AS THE dust settles from the introduction of CLERP9 into Australian law, a senior judge has questioned whether the increased penalties for breaches of the Corporations Act 2001 will be an effective deterrent.
Justice Neville Owen, who chaired the Royal Commission into the collapse of insurance giant HIH, said recently that although CLERP9 increases the penalties for some contraventions of the Act from five to 10 years, in reality this may not discourage breaches.
“Will that really make a difference?” he said. “I think, as they say, the jury is well and truly out on that. I remember during the [HIH] Royal Commission speaking with a well-credentialed and respected Australian company director and chairman, and I asked him whether or not he thought that increasing penalties would have an effect and he just looked at me and said ‘anyone who is concerned with penalties would never get a seat on my board’.”
However, Owen admitted that striking a balance between prescriptive approaches and self-regulation is no easy task. “Legal regulation provides law and standards to dictate what is acceptable and it puts limits on what is permissible,” he said.
“The problem with this is that almost inevitably it leads to ‘one size fits all’, which is demonstrably the opposite,” he said.
“Speaking generally, a self regulating system can be more flexible and more readily adaptable than a system that is centred on prescriptive dictates. But self regulation in turn depends on the expertise, diligence and integrity of the operators in that particular market sector. It is reliant upon the theory of deterrence.”
But, he said, there are strong criticisms of the theory of deterrence. “First, putting aside the paucity of reliable empirical data which supports the value of deterrence, it is argued that the prospect of detention, rather than the severity of punishment, sways potential offenders from engaging in prohibited conduct,” Owen said.
“The most notorious example of this is the lack of deterrent effect of the death penalty,” he said, (adding he was not suggesting that corporate governance laws should carry the death penalty).
“The second major criticism of the general deterrence system is the serious injustice and practical application of what’s called exemplary sentencing, or more colloquially, ‘scapegoating’,” Owen said.
He added that it is an open question as to whether more prescription will have a significant effect. “It doesn’t seem to have worked in the past,” he said. “But of course we can’t simply stand still and allow things that are wrong to go unpunished, or systems that are not working to be immune to change. What I think is extremely important is to obtain and maintain a flexible approach.”
According to Owen, the best path to regulatory compliance is for Australian companies to create a ‘compliance culture’. “It seems to be whatever system of regulation that we put in place by way of rules and regulations, it’s not going to work unless there is a culture of compliance,” he said.
“The aim of any system of corporate governance, whether it be imposed or self-adopted, should be to ensure that those on whom responsibility falls understand what is required of them by the law, and by the reasonable and legitimate expectations of the market,” he said.
“The carrying out of those obligations and responsibilities would in an ideal world be second nature for those concerned. And establishing a culture of compliance is a significant step on the road to achieving the ideal world. The black letter of a corporate governance model will not be effective unless there is this culture of compliance.”
He added that in an ideal world, lawyers and risk practitioners would be out of a job. “In the Royal Commission report I emphasised the importance of a culture that stresses substance over form and that is another key thing that we should bear in mind,” Owen said.
“Substance must always prevail over form. And we must also look to a system that encourages decision making that is not only correct legally, but which accords to models of principles. Put in the vernacular, that is decision making that passes the smell test,” he said.
“Decision makers won’t always know the law. If they did, lawyers, and I suspect many other risk practitioners, would be out of a job. Wouldn’t it be wonderful if I were to be made redundant, not because I’m stupid, but because none of us are doing anything wrong. I’m afraid those days are a long way away.”
Stuart Fagg is the Editor of Lawyers Weekly’s sister publication Risk Management.