NEW pieces of legislation are in the pipeline which may impact significantly on the form and structure of companies, and on the responsibilities of those in charge. The Company Law Review Committee, set up by the Department of Trade and Industry in 1998, is expected to present its conclusions to the government soon. This far-reaching investigation into the fundamentals of company law will include an examination of corporate governance issues and a definitive statement of directors' duties to the company, to be underpinned by legislation which includes criminal and civil sanctions for breaches of the new laws.
Strict disclosure requirements will also be introduced, including a streamlined timetable for publication of the report and accounts. These reforms should make it easier to establish where breaches of directors' duties have occurred, and to penalise those responsible.
The European Union has, for the best part of 30 years, been working towards establishing a European Company Statute, or Societas Europaea (SE). This regulation was ratified at the Nice summit in December 2000.
The principal aim of the SE is to give companies operating in more than one member state the option of being established as a single company under community law, rather than as a network of separate subsidiaries.
This company would then be able to operate throughout the EU in accordance with one administrative framework – greatly simplifying the administrative and regulatory burdens of multi-national organisations, which presently have to comply with the varying requirements of each member state where they operate.
The SE is expected to be implemented in 2004 and is seen as being crucial to the creation of a fully integrated financial services market in the EU.
In the UK, high-profile tragedies such as the Selby, Hatfield and Paddington rail crashes have ensured that the government's proposed new corporate killing law has remained highly topical. The draft bill, based on a 1996 report by the Law Commission, was issued in May 2000, but the volume and complexity of responses to the consultation meant that the legislation could not be included in the current parliamentary session.
The forthcoming general election raises further doubts as to when the proposals might become law. Continued public pressure for action should, however, ensure that the issue remains at the top of the political agenda.
When implemented, the bill should make it easier to bring successful manslaughter prosecutions against companies.
At present, it is necessary to identify an individual who is the “embodiment of the company” and can be proven to be guilty of manslaughter – a notoriously difficult task, demonstrated by the fact that only three such cases have succeeded to date.
Under the new proposals, demonstrating that a “general management failure” was responsible for the death will be sufficient for a conviction for corporate killing (the penalty for which would be an unlimited fine). The damage to the company's reputation and to shareholder value would, of course, be considerable.
A further proposal in the draft bill, whereby an identifiable, culpable director may be disqualified from continuing to act in a management capacity, means that individual directors would still be exposed to the risk of prosecution.
Meanwhile, a number of organisations have expressed their support for the corporate killing legislation. In some cases, they have revealed complementary proposals of their own, such as the Health and Safety Commission's public consultation exercise on the health and safety responsibilities of directors.
Duty of directors
Whereas the forthcoming legislation is concerned with establishing a means of compensating for death arising from companies' activities, the HSC's document proposes a new code.
This sets out the Commission's view of the health and safety responsibilities of board members of both private and public organisations. Directors are urged to recognise and act upon their duty to provide leadership on health and safety in their organisation. This includes appointing a “health and safety director” to ensure staff are consulted on the issues and to keep the board informed of all relevant matters in their company.
The code is in line with the government's Revitalising Health and Safety initiative, launched last year, which aims to cut work-related deaths, injuries and illness over the next ten years. This is a laudable aim – the HSC estimates that the British economy currently loses £18bn every year from workplace health and safety failures.
Time to prioritise
Further, a recent MORI survey for the British Safety Council highlighted that health and safety was only the fifth priority for top executives in British industry. Only 13% rank the issue in their top three corporate objectives, behind building shareholders' profits and customer satisfaction, new product development, and staff training.
The message for directors is plain: the forthcoming legislation will highlight their responsibilities and duties, and be accompanied by criminal sanctions for those who fail to comply. Prevention is preferable to punishment and, by working with their clients, insurers and brokers can do much to highlight the causes of losses and to suggest effective risk management strategies.
If, despite these efforts, losses do occur, directors and officers' liability insurance is a valuable tool, covering the costs of investigating and defending a claim, including a successful defence of a criminal action.
The writing may well be on the wall for company directors, but fortunately the legislation will not be in place for some months or even years. Directors should use this time to investigate the risks associated with their companies' activities and to put appropriate measures – including insurance cover – in place.