Fines are not the cure for rotten corporate culture

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The modern insistence on finding someone else to blame for any misfortune is now too widespread, and the costs of litigation too great, for either criminal or civil proceedings to be an appropriate means of deterring unacceptable corporate behaviour. The law of corporate responsibility is unsatisfactory. It should also provide for situations where the corporate culture is all too financially viable, but rotten to the core.

In October 2000, four people died in a rail accident at Hatfield. Investigations showed a pattern of poor maintenance. Last week, the owner of the railway, Network Rail, was fined £3.5m. The contractor with day-to-day responsibility, Balfour Beatty, was fined £10m. These are the largest penalties imposed by British courts for such offences.

Has justice been done? Up to a point. Network Rail did not exist at the time of the Hatfield accident. The £3.5m will go not to the victims or their families, but to the taxpayer. The fine and the substantial legal costs will be paid by taxpayers or by other rail users. Balfour Beatty shares are well above their level at the date of the accident and remained unchanged in response to the judge’s sentence and criticisms.

The law of corporate responsibility is unsatisfactory. When the Herald of Free Enterprise capsized in Zeebrugge harbour with the loss of 200 lives, the real blame did not lie with hapless sailors who had cut corners to enable the ship to depart on time, but with an organisation which encouraged, even required, them to do so. But English law, for good reasons, has difficulty finding people guilty of criminal actions of which they have no knowledge, or convicting an organisation of a crime that was not committed by any individual. As a result, the attempt to prosecute the owners of the ferry failed.

The instinct that responsibility lies with people not things is sound. Convicting abstractions of criminal offences has little more merit than denouncing evil spirits or scapegoating animals and is done for show rather than effect. Proposals to create graver heinous corporate offences such as corporate killing would only provide another opportunity for politicians and judges to engage in displays of self-righteous anger.

Yet there are organisations that allow corrupt individuals to flourish and negligent ones in which sloppy behaviour is commonplace. The right solution is not to punish the organisation (whatever that means). It is to deter people from allowing these practices to develop, to prevent such organisations exercising economic power and to punish venal individuals who create these corporate cultures and the weak people who preside over them. Senior executives are responsible for the ethos of the companies they run. The corollary is that they are liable for the consequences.

But the Equitable Life litigation demonstrates the difficulties involved in such insistence on personal responsibility. In business, things go wrong every day: most such failures lead to financial loss by innocent parties and some cause physical harm. If the law does not protect the exercise of business judgment, even permitting egregious mistakes, it will stultify a market economy.

Equitable’s decision to pay out too much in bonuses to policyholders, like the decision by the mutual’s new board to pursue ill-conceived litigation against auditors and former directors, falls clearly into the category of honest error. The modern insistence on finding someone else to blame for any misfortune is too widespread and the costs of litigation too great for either criminal or civil proceedings to be an appropriate means of deterring unacceptable corporate behaviour.

The law already provides for handling situations where corporate culture is admirable but not financially viable. It should also provide for situations where the corporate culture is all too financially viable, but rotten to the core. These mechanisms exist in some business sectors, such as financial services and utilities. Regulatory intervention closed Andersen after the scandal of Enron, the energy trader, and could have imposed a restructuring of European Ferries after the Zeebrugge disaster had the company not already been brought under new management. The Hatfield accident led more or less directly to the winding up of Railtrack, the dismissal of its board and senior management and the substitution of a new organisational structure. That is the right way to deal with these issues. The fine of £3.5m will satisfy only the many people who are more interested in gestures than in substance.

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