Guilty Corporate Minds: regulating corporate (mis) conduct

This guest editorial was written for the ANZSOG/National Regulators Community of practice monthly newsletter, highlighting new additions to the Regulation Policy and Practice collection on APO. The RP&P collection brings together a range of practical resources from national, local and state/territory governments, regulatory agencies and external institutions conducting monitoring, inquiries and reviews. You can receive this newsletter by  joining the ANZSOG/National Regulators Community of Practice (membership is free) or  subscribe to the newsletter directly.

By Dr Elise Bant FAAL

I recently had the pleasure of discussing the vexed question of attribution of corporate mental states with Ray Finkelstein (former Federal Court judge and Victorian Royal Commissioner) and Rowena Parks. Why is this a vexed question? And why does it matter? 

It is a vexed question because corporations are artificial persons who, by definition, lack a natural mind. Yet our laws generally are premised on human subjects. And most serious forms of wrongdoing require proof of high levels of blameworthiness, which generally means a guilty state of mind. Here, concepts like knowledge, intention, mistake, and related normative standards such as dishonesty, recklessness and unconscionability play critical, and recurrentroles across common law, equity and statute. [1]

Consistently, in regulating corporate misconduct, defendant culpability underpins every stage of enforcement: whether to proceed informally, through administrative processes or through litigation; identifying the breaches that have occurred; considering settlement; and terms of any penalties or remedial outcomes, among others. 

So, unless we are going to develop a corporate-specific set of strict liability laws, and remove all inquiries into corporate fault (and I am not sure this could be done effectively, even if we wanted to), we need to be able to identify and assess the corporate state of mind. This is no easy task. But it is absolutely necessary. 

Nowadays, corporate actors dominate the commercial landscape. And they enjoy capacities denied to natural persons: they do not require sleep, enjoy perpetual succession, can operate across borders and time zones simultaneously, can split and rearrange their parts to make doppelganger relatives to work alongside them, thereby minimising the parent’s liabilities, and (all going well) never die. So, when corporations behave badly, harms and risks can be magnified exponentially, and regulators are correspondingly hard-pressed to act. 

Unfortunately, our current attribution ‘toolkit’ generally requires proof of some individual (natural) repository of fault, whose guilty state of mind can be attributed to the corporation. This might be a member of the corporation’s ‘directing mind and will’ (generally, the Board of Directors), [2] the person identified by a particular statute as the relevant person for the purposes of the law’s prohibition, [3] or an employee or agent acting for and on behalf of the corporation who has committed the misconduct. [4] But all these approaches are deeply individualistic, looking for a guilty human hook on which to hang the corporate wrongdoer. 

These approaches generally work fine (ironically) for mum and dad companies, or small businesses. But they are hopelessly inapt where they are needed most: when dealing with large, powerful companies that can cause correspondingly diverse and serious harms. Modern companies tend to have devolved structures, where knowledge (and hence responsibility) is spread across departments and groups, segmented in information silos and often held well below Board level. This problem of ‘diffused responsibility’ [5] undermines the law’s – and regulators abilities to remedy, deter and (where necessary) punish serious corporate wrongdoing. The increasing use of automation makes our current attribution rules even less ‘fit for purpose’: here, there may be very little or no human involvement in the process that has produced harm. 

It is here that my model of ‘Systems Intentionality’ seeks to offer a new, and workable, way forward. [6] Systems Intentionality proposes that corporations manifest their states of mind through their systems of conduct, policies and practices. The basic idea is extremely simple and intuitive. Natural persons routinely use systems of conduct to guide their decision-making and, hence, conduct. Common examples are recipes, directions on a map and notations. These ‘external decision supports’ [7] enable a person to achieve their purpose: to make a cake, find a location, or recall how to do something. And they manifest (in the sense of reveal and give effect to) these purposes. If, for example, I am observed applying a cake recipe-system, it is simple to understand that I mean to engage in baking (my intended conduct) in order to make a cake (my intended result of that conduct). Further, some of my knowledge is patent from my successful application of the recipe-system: I must know what flour is, the process of beating eggs and so on. No mind-reading is required: we can objectively assess and understand my state of mind from the system of conduct that I deploy. 

Similarly, corporations utilise systems of conduct to enable them to achieve their organisational purposes. Indeed, for corporations this is absolutely necessary, because corporations lack natural minds or memories, and because the humans (and corporations) through which they act frequently change. To put this another way, corporations necessarily think through their systems. So assessing those systems allows us to understand corporate intentions and knowledge. Nor does this analysis change if certain steps are automated: returning to my cake example, the fact that I use a food processor for one stage in my recipe makes no difference to the ability to assess my state of mind from the system of conduct that I deploy. So too it is with corporations. 

These simple ideas have big consequences for corporate governance, regulation and enforcement. My research shows how they can be used to establish the spectrum of corporate mental states, including in litigation contexts. [8] They suggest, for example, that ‘Board renewal’ won’t be enough to fix a delinquent corporation: to change its ways, a corporation must adopt, and embed, ethical and lawful systems, policies and practices. And this means incorporating appropriate audit and remedial mechanisms to correct the corporate conscience, when it goes astray. Systems Intentionality makes clear how, and why, glossy policies that are not enacted are best understood as forms of misleading conduct (as to the true corporate intentions) and actionable accordingly. [9] And the model turns on its head the common claim that systemic misconduct can be explained as administrative errors or simple bureaucratic negligence. Systems of conduct are intrinsically purposive. Any claim to the contrary demands close scrutiny. 

[1] Recent inquiries in Australia and England reflect the critical importance of the question: https://apo.org.au/node/307955 (ALRC Final Report) chapters 4 and 6; and https://apo.org.au/node/320418 (Law Commission Corporate criminal liability options paper).

[2] The authorities are usefully gathered and discussed in ALRC Final Report [4.58-[4.72].

[3] Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500, 507 (Lord Hoffmann).

[4] The ‘TPA model’, originally contained in Trade Practices Act 1974 (Cth) s 84 is the best-known and most widely copied example: see ALRC Final Report [3.60]-[3.63], [6.123]-[6.160].

[5] B Fisse, ‘Reconstructing Corporate Criminal Law: Deterrence, Retribution, Fault, and Sanctions’ [1983] 56 Southern California Law Review 1141, 1189.

[6]The model and selected publications are explained further at  https://www.uwa.edu.au/schools/research/unravelling-corporate-fraud-re-purposing-ancient-doctrines-for-modern-times .

[7] M Diamantis, ‘The Extended Corporate Mind: When Corporations Use AI to Break the Law’ (2020) 98 North Carolina Law Review 893.

[8] The full litigation roadmap is forthcoming in https://www.bloomsbury.com/au/culpable-corporate-mind-9781509952397/ .

[9] A common example is ‘greenwashing’, now a strategic priority for the Australian Competition and Consumer Commission: https://www.accc.gov.au/media-release/accc-internet-sweeps-target-greenwashing-fake-online-reviews.