MGMT20144 Management Business Context Master of Business Administration (MBA) School of Business and Law MGMT20144 Management Business Context Unit 6 Governance Options for different Organizations Introduction According to the Australian Institute of Company Directors (2016), ‘Corporate Governance is a broad-ranging term which, amongst other things, encompasses the rules, relationships, policies, systems and processes whereby authority within organisations is exercised and maintained.’ The governance characteristics of an organization are formed by a variety of factors, both "internal" (e.g. constitution, organizational policies) and "external" (e.g. laws, regulations, community expectations). A board of directors plays a key role in guiding an organization's governance environment. An effective governance framework would have suitable regard to the: ⦁ contribution of individual directors; ⦁ effectiveness of the board and board performance; ⦁ way in which governance is applied throughout the organization; ⦁ strength of the relationships the organization cultivates with its stakeholders. Learning objectives This unit has the following learning objectives: ⦁ introduce some basic legal terms and concepts to business students as well as high-lighting some of the areas of law which may be relevant to the business manager. ⦁ To understand the concept of Governance in relation to business organizations. ⦁ Examine the role of boards and executives in Governance of business organizations. ⦁ Apply knowledge and skills gained from this unit towards resolving business challenges and issues. ⦁ Fundamental Styles of Corporate Governance No two companies are the same, however they all share the need for some form of corporate governance. Corporate governance balances the interests of the board of directors, the management executives of the company and stakeholders, whilst also providing a structure that establishes the objectives for the company and the methods for achieving these objectives and finally evaluating performance. There are several approaches to corporate governance to suit differing needs of companies. Unitary Board The unitary board consists of executives, such as the managers of the company and non-executives who have no prior ties to the company before their appointment. Communication flows well among executive members because all are privy to corporate information and data. In this setting, chief executive officers are often extremely powerful because they also hold the chairperson position. Company policies are dependent on their direction. Companies sometimes balance this aspect by establishing different committees such as audit, compensation and nominating; non-executives, or independent directors, often control these committees. Dual Board When a company has a management board and a separate supervisory board, it operates under dual boards. Under this type of structure, the shareholders elect the supervisory board which supervises the management board. The management board manages the company's daily operations. Because the two boards are independent, they balance the roles of the CEO and chairman, but the flow of information might not be fluid because of a lack of direct contact between the executives of each board. A major risk in this style of corporate governance is that a majority shareholder might dominate the supervisory board. Partnership Management A partnership style of corporate governance is characterized by a highly involved board and top management. A culture of transparency and support is necessary for the two groups to work together setting up the company’s policies, strategies, objectives and missions. In order to give feedback to the top management on execution of approved policies and strategies, board members actively participate in committee work. Moreover, they also use strategic audits. This style of corporate governance is successful because each area recognizes that the board and management need to be aligned on the organization’s direction. Three Types of Corporate Government Mechanism Effective corporate governance is essential if a business wants to set and meet its strategic goals. A corporate governance structure combines controls, policies and guidelines that drive the organization toward its objectives while also satisfying stakeholders' needs. A corporate governance structure is often a combination of various mechanisms. Internal Mechanism The foremost sets of controls for a corporation come from its internal mechanisms. These controls monitor the progress and activities of the organization and take corrective actions when the business goes off track. Maintaining the corporation's larger internal control fabric, they serve the internal objectives of the corporation and its internal stakeholders, including employees, managers and owners. These objectives include smooth operations, clearly defined reporting lines and performance measurement systems. Internal mechanisms include oversight of management, independent internal audits, structure of the board of directors into levels of responsibility, segregation of control and policy development. External Mechanism External control mechanisms are controlled by those outside an organization and serve the objectives of entities such as regulators, governments, trade unions and financial institutions. These objectives include adequate debt management and legal compliance. External mechanisms are often imposed on organizations by external stakeholders in the forms of union contracts or regulatory guidelines. External organizations, such as industry associations, may suggest guidelines for best practices, and businesses can choose to follow these guidelines or ignore them. Typically, companies report the status and compliance of external corporate governance mechanisms to external stakeholders. Independent Audit An independent external audit of a corporation’s financial statements is part of the overall corporate governance structure. An audit of the company's financial statements serves internal and external stakeholders at the same time. An audited financial statement and the accompanying auditor’s report helps investors, employees, shareholders and regulators determine the financial performance of the corporation. This exercise gives a broad, but limited, view of the organization’s internal working mechanisms and future outlook. Corporate Governance Principles and Recommendations – Australian Stock Exchange (ASX) Corporate Governance Council The structure of the Principles and Recommendations The Principles and Recommendations apply to all ASX listed entities, regardless of the legal form they take, whether they are established in Australia or elsewhere, and whether they are internally or externally managed. Some recommendations require modification when applied to externally managed listed entities. There is a separate section immediately after the recommendations below explaining how externally managed listed entities should apply and make disclosures against the recommendations. The Principles and Recommendations are specifically directed at, and only intended to apply to, ASX listed entities. However, as they reflect a contemporary view of appropriate corporate governance standards, other bodies may find them helpful in formulating their governance rules or practices. The Principles and Recommendations are structured around, and seek to promote, 8 central principles: 1. Lay solid foundations for management and oversight: A listed entity should establish and disclose the respective roles and responsibilities of its board and management and how their performance is monitored and evaluated. 2. Structure the board to add value: A listed entity should have a board of an appropriate size, composition, skills and commitment to enable it to discharge its duties effectively. 3. Act ethically and responsibly: A listed entity should act ethically and responsibly. 4. Safeguard integrity in corporate reporting: A listed entity should have formal and rigorous processes that independently verify and safeguard the integrity of its corporate reporting. 5. Make timely and balanced disclosure: A listed entity should make timely and balanced disclosure of all matters concerning it that a reasonable person would expect to have a material effect on the price or value of its securities. 6. Respect the rights of security holders: A listed entity should respect the rights of its security holders by providing them with appropriate information and facilities to allow them to exercise those rights effectively. 7. Recognise and manage risk: A listed entity should establish a sound risk management framework and periodically review the effectiveness of that framework. 8. Remunerate fairly and responsibly: A listed entity should pay director remuneration sufficient to attract and retain high quality directors and design its executive remuneration to attract, retain and motivate high quality senior executives and to align their interests with the creation of value for security holders. (Source: Corporate Governance Principles and Recommendations – Australian Stock Exchange (ASX) Corporate Governance Council, 2014) Governance & Law There are many definitions of ‘law’ – a basic one is that the law encompasses those rules governing relationships between members of society (civil law) and between the government and its citizens (criminal law) to avoid conflicts. Looking at the definition, it raises concepts of control, regulation, certainty, security, society values (economic, political, moral), justice and natural law. What is the purpose of law? ⦁ Regulates behavior ⦁ Avoids disputes ⦁ Settles disputes ⦁ Assists in accepting change ⦁ Allocates power, authority and tasks within a group ⦁ Scientific laws. ⦁ Reflection of society’s values (social, moral, economic, political). Who makes Australian laws? ⦁ Parliament (Commonwealth and State) which includes delegated and subordinate legislation; and ⦁ the Senior Australian Courts (common law and precedent). Classification of international law and domestic law. ⦁ public international law- rules that regulate conduct of countries when dealing with other countries; ⦁ private international law – rules that apply to individuals and companies at an international level; ⦁ domestic law- regulates individuals within a country. What areas of law might be relevant to businesses? ⦁ contract; ⦁ torts such as negligence, defamation, passing-off; ⦁ company law; ⦁ consumer and competition law; ⦁ employment law, ⦁ criminal law; ⦁ credit law; ⦁ equity and trusts. To tie in with the case study, we will focus on company law and anti-corruption law. Company Law What is a company? A corporation? Is there a distinction? A corporation is an artificial body recognized by the law. The main features are that it has a legal existence and it has perpetual succession. A company is a type of corporation. Companies are very popular as a business structure and therefore it is important for business managers to have an understanding of company law. Another business structure common in Australia is the ‘partnership.’ In Victoria, partnerships are governed by the Partnership Act 1958 (Victoria) and the contractual arrangements between the partners in a partnership agreement. S 5 of the Act describes a partnership as one where two or more persons carry on business in common with a view to profit. ‘The sources of Australian company law are the Corporations Act 2001 and the Australian Securities and Investments Act 2001 (both pieces of legislation being Commonwealth legislation and collectively referred to as the ‘corporation’s legislation’) and the law made by the courts. A vital area in company law is corporate governance which encompasses the duties and responsibilities of those persons managing a company. Corporate governance is about the protection of shareholders’ rights, the equal treatment of all shareholders, the effective monitoring of management by the Board of Directors, the Board’s accountability to the company and to the shareholders and timely and accurate disclosure. Therefore, issues such as internal governance rules, the role of and duties of directors and other officers of the company are pivotal to corporate governance. The management of a company is usually vested in the Board of Directors who are usually elected by the members at a meeting of members. Collectively, the Board of Directors is considered the agent of the company. With the powers and responsibility of management vested upon the Board of Directors, there are the corresponding responsibilities and liabilities. Duties arise under general law – the common law and fiduciary duties - imposed on the directors and senior management. Under the Corporations Act, duties are imposed on (depending on particular statutory provisions): ⦁ directors (including de facto and shadow directors ie persons who have not been formally appointed as directors by the members at general meetings but who act in the position as directors or persons from whom Board of directors are accustomed to act in accordance with that persons instructions or wishes – s 9 of the Corporations Act (to be referred to as the Act); ⦁ officers (including directors and persons who makes or participates in making decisions that affect the whole or a substantial part of the business of the corporation or who has the capacity to affect significantly the corporation’s financial standing and so forth as defined in s 9); ⦁ employees and in one instance, past employees (see s 183 of the Act) Briefly, the statutory duties are: (a) the duty of care and diligence (s 180) Essentially, the issue evolves around the standard of care directors and officers must exercise - it varies and depends on the care and diligence a reasonable person would exercise if they were a director and officer of a company in the company’s circumstances (s 180(1)(a) and occupied the office and had the same responsibilities as the director or officer in question (s 180(1)(b)). The standard of care has changed from a more lenient and subjective approach in Re City Equitable Fire Insurance Co Ltd [1925] Ch 407 where the standard of care was the care that an ordinary person might be expected to take on their own behalf ie the standard of care was measured according to the particular director’s knowledge and experience. Today, the leading case on the expected standard of care, skill and diligence of directors is AWA Ltd v Daniels (Trading as Deloitte Haskins & Sells); on appeal Daniels v Anderson (1995) 37 NSWLR 438 where minimum standards were set out which requires a director, must, amongst other things: - ensure he/she has a basic understanding of the business of the company ; - familiarise himself with the fundamentals of the company’s business and the financial status of the company; - keep him/her informed about the activities of the company. The standard set down by the Court of Appeal required directors to abide by an objective standard which did not allow for excuses such as the lack of knowledge or lack of experience. It was also held by the Court of Appeal that the same standard of care applied equally to executive and non-executive directors. (b) the duty to act in good faith and in the best interests of the company and for a proper purpose (s 181); ⦁ What is meant by “in good faith” and “in the interests of the company?” When a director acts in good faith, he/she is said to be acting honestly and at the same time believing his/her act to be for the benefit of the company. As to the meaning of ‘interests of the company’ it is generally taken to mean the members collectively as a general body and often described as “the company as a whole” (Greenhalgh v Arderne Cinemas Ltd [1946] 1 All ER 512 per Evershed MR). The directors and senior management must also exercise their powers for a proper purpose. In Mills v Mills (1938) 60 CLR 150, Dixon J said at pg 180: “Directors of a company are fiduciary agents, and the power conferred upon them cannot be exercised in order to obtain some private advantage or for any purpose foreign to the power.” In determining whether there has been a breach of this duty, the court will firstly, look at the particular power by scrutinising the internal rules and secondly, examine the facts to determine the directors’ actual reason or purpose for exercising the power. Therefore, the Court will analyse the substantial purpose for which the power is exercised (Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821). If the main purpose of the director in exercising the power was improper – for example issuing shares for the purpose of maintaining control of the company or its major assets and to reduce the majority shareholding of majority shareholders- then there is a breach of this duty to act for a proper purpose. s 181 is breached even if directors believe they are acting in the best interests of the company but no reasonable director could have reached that conclusion which is similar to the approach in relation to the equivalent fiduciary duty. (c) the duty not to improperly use their position to gain advantage for themselves or someone else or cause detriment to the company (s 182); (d) the duty not to use information obtained by virtue of their position in the company to gain an advantage for themselves or someone else or cause detriment to the company (s 183); These provisions reflect the fiduciary duty to avoid conflicts of interest. These two statutory provisions are extended to employees so that they and the directors and officers must not place themselves in a position where there is actual or potential conflict of interest between their own personal interest and their duty to act in the best interest of the company. The issue of disclosure (see below re: s 191) becomes very relevant in these circumstances. (e) the duty to prevent the company trading whilst insolvent (s 588G); The elements of the duty, which is imposed on directors only, are set out in s 588G. It requires the company to incur a debt when the company is insolvent or becomes insolvent as a result of incurring the debt and the director is aware at the time the debt is incurred that there are reasonable grounds for suspecting the company is insolvent or a reasonable person in a similar position in the company in the company’s circumstances would be aware and fails to prevent the company from incurring the debt. S 588G also requires the company to incur a debt. As to the meaning of “incurring a debt,” S 588G(1A) sets out the circumstances where a debt is a deemed debt- for example, a reduction of share capital. Solvency, or otherwise, is defined in s 95A. A company is insolvent if it is unable to pay all its debts as and when they become due for payment. Other requirements of s 588G are that the directors must also have reasonable grounds for suspecting insolvency. According to the High Court in Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266, “suspecting” means more than mere speculation and involves “a positive feeling of actual apprehension.” s 588G(2)provides that the director contravenes this section when the director is actually aware that there were reasonable grounds for suspecting insolvency or if not actually aware, a reasonable person in a similar position in a company in the circumstances of the company , ie a reasonable director, would have been aware and he fails to prevent the company from incurring the debt. Note that the contraventions of these statutory duties are deemed to be contraventions of civil penalty provisions (see below). Other obligations relate to issues such as: (i) disclosure – there is a duty on directors to disclose or notify other directors of material personal interest that relates to the affairs of the company (s 191). Note that a contravention of s 191 is an offence of strict liability. Another ‘disclosure’ issue may arise in the contexts of those public companies (or other bodies such as trusts) which are listed on and their shares quoted on the Australian Stock Exchange (ASX). The ASX Listing Rule 3.1 (also known as the ‘General Rule’) requires the company to immediately inform the ASX of information that a reasonable person would expect to have a material effect on the price or vale of its securities once or when it becomes aware of the same. Contravention of this Rule may lead to liability imposed on persons involved in the company’s contravention of the Rule. (ii) related-party transactions – a corporation is not to give financial benefits to a related party (for example, directors and their spouses) unless the shareholders agree and persons (not limited to the directors) involved in the company’s contravention of this provision are deemed to have contravened a civil penalty provision. Examples of financial benefits include loans and issues of shares. (iii) taxation legislation – the Income Tax Assessment Act 1997 (Cth) imposes liability on the directors to pay the company’s unremitted group tax and other similar payments. (iv) insider trading – this usually describes a person who has ‘price-sensitive’ information and uses it to profit himself or another person by dealing in securities. Insider dealing is dealt with mainly in s 1043 of the Act and the elements are: ⦁ where a person (the insider) possesses inside information (that is information that is not generally available and if it were generally available, it might have a material effect on the price or value of the relevant financial product); ⦁ the insider knows or ought reasonably to know that the information is inside information; ⦁ they must not trade or procure any other person to trade those financial products. Insider dealing also covers communicating the information on financial products quoted on the ASX to another person. Contravention of s 1043 is a contravention of a civil penalty provision although criminal liability may be imposed if there is dishonesty involved. The consequences of contravening the Corporations Act In regard to civil liability and as noted above, some provisions of the Corporations Act are deemed to be civil penalty provisions. The regulatory body of companies, the Australian Securities and Investments Commission (ASIC) are empowered to seek a court declaration that one or more civil penalty provisions have been contravened by the person(s) in the application and ask for any or more of the following civil penalty orders be made against the persons: ⦁ pecuniary orders; ⦁ compensation orders; ⦁ disqualification ie banned from taking part in management of companies. As to criminal liability, this is largely regulated by the corporation’s legislation and its relationship with the Crimes Act 1914 and the Criminal Code 1995. Criminal proceedings are initiated by the Commonwealth for contraventions under Commonwealth legislation such as the corporation’s legislation. Examples of criminal liability arising from contraventions of the Corporations Act include: ⦁ s 184 – an offence if there is recklessness or intentional dishonesty in relation to ⦁ s 181, s 182, s183, s 588G; ⦁ s 209(3) – an offence if dishonest involvement in related party transaction; ⦁ s 344(3) – an offence if dishonestly fails to secure compliance with financial reporting requirements; In relation to share capital requirements eg buybacks, capital reductions etc – offence if dishonestly involved in contraventions of provisions; In relation to insider trading, an offence if dishonestly involved in contravention of provisions. Criminal sanctions on conviction include: ⦁ fines; and/or ⦁ imprisonment. A recent case example on the imposition of civil penalties on directors is the case involving the executive and non-executive directors of James Hardie Industries Limited (ASIC v Mcdonald (No. 11) [2009] NSWSC 287). An earlier and high profile saga involved Rodney Adler in connection with the collapse of HIH Insurance Ltd. There were about seventeen civil and criminal proceedings involving Mr. Adler over a period of 5 years prior to Mr. Adler spending some time in jail. Anti-corruption legislation Corruption includes bribery, embezzlement, nepotism and extortion and they are covered in many Commonwealth and State legislation. Bribery is considered to cause distortion in markets, impedes national development and can also be linked to terrorism. However, many businesses believe that they will not be able to win international contracts unless they pay a bribe. In any event, as part of the international efforts to ensure that contracts are won fairly, Australia has embarked on a campaign to raise awareness of the serious consequences of the crime of bribing foreign officials. Many countries have anti-corruption legislation. Note though that an important issue seems to be the will of the regulatory bodies to enforce these laws which in most cases will necessarily involve the cooperation from international authorities and other foreign bodies. We will briefly examine two foreign pieces of anti-corruption legislation – those from the United States of America and the OECD. (a) The Foreign Corrupt Practices Act 1977 (USA) The main features are: ⦁ contraventions of the legislation may lead to criminal sanctions and civil remedies. Criminal sanctions include: ⦁ fines of up to $2m for businesses with individuals facing fines of up to $100,000; ⦁ imprisonment. Civil remedies such as compensation and, injunctions may be obtained against the party contravening the law. There are other possible consequences of violation of the relevant legislation such as loss of government contracts, loss of privileges and support from government agencies locally and overseas and loss of investment protection abroad. ⦁ the laws are enforced by the Department of Justice; ⦁ the laws are applicable to any individual, firm, officer, director, and employee, agent of firm or stockbroker acting on behalf of firm. It is also applicable where any of them order, authorize or assist another to break the law. The laws apply to any U.S. citizen wherever they might be world-wide so that breaches of the US law may involve breaching of the local law; ⦁ The law is applied where the individual or company: ⦁ had corrupt intent; ⦁ had bribed a recipient who is a foreign official, a foreign political party or party official or candidate for foreign political office and ⦁ paid money or anything of value, including offers and promises to pay or authorizing payment or offer; ⦁ made payments in order to assist a firm etc in retaining or obtaining business for or with or directing business to any person. Note that it is also illegal to make corrupt payments through intermediaries. There are exceptions and the main ones are that the payments (to the foreign officials etc) were the usual payments such as visas for its expatriate employees or that the payments were not in breach of the local law. On a historical note, because of the Foreign Corrupt Practices Act, American businesses found themselves in a situation where they were losing foreign contracts. As a response, the US administration pushed for similar laws to be passed by her trading partners and the result is the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions which was signed by 38 signatory countries. In 2009, there were further recommendations which introduced new measures to reinforce the OECD’s efforts in combating bribery of foreign officials. Australia ratified this Convention in 1999 and as a result, the Criminal Code was amended to include the anti-bribery provisions in the Criminal Code Amendment (Bribery of Foreign Public Officials) Act 1999. In 2005, Australia ratified the United Nations Convention against Corruption. (b) The Bribery Act 2010 (UK) This Act received the Royal Assent on 8th April 2010. The main offences are of: ⦁ bribing another person; ⦁ in relation to being bribed; ⦁ bribing a foreign public official; ⦁ failing to prevent bribery. (c) OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions The Organisation for Economic Cooperation and Development (OECD) adopted the Convention on Combating Bribery of Foreign Officials in International Business Transactions (the Convention) on 21 November 1997 in recognition of the pervasive incidence of bribery in international business transactions. The Convention entered into force on 15 February 1999 and has been ratified by all 34 member countries of the OECD (of which Australia is one) and Argentina, Brazil, Bulgaria and South Africa (Barker, 2012). As a signatory to this convention Australia is obliged to abide by its definitions of bribery and corrupt acts and to investigate and act in accordance with its recommendations regarding obligations to parties to the convention. The OECD represents a significant register of key trading partners for Australia, thus it is in effect a template for global practice. (d) The Criminal Code Amendment (Bribery of Foreign Public Officials) Act 1999 In Australia this is a piece of Commonwealth legislation (referred to as the Act), provides for the offence of bribing foreign officials. Briefly, it is a crime to provide or offer a benefit to another person, or causing a benefit to be provided or offered to another person where the benefit is not legitimately due. Further, the benefit must be intended to influence a foreign public official in the exercise of their official duties for the purpose of obtaining business or a business advantage. The Act applies to Australian citizens or residents and corporate bodies incorporated under Australian law. The conduct in question must occur wholly in Australia or wholly or partly on board an Australian aircraft or ship, or wholly outside Australia. The maximum penalties on conviction of the offence of bribing a foreign public official are imprisonment for 10 years and or a fine of $66,000. With corporations, they may also be liable if their employees, agents or officers commit offences while acting within their scope of employment. In these circumstances, the penalty imposed on the corporation may be as high as $330,000. Normally, if the persons involved are Australians, the matter will be heard in Australia. Extradition agreements will facilitate the return of those alleged to have broken the law. The responsibility for investigating corruption in Australia lies with the police force ie the Australian Federal Police and the State and Territory police forces as well as the Australian Securities and Investments Commission and the Australian Consumer and Competition Commission. After investigation by these bodies, the matters may be referred to the Director of Public Prosecution to charge the alleged offenders and pursue the matter through the courts. Recent amendments The legislative reliance is now largely placed upon the Criminal Code Act 1995. Recently the Criminal Code Act 1995 was amended under the Crimes Legislation Amendment (Powers, Offences and Other Measures) Bill 2015. The amendment states: Criminal Code Act 1995 1. Subsection 70.2(1A) of the Criminal Code Repeal the subsection, substitute: (1A) For the purposes of paragraph (1)(c): (a) the firstmentioned person does not need to intend to influence a particular foreign public official; and (b) business, or a business advantage, does not need to be actually obtained or retained. This effectively broadens the scope of potential cases for prosecution as intent to influence need not be a determinant of the bribe process and also the bribe outcome does not have to achieve or retain an advantage. Under these two amendments the likelihood of prosecutorial success relies more on evidence of a transfer of an entity of value between business parties has occurred. The UK Bribery Act - Radical new anti corruption law? (HLB international, 2011) ‘How it may affect global business' The UK Bribery Act was passed in April 2010 by Government to become law on 1 July 2011.The publication in April 2010 provoked a strong reaction to the new law, leading to much political lobbying, media pressure and public interest. The focus for this has been the prospect of formal Government guidance about the way the Act will work. The guidance was published by the Ministry of Justice at the end of March 2011 together with a covering statement by the Secretary of State on how to help businesses with compliance activity. The tone of the guidance is placatory and soothing. Honest businesses would not need to employ an army of lawyers in order to comply, it states. At the same time as publication of the Government guidance, the UK prosecuting authorities issued their own guidance about the principles to be adopted when criminal proceedings under the new Act are being considered. Reading these alongside the Ministry of Justice guidance gives a much clearer picture about the effect of the new law than existed before. There are still many uncertainties, but even pending further clarification by the courts, it is possible to draw some conclusions about how tough the new UK regime will be, by comparing its main effects with the US Foreign Corrupt Practices Act (FCPA), which is 34 years old and has been applied in practice to thousands of specific cases. The history of the FCPA can help business estimate how the UK Act may actually affect global business. Application All the OECD countries have adopted a Convention aimed at stamping out commercial bribery of government officials. Like the UK Act, the FCPA prohibits bribery by US companies of foreign officials. Unlike the UK Act, the FCPA does not deal with bribery within the private sector. The UK Act has a broader effect than the FCPA as it applies across the UK, covers bribing and being bribed and applies to both public and private sector bribery. The FCPA is aimed primarily at criminalizing bribery of foreign public officials. There are other federal and state laws in the USA that apply directly against the recipient of a bribe, but the FCPA does not. Corporate hospitality The UK Government confirmed that corporate hospitality is in itself not a crime but could amount to bribery in some circumstances. To avoid this, hospitality must be reasonable, proportionate, bona fide and transparent. Even high profile events like Wimbledon or the Grand Prix can be acceptable within these guidelines, as can fine dining, if the overall objectives are to meet, network and improve relationships with customers. This position is broadly the same as under the FCPA, but US persons have gone to jail for extending lavish entertainment and gifts that amount under the circumstances to a bribe. The difficulty will be in distinguishing when an effort to make good relations appears in hindsight to be an improper inducement to gain or retain business. The US experience is that companies create compliance systems that provide maximum monetary amounts for entertaining clients and requiring review and approval when something beyond a common meal is intended. Gifts No reassurance was given in the UK guidance about gifts, but it is thought unlikely that these will be challenged if they fall within the reasonable, proportionate, bona fide and transparency limits applicable also to corporate hospitality. The position in the US is different, although nominal gifts, corporate labelled pens, hats and similar items, are not viewed as bribes the US has no de minimis figure for determining when a gift is "too much." The FCPA prohibits "anything of value" being given to a foreign official when intended corruptly to influence the official to extend or retain business or to grant the US company a commercial advantage over its competitors. Facilitation - "Grease" - Payments Facilitation payments - such as paying a Customs agent £10 to get a trade show sample through the Customs line, rather than have it stuck there for several days - are illegal under UK law. The guidance showed no softening of approach in relation to them, except that it was recognized that sometimes these payments are made in circumstances where the recipient of the demand is in fear of health, safety or wellbeing - in these circumstances the defense of duress may be available to a criminal charge. The payments should still be forbidden in employment contracts, however. This is one of the main differences compared with the position under the FCPA, under which facilitation payments are not illegal. Facilitation payments are defined narrowly, however, to fit only circumstances where the foreign official was ministerial and was not in a position to exercise any discretion in response to receipt of a favor. The Corporate Offence The UK Act creates a criminal offence by section 7 in circumstances where associated persons of relevant commercial organizations commit bribery in order to obtain business for the organization. The guidance helped with interpretation of the terms somewhat - a "relevant commercial organization" is one doing business in the UK in common sense terms - a physical presence is likely to be required for this, so listing on the London Stock Exchange may not be enough to engage the Act. It was made clear that there is no reason why public, charity or educational organizations cannot be caught by this test. "Associated Person" means a supplier of services, not just goods. The act of bribery by such a person must be intended to directly benefit the organization, and it is not sufficient that some indirect benefit might follow. Uncertainties remain in this area for holding companies and investors whose subsidiaries or agents of whose subsidiaries act illegally causing resulting benefit to shareholders. The FCPA is equivalent to the extent that if any US person on behalf of the foreign subsidiary of a US corporation authorizes, acquiesces in or facilitates bribery of a foreign public official by a foreign subsidiary, the US corporation and any US persons involved can be held civilly and criminally liable. Anti corruption management procedures as a defense to the Corporate Offence The main effect of the guidance is to give information about what is meant by the "adequate procedures " which can be deployed as a defense to the section 7 corporate offence. These will be regarded as adequate if they are introduced following a risk assessment of exposure to bribery and are proportionate and effective in relation to the result of the assessment. This was the main Government response to the charge of imposition of heavy burdens on business, but at the same time it was made clear that the existence of procedures, and the extent of adherence to them on an ongoing basis, would be a key issue for those considering whether to prosecute, or not. In the US, failing to have a compliance system is not, in and of itself, an offence. Nonetheless, increasing numbers of businesses have adopted corporate codes that meet best practice standards as a means of preventing violations and of establishing a good faith defense in case one of their employees or agents runs afoul of the FCPA and corporate policy intended to achieve compliance. The role of the Court The UK guidance makes it clear that the Court would have the key role to play in deciding how some of the broadly defined concepts applied in particular circumstances. Although the guidance will be a useful aid to a Court faced with a judgment call, it will not be conclusive and could even be ignored in certain circumstances. Certainly a Court would be unwilling to hide behind the reassurance given by the guidance, and to use it as an excuse to do nothing. Of course, judicial interpretation is also vital in the US where the courts have been quick to impose multi-million dollar fines in circumstances regarded as serious. The largest FCPA fine to date has totaled about US $1.5 billion, levied against 4 participants (including 3 non-US companies) in a scheme to gain commercial advantage in a tender for an LNG facility in Nigeria. It remains to been seen whether UK courts will impose similarly heavy penalties. The US experience suggests that prosecutors and courts will ensure that penalties are heavy deterrents, forcing companies to disgorge ill-gained profits, to pay fines beyond that and to submit to compliance monitors and systems to ensure no repeat of a violation. In the case of USSEC v KPMG Siddharta and Harsono the accountants consented to the making of a final injunction against them to prevent violation of the FCPA (without admitting or denying the allegations made). One key distinction between the UK Bribery Act and the FCPA is that in the UK there is no clearance procedure available within the Government whereby intended actions can be legitimated before a course of action is undertaken. In several US cases an "advice of Counsel" defense has been rejected, where it is apparent that the legal advice given was found to be mistaken. Prosecution Guidelines Key points arising from the guidelines to prosecutors in England and Wales are these: A decision to prosecute must follow from a review of the strength of the evidence and whether it is in the public interest to prosecute - a two-part test. A decision to prosecute must be made by the Director of the Serious Fraud Office (SFO) or the Director of Public Prosecutions. It will be in the public interest to prosecute unless the factors against outweigh those in favor. Amongst the factors to be considered are: ⦁ likelihood of conviction and likely size of penalty; ⦁ whether circumstances were self reported and management have been open in disclosure and co operation; ⦁ whether adequate procedures are in place; ⦁ whether adequate procedures have been adhered to. So the incentive to introduce procedures is not limited to their providing a defence if prosecution occurs but a reason why a prosecution could be avoided. It should also be borne in mind that the main prosecuting authority, the SFO, has been given very little additional resource with which to police the UK Act. This doesn't mean that prosecutors will be short of funds if the US experience is followed, however, as there the proceeds of successful prosecutions have been cited by prosecutors to increase funding their investigatory and enforcement work. In fact, if that experience is followed, this is likely to be fertile ground for criminal litigation. Whistleblowing In the US another use of the proceeds of successful prosecutions is to reward whistleblowers who can be entitled to receive up to 30% of the amounts collected by Government under the recent Dodd-Frank Act and related laws. No such rewards are available in the UK (apart from as a result of any private arrangement) although of course both in the UK and the US whistleblowers are exempt from any retaliatory action and enjoy security of employment. Recordkeeping Of particular relevance to accounting firms is the US FCPA requirement that, at least for public companies and other "issuers" (generally any company that reports to the US Securities & Exchange Commission), financial records must accurately report any bribes and other inducements to foreign officials, and may not be gently disguised as "marketing" or "petty cash." There is no materiality standard for such improper reporting, and this has led to stringent measures applied to preparation, review and audit of financial statements. By contrast, the UK Act did not intrude into this particular space. Conclusion The new UK Bribery Act creates a tougher legislative framework for prosecution and punishment of bribery than applies in the US under the FCPA, and if followed up by pro-active enforcement activity it is likely to be an effective anti-corruption tool. Equally, the signs are that in the US and elsewhere in the developed world bribery laws are being reviewed and progressively toughened, so that it is not likely that the UK will stand out amongst these countries in this way for long. The message to business is to institute compliance systems that will deter violations, to engage in multi-lingual training of those involved in marketing, sales and other activities affecting a company's effort to gain and retain business and to achieve commercial advantage, and to strive for a standard that is most likely to achieve best practices under the most stringent of applicable laws. The alternative is to risk embarrassment, financial penalties and jail time The activity presented below is designed to aid your thinking through issues associated with Corporate Governance. Required Reading References: Australian Institute of Company Directors, 2016. Guiding Principles of Good Governance, AICD website at http://www.companydirectors.com.au/director-resource-centre/governance-and-director-issues/guiding-principles-of-good-governance accessed 20 June 2016. Australian Securities and Investments Commission, 2016. Corporate Governance on ASIC website at http://asic.gov.au/regulatory-resources/corporate-governance/ accessed 20 June 2016. Australian Securities and Investments Commission Act 2001, Australian Government Legislation website at https://www.legislation.gov.au/Details/C2015C00411 accessed 20 June 2016. Corporations Act 2001, Australian Government Legislation website at https://www.legislation.gov.au/Details/C2016C00368 accessed 19 June 2016. Crimes Act 1914, Australian Government Legislation website at https://www.legislation.gov.au/Details/C2016C00484 accessed 19 June 2016. Crimes Legislation Amendment Bill 2015, Australian Government ascent from Australian Parliament pending, Australian Government Legislation website at https://www.legislation.gov.au/Details/C2015B00035 accessed 28 June 2016. Criminal Code 1995, Australian Government Legislation website at https://www.legislation.gov.au/Details/C2016C00544 accessed 20 June 2016. OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, OECD website at http://www.oecd.org/corruption/oecdantibriberyconvention.htm accessed 18 June 2016. Partnership Act 1958 (Victoria), Victorian Government Legislation website at http://www.legislation.vic.gov.au/domino/Web_notes/LDMS/PubLawToday.nsf/95c43dd4eac71a68ca256dde00056e7b/68527c675273de68ca257c8c00011fde!OpenDocument accessed 18 June 2016. Tax Assessment Act 1997, Australian Government Legislation website at https://www.legislation.gov.au/Details/C2016C00538 accessed 19 June 2016. The Bribery Act 2010 (UK), legislation.gov.uk website at http://www.legislation.gov.uk/ukpga/2010/23/contents accessed 17 June 2016. The Criminal Code Amendment (Bribery of Foreign Public Officials) Act 1999, https://www.legislation.gov.au/Details/C2004A00434 accessed 20 June 2016. The Foreign Corrupt Practices Act 1977 (USA), The United States Department of Justice website at https://www.justice.gov/criminal-fraud/foreign-corrupt-practices-act accessed 18 June 2016. U.K. Ministry of Justice, 2010. Start Up Guide for the U.K. Bribery Act (2010) website at https://www.justice.gov.uk/downloads/legislation/bribery-act-2010-quick-start-guide.pdf downloaded on 20 June 2016. U.S. Department of Justice, 2012. Resource Guide to the U.S. Foreign Corrupt Practices Act (1977), Department of Justice and Securities and Exchange Commission, U.S. at https://www.sec.gov/spotlight/fcpa/fcpa-resource-guide.pdf downloaded 20 June 2016.