On Boards Forum
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On Boards Forum

Directors Are Above The Law As The Law Currently Stands

Yesterday the Financial Times published a “Big Read” article on “The Legal Fight over a company’s ‘controlling mind’” [also referred to as the directing mind]. It tells the story behind the acquittal of three former Barclays employees after their retrial in a case brought by the Serious Fraud Office (SFO) which has dragged on for almost a decade. They were acquitted in just over five hours in a case that has massive implications for corporate governance in the UK. In practice it means directors are above the law as the law currently stands.

The heart of the matter was the question of responsibility for wrong doing. Does it rest with directors (i.e. ‘the board’) or the executive? Which of the two is the “controlling mind”, the legal term coined in the 1800s when businesses were far smaller and it was easier to identify who the controlling mind was.

In England and Wales a prosecutor must demonstrate the controlling mind of the company was involved in any alleged criminality. As the law now stands. “it is almost impossible to find a controlling mind and prove that controlling mind is complicit in any criminality” according to David Green, director of the SFO. The debate centres on whether the controlling mind refers to the executive or the board. It is ambiguous because there is simply no definition of what constitutes a controlling mind.

It has been thought a chief executive might be regarded as the controlling mind, but Mr Justice Jay dismissed that idea in the initial trial saying the Barclay’s CEO John Varley was answerable to the board and was therefore not working as the company but for the company.

As the Financial Times comments, the situation in the Barclay’s case meant, “the bank could not be held accountable for the actions of the chief executive, but neither could the chief executive be accountable for the actions of Barclays” i.e. the Board.

As the SFO has said, the ruling allows directors to “insulate themselves from liability” because alleged offences are now “impossible to prosecute”.

It is now thought the SFO will ask the Attorney General to grant permission for a special case to decide a ‘point of law’. It is also being suggested a solution may already exist since the need to identify a controlling mind does not exist in the case of bribery. It has been possible to prosecute corporations under the UK Bribery Act since 2011 for failure to prevent graft in their organisation. This was extended to cover tax evasion in 2017 and, “failure to prevent” could be extended as a way to determine that responsibility for other types of crime lies with the company i.e. the board.

Worryingly, whilst this situation is another example of corporate governance failure and should be addressed urgently, it is being suggested the prime minister will not wish to add ‘red-tape’ in the context of Brexit Britain. Should this matter not be addressed for any reason it would be a grave mistake by the government. It would then be acting as a ‘controlling mind’ in choosing to allow directors to stay above the law. And it would be guilty of abdicating its responsibility, leaving the image of UK corporate governance badly tarnished.

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An exploration of boards and governance

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Paul Barnett

Paul Barnett

Advocating the purpose of all enterprise should be contributions to sustainable widely shared prosperity measured in terms of human flourishing and wellbeing.

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