A glimpse at recent news headlines is telling of a mass social awakening underway. From the #MeToo movement to public reprimand against organizations’ unrealistic sales targets, it is clear that it is becoming increasingly important for companies to foster a positive “corporate culture”.  These scandals, once in the public eye, can have long-lasting damaging effects on businesses’ profitability, brand, and marketability.  Indeed, as noted in this previous post, millennials’ investment decisions are heavily influenced by a company’s brand.

But when these scandals do arise, what recourse is available? An article by Jennifer G. Hill, a Professor of Corporate Law at the University of Sydney Law School, identified the following forms of liability as means of addressing flawed corporate culture:

  • Criminal Liability of Corporations: Hill noted that a coherent theory of corporate criminal liability with respect to misconduct involving flawed corporate cultures is elusive. The famous House of Lords decision, Tesco Supermarkets Ltd v Nattrass, [1972] AC 153 (which was later criticized as being overly-stringent) held that the requisite mental and conduct elements are only attributable to the entity if they can be traced to the top of the corporate hierarchy. In Canada, the Supreme Court similarly held that in order to trigger corporate criminal liability, the actor-employee who physically committed the offence must be the “directing mind” of the corporation. Accordingly, actions undertaken by those without decision-making authority, but that nonetheless impact corporate culture, may go unpunished.
  • Criminal Liability of Directors and Officers. Hill explained that individuals who intentionally commit criminal acts in the corporate setting can, of course, be prosecuted for that conduct. However, while directors and senior officers may be responsible for creating a corporation’s flawed corporate culture, their action (or inaction) will usually fall outside of established principles of criminal liability. In this respect, it is an onerous undertaking to prove the requisite mens rea and to apply these principles to a director or officer’s omissions.
  • Civil Liability for Breach of Directors’ Duties. A third possibility is civil liability for breach of duties to oversee, recognize, and address ethical risks that arise from a flawed corporate culture and result in corporate wrongdoing. The business judgment rule, however, offers capacious protection in Canada. Conversely, Australian courts have taken the opposite approach, and are increasingly categorizing directors’ duties as “public obligations” that carry an important social function. Australian case law further provides that directors have an obligation to oversee and monitor the activities of the company, and that their failure to do so can amount to a breach of the required duty of care.

Despite the recent media-attention, Hill noted that many of these forms of liability are ill-suited to achieve director and officer accountability. As it stands, shareholders and consumers that wish to bring claims against corporations for liability arising from flawed corporate culture may be more likely to find redress in class action proceedings. For example, the secondary market liability provisions in Ontario’s Securities Act provide a statutory cause of action for misrepresentations in disclosure documents. In the meantime, social pressure from consumers and investors may have the strongest influence to address an entity’s flawed corporate culture.

The author would like to thank Elana Friedman, articling student, for her assistance in writing this legal update