The consequences of a poor corporate culture

Corporate culture has been a particular emphasis of financial services in recent times and was a primary focus of the Hayne Royal Commission. But what are the consequences of having a poor culture - and who is ultimately liable for it?

Corporate culture and criminal liability

The Corporations Act 2001 (Cth) does not define "corporate culture". However, the concept is defined in the criminal commercial context. Section 12.3 of the Criminal Code Act 1995 (Cth) defines corporate culture as "an attitude, policy, rule, course of conduct or practice existing within the body corporate generally or in the part of the body corporate in which the relevant activities take place".

Whether a corporation, as a legal entity, should or can be charged as a criminal defendant has historically been, and continues to be, a complex and contentious subject.

The Criminal Code addresses the fault elements of an offence through the use of ideas of organisational blameworthiness, taking into account such factors as the corporation's culture, systems and, operating policies. (See Part 2.5, sections 12.1 - 12.6.) Though criminal prosecutions in the area are relatively rare, corporate culture has been mentioned in regulatory offences and investigations as a factor in sentencing. Consideration of corporate culture at the liability stage encourages corporate self-monitoring and the development of a general culture of compliance. Failure to self-monitor and develop a compliance culture often increases the penalties imposed.

Corporations are generally found either directly or vicariously liable for conduct. Corporations are able to be found directly liable in line with the "alter ego" theory which attaches liability for the acts of those individuals who make up the directing "mind or will" of the company. Alternatively, the corporation may be found vicariously liable for the acts of an individual agent if they commit the crime within the scope of their employment.

Historical framework for direct liability

Traditionally, direct liability has only been attributed to a company where the act or omission was performed by an employee who was authorised to "embody" the corporation or is considered to be a "directing mind" of the company. A string of case law explores the "Tesco principle", derived from Tesco Supermarkets Ltd v Nattrass [1971] 2 All ER 127. The Tesco principle draws on an earlier case (Bolton (Engineering) Co Ltd v T J Graham & Sons Ltd [1957] 1 QB 159), in which...