Issue #8                                                                                                         July 2019
Corporate criminal liability in Europe: some implications for corporate governance
by Professor Miguel Duro and Félix Sánchez
Can a corporation commit a crime? If we look to the ongoing evolution of European countries’ legal doctrine for an answer, there leaves little room for doubt: yes. Whereas some decades ago only common law countries such as the U.K. granted direct responsibility of the legal entity, that is, the prosecution not only of the individuals who committed the offenses but also the companies involved, today, the majority of Continental European jurisprudence contemplates the liability of the legal entity. What’s more, the liability of corporations for corruption offences is now a well-established international standard included in the mandatory provisions of E.U. anti-corruption instruments. With this shift comes a series of implications for corporate governance. 

Before examining these implications, the complex nature of the treatment of corporate liability of legal entities must be understood. While there may be little discussion as to whether a company can commit a crime today, the criteria for the attribution of crimes to legal entities varies from country to country. For example, in the cases of Denmark and Spain, an offence of any employee, regardless of his or her rank, acting within the scope of his employment and with the intent to benefit the corporation will trigger criminal liability for the company. However, in other countries such as Switzerland and the Netherlands, the attribution model criteria are based on deficiencies in corporate culture. 

Adding to this intricacy, we must also consider that international borders have never been so blurred. Most corporations work under multi-country legal systems. A fact clearly illustrated in that most of the serious non-bribery settlements have been overseen by the U.S. Department of Justice on non-U.S. firms. So, hypothetically, though one country may have its particular system for dealing with the attribution of crimes to legal entities, companies based there are also more exposed than ever to conviction of a range of crimes including antitrust violations, environmental crimes, tax fraud, wire fraud, and bank fraud because of foreign business dealings and this diversity of crime attribution approaches (Garrett 20112014). Today’s highly competitive environment in which corporations have thousands of employees, multiple business partners, and extensive operations throughout the world, make corporate compliance a very challenging issue.

But it would be a mistake to believe that the effects of the legal sanctioning on companies only affect large corporations. On the contrary, small firms are more exposed to criminal offenses because they are not “too big to jail”. As such, the recent experience in the U.S. is that prosecutors impose plea agreements on small and foreign firms and only sign non-prosecution agreements with big firms to not wreak havoc on the economy.

However, size aside, government authorities worldwide are continually heightening standards when it comes to comprehensiveness of corporate compliance programs. They are demanding more robust policies, processes, and controls not just for anti-corruption, but for trade, antitrust, data privacy, and anti-money laundering compliance as well. This spotlight on compliance has prompted the resignation of directors from their riskiest directorships, unwilling to assume vicarious responsibility. Consequently, these riskier board positions are now more readily filled by directors with relatively less board experience, a smaller network, and fewer academic qualifications (Ormazabal 2018). The impact of this new environment has also been felt in the rising number of directors’ and officers’ (D&O) insurance claims (European Confederation of Directors’ Associations, 2015).

But there has to be a way to retain talent in positions of leadership within firms. Is it simply increasing a director’s compensation as a risk premium? Is it buying the most bullet-proof D&O insurance policy on the market? These options can be effective to a certain extent. But the impossibility of controlling the conduct of every single employee, and in so doing granting total legal protection to directors, seems to render these attempts insufficient. However, having a proper system of corporate legal compliance in place is a good place to start. 

Indeed, in some European countries, a legal person is exempt from liability if it is ascertained during the investigation or trial that the entity had sufficient compliance rules and mechanisms and that it did everything in its power to prevent the crime. For example, the appointment of high-ranking level independent chief compliance officers, serious annual risk assessments (as enforced by Basel and Solvency for financial institutions), stringent policies and controls, and an ongoing monitoring system. 

All this considered, it is no secret that we can expect to witness greater interference of regulators and judges in matters related to the internal governance of the company. The banking sector in Europe is already experiencing this trend under the “fit and proper” principles. And in the context of this emerging business atmosphere, the role of compliance and corporate culture will continue to move to the forefront of corporate strategy. 

Miguel DuroProfessor of Accounting and Control. 
Félix Sánchez, Manager.
IESE Center for Corporate Governance

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IESE's Recent Research on Corporate Governance 

“Nurturing Personal Purpose at Work”

Chapter (August 2019)

Book: Carlos Rey, Miquel Bastons, Phil Sotok. Purpose-driven Organizations: Management Ideas for a Better World. Palgrave Macmillan, 2019. 
Authors: Rey, Carlos; Almandoz, John; Montaner, Alex
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“Managing Strategic Alliances” 

Chapter (July 2019)

Book: A. Caldart, J.E. Ricart, A. Carrera. General Management in Latin and Ibero American Organizations: A Humanistic Perspective. London: Routledge, 2019.
Author: Ariño, Africa
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Upcoming Events & Programs

IESE CCG and ECGI co-organize the conference “Corporate Governance and Ownership with Diverse Shareholders”

Date: October 25-26, 2019
Location: IESE, Barcelona Campus
Visit the event website

Executive Program: “Consejos de administración responsables”

Date: January 29-30, 2020
Location: IESE, Madrid Campus
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