments and conducting thorough due diligence if buying or selling a business.
3 - Failure to appreciate reputational risks as well as costs risk in dealing with an investigation.
So, what can small business directors/owners do to help themselves and their business?
- Take risk assessments and understand your business risks.
- Review the business culture, its values and integrity when delivering its activities. Ask - are we doing things well and getting it right for all stakeholders?
- Take time to review your policies and procedures and plan for the event of crisis. Establish solid policies and procedures for the business that cover everything from health and safety to internal communications to vendors agreements to cyber security to dealing with customers. Monitor that the policies and procedures are being followed correctly.
- Establish an educational and compliance programme that will enable cascading information and consistent, open, transparent and easy to understand messages to all employees.
- Prepare or do a thorough Due Diligence – ask difficult questions.
- Keep records in order and up-to-date.
IMPORTANT Note: If you or your business is the subject of an investigation it is very important that you seek specialist help as early as possible. Cooperate but do not attempt to deal with investigations alone. You can contact the speaker and his team on the link above (https://blog.macfarlanes.com/u/102f23y/neill-blundell), or get in touch with us, and we will do our best to help you find the right help.
Be Rescued – can help you review and analyse your business risks
- Do you need any help implementing processes and systems to help you deal effectively with your business risks?
- Be Rescued is there for the good times and the bad times. We can help your business turn things around and will work with you to help resolve any business process issues and identify risks early enough so you are in control.
If you have any business or financial issues that you need help with or you would like to discuss this article, please contact us on 01366 387 672.