Parallel Tracks of B Corp and Business and Human Rights Movements

Ahead of tomorrow’s UK launch of B Lab, the certifying body for B Corps, it is worth reading the recent paper of Joanne Bauer and Elizabeth Umlas comparing the B Corp and business and human rights movements. Both movements are relevant to corporate purpose (creating responsible business) but differ in their approaches. B Corps embed social purpose into their business strategy and legal structure, while the BHR movement seeks to impose rules to prevent human rights violations.

The authors note that “[i]n contrast to the B Corp movement, the idea of modifying company law has not been a centerpiece of the BHR movement” (p. 4). Instead, BHR advocates focus on imposing external regulations that will mitigate ESG impacts. A footnote observes:

There are signs this is changing, at least in Europe. In a number of countries, there is growing debate, led by civil society organizations, law scholars and progressive lawmakers, about the need to make companies take into account their impact on society and the environment. In some cases, reforms to company law are being discussed as part of the debate.

The paper goes on to cite a blog post I wrote for the Lawyers for Better Business as well as the work of the Purpose for the Corporation Project.

An interesting read.

EU contemplates significant changes to the Shareholder Rights Directive

The EU is contemplating a number of changes to its corporate governance framework that would affect publicly listed companies, including a revision of shareholder rights to give them a say on pay and access to certain information, among other changes. With several academic partners, I co-wrote a Commentary on the Shareholder Rights Directive, which critiques the Directive’s shareholder-centric approach to corporate governance and proposes a number of concrete amendments.

We presented our commentary in various meetings with EU policymakers at the Parliament and Commission, as well as at a conference on corporate governance at EU Parliament (audio available online and the paper is on SSRN).

The Rapporteur for the Shareholder Rights Directive subsequently published a report recognising that shareholders are not the owners of companies. The Rapporteur also recommended that shares not be a major part of variable pay; suggested that Member States should promote long-term shareholdings through tax incentives, fidelity dividends or other means; and recognized the importance of employee voice in a balanced corporate governance framework, e.g. by giving them the ability to express an opinion on remuneration policy. (See my article in Europolitics for more detail).

Only some of the Rapporteur’s recommendations were adopted at the Parliament’s plenary vote in July 2015. A notable addition at the plenary vote was the requirement of country-by-country reporting, which would see large companies disclosing their tax payments to EU states. The Directive will proceed to trilogue negotiations between the Council, Commission and Parliament this autumn.

The revision of the Shareholder Rights Directive is hopefully the first step in a broader discussion on the future of corporate governance in Europe (and elsewhere). For further analysis of the Directive and the need for deeper reform, you can read a chapter co-written with Prof. Andrew Johnston of the University of Sheffield in the new book ‘Long-term investment and the Sustainable Company‘.

OECD launches new Principles for Corporate Governance

The OECD released today (5 September 2015) its revised Principles for Corporate Governance at the G20 meeting in Turkey on 4-5 September 2015. One particularly noteworthy addition is explicit mention of the OECD Guidelines for Multinational Enterprises and the possibility in many countries of bringing a complaint before the OECD National Contact Point if there is a violation, such as of labour rights. There is also stronger recognition of the financial impact of ESG matters (p. 43):

In addition to their commercial objectives, companies are encouraged to disclose policies and performance relating to business ethics, the environment and, where material to the company, social issues, human rights and other public policy commitments. Such information may be important for certain investors and other users of information to better evaluate the relationship between companies and the communities in which they operate and the steps that companies have taken to implement their objectives.

As part of its review of the Principles, the OECD held a public consultation to receive feedback on the draft revised text. With academic partners, we submitted a commentary that critiqued the current focus on the role of shareholders in corporate governance at the expense of other stakeholders and suggested amendments. Our commentary is available on the Purpose of the Corporation Project website and SSRN. All responses are available online here. Compliance Week published an overview of the review process, which quotes our work.

The OECD is also leading a Trust and Business Project to promote implementation of the underlying values of the Principles for Corporate Governance and those on MNEs, namely responsible business behaviour. Its public consultation appears to be ongoing and a background paper is expected soon.

European lawmakers vote to increase shareholder rights

Op-ed in today’s Europolitics:

In a strong signal about the importance of fostering sustainable and transparent companies, the European Parliament’s Committee on Legal Affairs (JURI) approved, in May, a number of revisions to the shareholder rights directive that aim to enhance the role of long-term shareholders in corporate governance. The changes include the introduction of ‘say on pay’ (with employees having the right to express a view) incentives to hold shares for more than two years and country-by-country reporting.

Shareholders do not own corporations

The directive will explicitly acknowledge that shareholders do not own corporations – a first in EU law. Contrary to the popular understanding, public companies have legal personhood and are not owned by their investors. The position of shareholders is similar to that of bondholders, creditors and employees, all of whom have contractual relationships with companies, but do not own them.

Giving voice to long-term investors

In 1960, the average holding period of stock in the S&P 500 was eight years. Today, it is four months. In the 1950s, the average life expectancy of a Fortune 500 company was 50-60 years; now it is 15 years. Executives point to pressure from capital markets as making it impossible to steer companies towards sustainable, long-term growth.

The new directive seeks to tackle the problem by requiring member states to give additional voting rights, tax incentives, loyalty dividends or loyalty shares to investors who hold shares for more than two years. This will reward patient investors, who have a better understanding of the business than short-term investors.

Democratic decision making on executive pay

Executive pay at FTSE 350 companies has increased by 233% since 2000, while pre-tax profits have increased by 95% and market value has only increased by 65%. The directive will promote the accountability of senior executives by giving shareholders a right to vote on the company’s remuneration policy every three years, which must include the maximum of directors’ average pay and the ratio between the pay of directors and workers. Employees will also have a right to express an opinion, which is a positive development that may help to stimulate engagement.

The aim is to shift increase transparency and accountability to long-term shareholders, as well as better align management remuneration with company performance. Current practice varies across member states: shareholders in UK companies have a binding vote and Germany introduced advisory ‘say on pay’ votes in 2009, but the changes will be completely new for many other European countries. There is not yet any clear evidence about the effectiveness of these provisions. Indeed, critics question whether the proposed changes will fix the root causes of short-termism or rather given additional powers to stockholders at the expense of companies’ ability to steer business strategy.

Increasing tax transparency

The recent explosion of the LuxLeaks scandal, which revealed that more than 300 companies had received secret tax rulings from Luxembourg allowing them to drastically reduce their tax burden, has shown how critical it is for companies to engage in responsible tax practices and for this to be monitored through appropriate international mechanisms. EU policy makers propose to address this issue through the introduction of country-by-country reporting, which would require companies to disclose their profits, revenue generated, taxes paid and the number of employees in each country where they have an operating subsidiary.

Currently, information is disclosed in a consolidated global report that does not break down information according to country of operation, making it difficult to determine whether companies are avoiding taxes through the use of tax havens or other forms of aggressive tax planning.

Consequences of changes

Following the vote in the Legal Affairs Committee, the changes will now go to a a vote in plenary before proceeding to trilogues. If passed, it remains to be seen whether the changes to the shareholder rights directive will have any effect on the behaviour of markets. There is nearly universal consensus about the need for patient capital to invest in long-term innovation and R&D but widely diverging views about how best to foster it.

Perhaps the root challenge is that the current proposal relies almost exclusively on shareholders to drive the shift to a longer-term perspective. This myopic focus on shareholders neglects potentially valuable input from other stakeholder groups, such as employees, who have a stronger stake in the company’s competitiveness and viability. Moreover, shareholders differ considerably in their time frames and approaches. Some shareholders are committed to holding for the long term, whilst others only hold for the short term. It is important that the former group become more engaged; however, there is a danger that the proposed directive will further empower shareholders with a short-term orientation, such as hedge funds and activist investors.

Beyond the directive

Achieving sustainability in European enterprises will require modification of the legal and regulatory framework at the national and EU levels, in addition to improvements to business education, practice and culture. We need a shift away from the current shareholder-centric approach to corporate governance and company law towards a model that prioritises the long-term interests of the company, whilst respecting the interests of shareholders and other stakeholders.

Trending towards increased corporate responsibility

A short legislative update published on the Lawyers for Better Business (L4BB) website.

France is considering changes to its civil code that would require companies to integrate the effects of their business activities on the economy, society and the environment into internal decision-making and strategy. The bill proposed by the Minister of Economy would amend the definition of business enterprises so as to require them to be managed in their higher interest, in accordance with the respect of the general economic, social and environmental interest (article 1833, text below).

Leading company law professors have proposed a similar amendment to Norwegian company law to clarify that “while companies in the aggregate may and should have profit as their core purpose this should be achieved within the overarching societal purpose of sustainable development.”

Driving change from within. A small change to company law has the potential to shift how boards of directors and top management develop business strategy. Neither of these proposals would require large companies to assume responsibility for specific impacts or externalities. Furthermore, they would not significantly curtail board powers or managerial decision-making. Instead, the changes would ask companies to consider the effects of their business decisions at the highest levels of the company and integrate those reflections into core strategy.

Increased expectations throughout Europe. The present debate about company law reform occurs against the backdrop of pushes for increased corporate responsibility across Europe. Approximately 6,000 large European companies will be required as of 2017 to report on non-financial matters relating to the environment, social and employee issues, respect for human rights, anti-corruption, bribery, and board diversity.

Movement is happening at the Member State level as well. At the end of March 2015, the French National Assembly adopted a historic bill creating a ‘duty of vigilance’ that will require certain large parent companies to oversee the actions of their subsidiaries to prevent human rights and environmental infractions.

Only two weeks earlier, Swiss parliament initially accepted a motion for an analogous proposal for mandatory human rights due diligence. In an unexpected twist, interest groups successfully pressured politicians to hold a second vote the same day, which narrowly failed. This week, a coalition of civil society partners known as the Responsible Business Initiative launched a campaign to gather the 100,000 signatures required to hold a binding Swiss referendum on the issue. Taken together, these initiatives signal a fundamental shift in our societal and legal expectations of corporate citizens.

Revisiting the purpose of the corporation. Our social enterprise law firm, Frank Bold, is contributing to this discussion through its project on the Purpose of the Corporation, which explores the question of how corporate governance and company law may ensure that a public company is governed in the best long-term interests of the business itself as well as those of its stakeholders, the broader community and the environment.

We worked with a team of international academics on a series of authoritative statements on economics, law, management and accounting. They determined that no company law system requires firms to blindly maximise profits for their shareholders to the detriment of proper risk management.

Depending on the perspective, profit is the byproduct or end result of a strong vision to create excellent products and services, not the reverse. Furthermore, boards and management have broad latitude to steer businesses towards sustainability. Yet the current mainstream focus on maximizing shareholder value — reinforced by capital markets, the rise of activist shareholders, executive pay packages tied to stock options, and policy support for ‘shareholder democracy’ — has led to a narrow, short-term focus on returns.

Revisiting the purpose of the company is critical in the wake of the financial crisis and protracted economic recovery. The proposed French Civil Code reform requiring companies to review the impact of their business activities is a strong first step.

Reprinted with permission from Lawyers for Better Business.

‘Lux leaks’ scandal shows why tax avoidance is a bad idea

Op-ed at Politico raising the question of whether publicly listed companies have an obligation to minimise or avoid tax.

The emerging “Lux leaks” scandal, which revealed that Luxembourg approved questionable corporate schemes to avoid tax by major companies including Ikea, Pepsi and Deutsche Bank, has two interesting dimensions.

First, it has placed tremendous pressure on Jean-Claude Juncker, the president of the European Commission, to explain and address Luxembourg’s so-called comfort letters – essentially private tax rulings – approving the intentions of 340 global companies to reduce global tax bills. The tax deals were primarily negotiated while Juncker was either finance minister or prime minister of the Grand Duchy. “While these latest revelations from the international Consortium of Investigative journalists (ICIJ) are certainly no surprise, they provide invaluable new evidence that the Luxembourg state is knowingly complicit in tax evasion on a massive scale,” said Gabi Zimmer, a German MEP and president of GUE/NGL.

Secondly, Lux Leaks raises the question of whether publicly listed companies have an obligation to minimise or avoid tax. Chief executives and boards often explain aggressive tax avoidance tactics on the basis that they are acting in the best interests of shareholders. In short, corporations do not have any legal duty to maximize shareholder value, and they certainly do not have any obligation to avoid paying tax.

The myth of shareholder value has become so entrenched that it is worthwhile examining this point country-by-country. Even in the UK, which is the most weighted in favour of shareholders of any country in the European Union, there is no requirement to maximize short-term stock price or reduce taxes. Instead, the UK Companies Act 2006 says that directors have a duty to act in good faith to “promote the success of the company for the benefit of its members as a whole” (ie shareholders), having regard to the likely long-term consequences, the interests of employees, business relationships, the community and the environment, the company’s reputation and the need to act fairly (s. 172).

In Germany, where workers have a well-entrenched voice in corporate decision-making, corporations are expected to respond to commonly accepted legal and ethical norms, and directors must consider the interests of certain parties (including employees) in addition to shareholders. Unless a business decision threatens the financial viability of the corporation, the interests are not ranked but must rather be balanced by directors. In France, directors have a duty to act in the general corporate interest of the company (intéret social), which may differ from that of the shareholders.

Where does the myth come from? Since the idea of shareholder primacy originated in the US, one might expect that a general duty to maximize shareholder value would exist there. It does not. Instead, it is an argument that can be traced back to the Nobel Prize winner Milton Friedman, who said in the 1970s that the only proper goal of business was to maximize profits for the company’s owners, meaning shareholders. Friedman was a brilliant economist but he did not understand company law. Many legal experts, including Professor Lynn Stout at Cornell Law, have shown that shareholders do not own companies and executives and directors are not their “agents”. Managers may choose to maximize share price, but they are not under any legal duty to do so. The law gives special consideration to shareholders only during takeovers and in bankruptcy. In bankruptcy, shareholders become the “residual claimants” who get what is left over.

Returning to Lux Leaks, the media furore around the companies named is perhaps one of the most compelling arguments against tax avoidance – it can cause serious reputational damage. Of course there are also arguments stemming from morality (corporations as responsible citizens) and long-term competitiveness (firms need well-funded public infrastructure and educated employees to thrive). Finally, there are financial risks for shareholders in the event that tax arrangements are subsequently challenged or ended, as may be about to happen in the EU. Since tax avoidance schemes artificially inflate net profits after tax, they can cause short-term stock price bubbles leading to subsequent unforeseen losses of share value. And that is certainly not in the interest of shareholders.

Lobbying for Good?

Lobbying tends to get a bad rap. The visual image it evokes is of politicians enjoying expensive wine and steak in the darkened booths of Michelin-star restaurants in DC or London. In 2012, which was a US presidential year, Google spent $18.22 million on lobbying and Microsoft doled out $8.09 million, according to Fortune, while the NRA spent $3.14 million. Everyone’s favourite radio show, This American Life, aired a great programme on the collapse of the proposed reform to American campaign financing and what that has meant for politics. But can lobbying ever achieve positive social change?

For many, corporate lobbyists are akin to Lord of the Rings’ Grima Wormtongue – quietly corrupting the ear of government with self-interest and accommodation with wrongdoing. The tobacco sector’s 50-year conspiracy to resist regulation, the chemical industry’s routine attempts to keep products of proven toxicity on the shelves and fossil fuel’s wholesale corruption of politics across the globe attest to why such a negative perception is warranted.

But there is another side to the story. […]

In the 19th century, William Lever’s creation of the Port Sunlight garden village to house his company’s workers attracted attention the world over. Lever was also an MP and in his maiden speech called for the state to have a role in the provision of pensions, and later went on to introduce a private members’ bill on the issue. John Cadbury brought chocolate to the masses, while in his spare time he campaigned against the use of young boys as chimney sweeps. Joseph Rowntree made sure that not all of the trusts he established were organised as charities (with all their attendant restrictions on politicking) as he wanted them to be able to “search out the underlying causes” of social ills and if necessary seek to “change the laws of the land.”

Today, an emerging group of pioneers has realised that the business case for corporate responsibility will never be strong enough to support an isolated business in its competition against the unscrupulous. Public policy intervention is required to change the rules and shift the bar for the allowable lowest common denominator.

[Read the full story in The Guardian.]

What Type of Lobbying is for ‘Good’?

In their article in the Stanford Social Innovation Review, Karl Peterson and Marc Pfitzer argued there are three different targets of lobbying for good (based on this article from the Harvard Business Review):

  1. generic social issues, which are critical to society but not immediately consequential to a company’s business;
  2. value chain social impacts, which are the footprints a company leaves behind through its normal operations; and
  3. social dimensions of competitive context, which are the external conditions (e.g., strong schools and good roads) that a company needs to succeed.

The authors suggest that companies tend to focus their CSR lobbying efforts on generic social issues but should instead be looking at reducing the impact of their value chain in terms of the impacts of their products and services. Thus, “[t]he company that pushes for improved standards can create competitive advantage for itself and safer, more environment-and consumer-friendly products and services.” I would add that we have also seen the importance of improving supply chains, particularly since the Rana garment factory fire of 2013, which require industry-wide approaches to identify root causes and develop best practices. More example, more than 150 companies have now signed onto the Accord for Fire and Building Safety in Bangladesh, which in an agreement between brands, retailers and trade unions in Bangladesh that makes independent safety inspections of 1,000 factories and public reporting on them mandatory. However, many other companies have signed onto a less stringent agreement and there is still a shortage of regulations on the overseas operations of garment companies to ensure that voluntary measures like the Accord are enforced.

Peterson and Pfitzer argue that lobbying to improve the social conditions that influence companies’ operating environments will have the highest strategic value for companies. Although social issues, like the quality of the local education system, exist out the direct business context, they have an indirect impact on a company’s success. Although a business might lobby for its own benefit, this can be compatible with the greater good. For example, Toyota which owns the ‘green’ Prius hybrid technology has called for higher global fuel economy standards that all manufacturers must meet, rather than percentage increases in the average fuel economy of each manufacturer’s vehicles, which is the preferred regulatory measure of manufacturers of less socially responsible cars that emit more pollutants.

The Role of Social Media

Given the increasing importance social media, it is of little surprise that ethical lobbyists have shifted to use Twitter, Facebook, online petitions,etc. to amplify their calls for change. Activism and lobbying efforts may be directed either at politicians, towards consumers/companies, or take a hybrid approach. For example, Fashion Revolution Day was created by Carry Somers, an ethical-trade entrepreneur, to build linkages across the fashion supply chain, from the cotton farmer to the factory seamstress to the consumer. The campaign has been supported by MPs including the UK shadow consumer minister, Stella Creasy, and Labour’s international development spokeswoman, Alison McGovern, as well as fashion insiders. But what can a social movement like Fashion Revolution Day hope to accomplish? The hashtag #InsideOut is a call for the public to wear their clothes inside out to commemorate those who died in the Bangladeshi factory fire, as well as to remind us to inquire into the origins of the clothing we purchase. The initiative has received press from major media outlets like Vogue and The Guardian. This type of initiative may raise awareness in a broader audience than would normally concern itself with supply chain management but no one is suggesting that a one-off event will singlehandedly transform sourcing in the garment industry.

Limits on Nonprofit Lobbying

One of the key barriers to socially responsible lobbying is the limits placed on the activities of non-profit organisations. In Canada, for instance, registered charities are required to act for ‘exclusively charitable purposes‘ and may lose their charitable status if they engage in political lobbying. While the intention is undoubtedly to prevent taxpayers’ contributions to ostensibly good causes being diverted to partisan political ends, the effect is to place charities at a disadvantage vis-à-vis corporate entities without similar restrictions.

An obvious case that comes to mind is climate change, where lobbyists have been active both for and against climate change measures. An analysis of 28 Standard & Poor 500 publicly traded companies showed that many of America’s largest firms have lobbied to block action on climate change or discredit climate science, despite public commitments to sustainable and green values. On the other side of the debate, corporate members of BICEP (Business for Innovative Climate and Energy Policy) testified before a Senate and House task force on climate change about their commitments to reduce carbon pollution and lobbied Congress on behalf of a clean-energy financing bill. The limited ability of environmental NGOs and trusts to participate in the debate on climate negotiations in certain countries has restricted the range of policy options being discussed. Despite this limitation, transnational advocacy networks have mobilized energetically and with some documented success.

Fighting Isolation to Achieve Collective Impact

Whether lobbying is done by corporate or non-profit entities, it should ideally be a collaborative effort to achieve collective impact. Referring back to Peterson and Pfitzer’s three types of ‘good’ lobbying that can be undertaken by companies, lobbying that is restricted to improving companies’ competitive context will necessarily be limited in what it can hope to achieve. Many issues will not be picked up because they do not resonate with any company’s mission or values. The same may be true for nonprofits but having more players in the field will maximize issue coverage.

Smaller nonprofits tend to be disadvantaged as they lack the resources to target decision makers and leverage their membership base. Additional clout may be obtained through advocacy networks, either local or transnational. An alternative approach is through ‘collective impact initiatives’, which represent the “commitment of a group of important actors from different sectors to a common agenda for solving a specific social problem” (John Kania & Mark Kramer, SSIR). Rather than simply working together through partnerships or decentralized networks, collective impact initiatives centre around a core team of dedicated thought leaders who use a centralized infrastructure and structured process to generate a shared agenda, aligned goals and mutually reinforcing activities amongst all members. While this is at the expense of some degree of individual autonomy, it has the potential to achieve targeted results.

Landmark Lawsuit Launched against Canadian Mining Company

This month saw the first lawsuit filed in British Columbia against a Canadian mining company for its operations overseas. A group of seven Guatemalans has commenced a civil action against the Vancouver-based mining company Tahoe Resources Inc. for injuries they suffered while engaging in peaceful protest against the company in spring 2013. A recent news article on the facts giving rise to the claim can be viewed here.

The case is unique both for being the first of its kind in the province and its reliance on the company’s adherence to voluntary codes of conduct to show that it had a duty of care to the claimants. The claim notes that Tahoe Resources has committed to upholding the UN Guiding Principles on Business and Human Rights as well as the Voluntary Principles on Security and Human Rights. In fact, both of these commitments are explicitly set out in the company’s Human Rights Policy (found here). The UN Guiding Principles were only adopted by the UN Human Rights Council in 2011 but we are starting to see a trend of claimants attempting to establish a duty of care under tort law in part relying on the company’s adopting of the Guiding Principles. A similar argument has been advanced in the case Choc v Hudbay Minerals by the intervenor Amnesty International, which argued that “a range of voluntary codes of conduct developed in conjunction with multinational corporations” have delineated an emerging standard of care for human rights in transnational business operations (Choc v. Hudbay Minerals, 2013 ONSC 1414, para. 33). The Ontario Superior Court of Justice has allowed the case to proceed to trial, making it the first of its kind in Canada.

The trials against both Tahoe Resources and Hudbay Minerals will raise difficult questions of legal policy and law for the courts to consider in establishing a novel duty of care. If successful, however, the decisions may introduce expanded exposure to risks and liabilities for Canadian corporations operating abroad. We may expect to see additional cases filed in Canada against companies operating particularly in the extractives sector in other countries due to the high number of companies headquartered in Canada and the difficulty of pursuing recourse in the US given the Supreme Court of the United States’ recent decision in Kiobel v. Royal Dutch Petroleum, which significantly limits the scope of the Alien Tort Statute.

The Notice of Civil Claim is a publicly available document which can be accessed via the link provided (NOCC-Tahoe Resources).

Do Deferred Prosecution Agreements Promote Corporate Accountability?

Deferred Prosecution Agreements (‘DPAs’) have long been available to prosecutors in the US but were only recently introduced in the UK on 28 February 2014 through the Crime and Courts Act 2013. The UK Serious Fraud Office (‘SFO’) and Crown Prosecution Service (‘CPS’) are now able to enter into agreements with corporate defendants (but not individuals, unlike the US) which they are considering prosecuting for an economic crime. The deferral of prosecution is done in exchange for payment of a financial penalty and compliance with the other terms stipulated in the agreement.

A DPA may impose a number of requirements on the corporate entity in addition to a financial penalty, including but not limited to:

  • compensation of victims of the alleged offence;
  • donation of money to a charity or other third party;
  • disgorgement of profits made from the alleged offence;
  • implementation of a compliance programme or changes to an existing compliance programme relating to policies and/or training for employees;
  • co-operation in any investigation related to the alleged offence; and
  • payment of reasonable costs of the prosecutor related to the alleged offence or the DPA.

There are a couple unique aspects to DPAs that distinguish them from guilty pleas. Firstly, as mentioned above, the defendant must be a corporate body, a partnership or an unincorporated association but cannot be an individual. Secondly, the DPA may only related to a limited list of offences, including fraud, bribery, money laundering and forgery offences, among others. Thirdly, the DPA must be agreed to before charges are laid. The prosecutor must apply for a private hearing before the Crown Court for a declaration that entering into a DPA is (a) likely to be in the interests of justice and (b) that its proposed terms are fair, reasonable and proportionate before proceeding. If such a declaration is made, the parties will negotiate the terms of the DPA, which will need to be approved by the Crown Court in a subsequent hearing before taking effect.

DPAs in Practice

The SFO and CPS have released a Deferred Prosecution Agreements Code of Practice (the ‘Code of Practice’) outlining how DPAs are intended to work in practice. The prosecutor may approach a company to discuss the potential for a DPA at any time after he or she has “a reasonable suspicion based upon some admissible evidence that [the organisation] has committed the offence, and that there are reasonable grounds for believing that a continued investigation would provide further admissible evidence within a reasonable period of time” (para. 1.2). The prosecutor is required to provide the business with “sufficient information to play an informed part in the negotiations” and to ensure that the corporate entity “is not misled as to the strength of the prosecution case” (para. 5.2).

In order to decide on the suitability of a DPA, prosecutors must apply a two-stage test:

  1. In the evidential stage, prosecutors must apply the ‘Full Code Test,’ or if that isn’t met, they must have “at least a reasonable suspicion” based upon the evidence that the company committed the offense.
  2. In the public interest stage, prosecutors have to consider if the public “would be properly served” if they used a deferred-prosecution agreement instead of prosecuting.

Alison Saunders, the Director of Public Prosecutions, has said that DPAs have given prosecutors “additional powers in the fight against fraud and economic crime” but it will be “quite rare” that the circumstances of a case will justify the use of a DPA.


The most important initial issue for a company is the decision whether or not to self-report and cooperate with the prosecutor. The decision whether to enter into a DPA or prosecute is discretionary and there is no guarantee that if a company self-reports or cooperates with the prosecutor that it will be spared prosecution. However, failure to notify the misconduct to the prosecutor within a reasonable timeframe or reporting the misconduct to a prosecutor but failing to verify the initial report are both deemed factors that a prosecutor should view as favouring a decision to prosecute. (Code of Practice 2.8.1 (v) & (vi)).

On the other hand, a “genuinely proactive approach” by company management, as well as self-reporting to the prosecutor “within a reasonable time” and taking remedial action will be factors to weigh in favour of a DPA (Code of Practice 2.8.2 (i)). Thus, if an internal investigation uncovers evidence of fraud, bribery, corruption or other corporate crimes, management must decide whether to release this information to the authorities without any certainty that it will be possible to negotiate a DPA and with the risk that the information may be used against the company if the prosecutor decides to lay charges. Furthermore, the inculpatory information will not remain confidential even in the event of a DPA as the hearing to confirm the DPA is conducted in open court.

Promoting Corporate Accountability?

The introduction of DPAs in the UK raises questions about how best to address corporate criminality, allocate responsibility and promote corporate accountability. The single most positive benefit of DPAs is their promotion of remedial measures and compliance programmes. The policies and procedures of the impugned company will be strictly scrutinized both internally and externally to look at fostering compliance. Employee training may be mandated to ensure that everyone in the business understands the policies and is able to implement them. Companies themselves tend to be in favour of DPAs due to the reputational consequences of a guilty plea and the admissions in guilty plea may lead to the commencement of civil actions.

More globally, DPAs avoid the potentially disruptive effects of criminal prosecutions and eventual convictions, which may lead to the winding up of the company. David Green, director of the U.K. Serious Fraud Office, has said in a statement that convicting a company for economic crime could “cause collateral damage” to employees, shareholders and creditors that may be negatively affected by the failure of the company.” Under appropriate circumstances, a deferred prosecution may “help restore the integrity of a company’s operations and preserve the financial viability of a corporation that has engaged in criminal conduct”, while still giving the prosecutor the ability to prosecute for material breaches of the agreement (US Principles of Federal Prosecution of Business Organisations, para. 9-28.1000 B).

At a more prosaic level, DPAs offer budget-strapped prosecutors an easy way to avoid the cost and delay of overseeing a full criminal investigation and conducting a prolonged trial, as well as enabling prosecutors to secure substantial fines. DPAs therefore represent a welcome contribution to government revenue. Because DPAs tend to be concluded much more quickly than criminal trials, they may also secure prompt victim restitution.

The rise in the use of DPAs in the US has led to a debate about whether they are effective in deterring misconduct and reducing recidivism or rather “allow a corporate criminal to escape without consequences” (US Principles of Federal Prosecution of Business Organisations, para. 9-28.1000 B). Since 2000, the US Department of Justice has entered into 273 publicly disclosed DPAs and NPAs that have led to monetary penalties totaling more than $40 billion (see here). Judge Rakoff of the Southern District of New York has questioned the use of DPAs and NPAs (‘Non-Prosecution Agreements’, not available in the UK) without the prosecution of any persons whose conduct resulted in corporate liability. According to Judge Rakoff, “the future deterrent value of successfully prosecuting individuals far outweighs the prophylactic benefits of imposing internal compliance measures that are often little more than window-dressing.”

Indeed, the move towards deferred prosecutions may be part of continued trend to privilege the speedy resolution of corporate crimes at the expense of a full adjudication and determination of responsibility. Given the expiry of the five-year statute of limitations for most potential offences that relate to the financial crisis, it appears less and less likely that any major banks will be prosecuted or top level executives charged for their role in the financial breakdown. While Credit Suisse recently became the first financial institution to plead guilty to criminal charges in more than a decade (there was no DPA), the guilty plea was for conspiring to aid wealthy Americans to avoid payment of taxes and was unrelated to the financial crisis. There is no evidence that the oft-cited argument that the major banks are “too big to fail”, even if true, should apply to prevent holding individual bankers accountable.

Joining Frank Bold

I am very pleased to be joining the public interest law firm/NGO Frank Bold at the end of my Masters of Law studies at the London School of Economics and Political Science as the Head of Brussels Operations. My primary focus will be to further the work of the Purpose of the Corporation Project, which questions the dominant theory that the central purpose of companies is to maximize shareholder value.

The project’s concept note can be read here. It is also possible to watch a number of talks from a European Parliament conference that Frank Bold co-organized in February 2014 with the Cardiff Business School and Richard Howitt MEP, the European Parliament rapporteur on corporate social responsibility. It attracted over 120 participants, including representatives from companies, investors, academia, NGOs, and policy makers. The conference aimed to re-open a public discussion on this topic and will be followed by a number of other initiatives and conferences. If you prefer to digest the information in written format, the conference synopsis and programme are both available online.

If corporate governance reform is a topic that interests you, the Purpose of the Corporation Project has produced short reports on challenges relating to corporate governance linked to management studies, politics, and accounting (available here). Also, you may wish to join the LinkedIn group to follow current discussion from leading business leaders, academics and lawyers, as well as to contribute your own thoughts.