French, Justice Robert --- "The culture of compliance - a judicial perspective" (FCA) [2003] FedJSchol 16

Australian Compliance Institute

National Conference
Culture is Critical

Sydney

3-5 September 2003

The Culture of Compliance – A Judicial Perspective

Justice RS French
Federal Court of Australia

Introduction
The term ‘culture of compliance’ for some may be evocative of the bland horrors of the suburb of Stepford in the 1975 film ‘The Stepford Wives’. In that film, which is this year being remade as a black comedy starring Nicole Kidman, all the town’s women were replaced by passive female robots each subservient to her husband’s every wish and whim.

This paper considers the idea of a culture of compliance and its relevance to the liability of corporations for breaches of the law and the imposition of penalties and other orders. Such a culture does not require robotic risk averse managers and staff. It is defined by active organisational engagement with legal and regulatory requirements. It is supported by structures, programs and procedures designed to ensure that the conduct of management employees accords with the law and regulatory codes. In best practice cases it will be manifested by a commitment to an ethical framework that predisposes members of the organisation to lawful decision-making because it seems right even if the detail of the law is not known by the decision-maker.

The law’s perspective on this kind of corporate culture recognises its social benefit and bears upon criminal and civil liability for offences and contraventions of the law and upon the penalties that may be imposed and other orders that may be made where an organisation has broken the law. In considering that perspective it is necessary first to think about definitional issues and from there the elements of a culture of compliance that are relevant to liability and to disposition where there has been a contravention. It is also necessary to understand how these things interact with considerations which influence judges in the assessment of the penalties that may be imposed or other orders that may be made.

Corporate Culture of Compliance – The Definitions
The mainstream dictionaries are not particularly helpful in the search for the meaning of corporate culture. A search of Google websites yielded definitions of varying utility including the very practical ‘how we do things around here’ adopted by an organisation called ‘Process/Edge’.

The American Heritage Dictionary of the English Language in its 4th Edition, published in 2000, notes that the application of the term ‘culture’ to the collective attitudes and behaviour of corporations arose in business jargon during the late 1980’s and early 1990’s. It spread to popular use in newspapers and magazines. The dictionary observes that:

‘Ever since CP Snow wrote of the gap between ‘the two cultures’ (the humanities and science) in the 1950’s, the notion that culture can refer to smaller segments of society has seemed implicit. Its usage in the corporate world may also have been facilitated by increased awareness of the importance of genuine cultural differences in a global economy, as between Americans and the Japanese, that have a broad effect on business practices.’

The relevant definition offered by the Heritage Dictionary is:

‘The predominating attitudes and behaviour that characterise the functioning of a group or organisation.’

The Collins English Dictionary 2000 Edition defines corporate culture as:

‘The distinctive ethos of an organisation that influences the level of formality, loyalty, and general behaviour of its employees.’

The term ‘corporate culture’ also appears and is defined in a major Commonwealth statute. As of 15 December 2001, the provisions of the Commonwealth Criminal Code relating to corporate criminal responsibility apply to all federal offences save for those offences created under Acts which retain specific regimes of corporate responsibility. Where intention, knowledge or recklessness is a necessary element of an offence that state of mind will be attributed to a body corporate that expressly, tacitly or impliedly authorised or permitted the commission of the offence. The Code provides in Pt 12.3 the means by which such an authorisation or permission may be established. These include:

‘(c) Proving that a corporate culture existed within the body corporate that directed, encouraged, tolerated or led to non-compliance with the relevant provision.’ – This may perhaps be referred to as a culture of non-compliance.

Or

‘(d) Proving that the body corporate failed to create and maintain a corporate culture that required compliance with the relevant provision.’

- This may be referred to as the non-existence of a culture of compliance.

The term ‘corporate culture’ is defined in s 12.3(6) of the Code thus:

‘Corporate culture’ means an attitude, policy, rule, course of conduct or practice existing within the body corporate generally or in the part of the body corporate in which the relevant activities take place.

In determining whether the relevant corporate culture of non-compliance existed or whether no corporate culture of compliance exists, a court may have regard to:

(a) whether authority to commit an offence of the same or a similar character has been given by a high managerial agent of the body corporate; and

(b) whether the employee, agent or officer of the body corporate who committed the offence believed on reasonable grounds or entertained a reasonable expectation, that a high managerial agent of the body corporate would have authorised or permitted the commission of the offence.

This definition is directly relevant to liability for criminal offences against federal laws. It does not operate as part of the legal rules governing the punishment that may be imposed for breach of the criminal law. It does not apply to liability for contraventions of civil penalty provisions. So it does not apply to the imposition of civil penalties which are provided for in some parts of the Trade Practices Act 1974 (Cth).

The definition is generally important as an illustration of the rapid rise in the law of the concept of corporate culture since it entered common usage in the English language in the 1980’s.

The Criminal Code definition of ‘corporate culture’ is an extraordinarily wide and vague one. It picks up individual policies or rules or practices. It does not accord with the emphasis on predominating attitudes and behaviour or distinctive ethos that appear in the two dictionary definitions quoted above. Importantly the Code definition is directed towards criminal responsibility. [1] In assessing a penalty a judge having regard to a corporate culture of compliance is more likely to be concerned with the overall picture of the attitudes and behaviours pervading an organisation which may be a useful predictor of its future conduct. In so doing of course, a judge will be concerned to know the concrete detail upon which a judgment about corporate culture can be made.

The idea of compliance involves the idea of complying with a request or command. In the context of the law it may be taken, without unnecessary complication, to refer to obedience to the law. So a corporate culture of compliance means a set of attitudes and behaviours or an ethos predisposed to obedience to the law.

The Australian Compliance Institute has defined ‘compliance’ as the provision of services that facilitate an organisation identifying and meeting its obligations whether these arise from laws, regulations, contract, industry standards or internal policy.[2] I observe, with respect, that this is not really a definition of compliance, it is a definition of the nature of services provided by compliance professionals.

What is Necessary to Establish a Corporate Culture of Compliance
A corporate culture of compliance needs more than the say so of the Chairman of Directors or the Chief Executive Officer to show it exists. Although the definition may be expressed in the rather numinous language of ‘predominating attitudes and behaviour’ and ‘ethos’ it will require details and concrete evidence to persuade a court that the relevant culture exists. This is particularly so when there has been a contravention of the law. For the fact of contravention implies at least the possibility that a corporate culture of compliance may not exist.

In Trade Practices Commission v CSR Ltd (1991) ATPR 41-076, CSR admitted in the Federal Court to having taken advantage of its market power in the market for the supply of ceiling materials in an anticompetitive way. This was a contravention of s 46 of the Trade Practices Act as it then stood. The maximum penalty for such a contravention was $250,000. There was evidence before the court of a corporate compliance program. The company had produced in 1980 a Guide to the Trade Practices Act for internal use. It had also conducted staff seminars in 1985. However at the time of the penalty assessment in the Federal Court there was no evidence that the Guide had been updated and nothing to suggest that any educational program had been undertaken within the company since 1985. The conduct which constituted the contravention of the Trade Practices Act had occurred in 1987 and 1988. The State Manager of the relevant product division of CSR had attended the 1985 seminar which included discussion of ss 46 and 47 of the Act. The evidence was that he regarded those provisions as difficult to understand and took the view that he would be guided in their application by legal advice. Having regard to the difficult history of s 46 and 47 in the courts he may have been entitled to some degree of sympathy.

In fixing a penalty, which at that time was close to the maximum, the court found:

‘There was little convincing evidence of a corporate culture seriously committed to the need to comply with the requirements of the Act. The compliance program as indicated by the evidence appeared desultory and in need of reinforcement. No indication of any corrective measures or revitalisation of that program was offered.’[3]

The corporate culture was also seen to be reflected in CSR’s conduct of the litigation, although, to its credit, it withdrew its defence and submitted to injunctions. These actions came ‘... nearly two years after proceedings were instituted and followed a period of protracted stonewalling in CSR’s dealings with the Commission’.[4]

Broadly speaking it may be said that the clearest indicator of a corporate culture of compliance is the existence within a corporation of effective compliance programs. The fact of a contravention of the law will not necessarily prevent a court from finding that the offending organisation has effective compliance programs.

Any serious contravention of the law by a company can give rise to an inference that there is a weak or non-existent culture of compliance and no effective compliance programs. Compliance programs which are not implemented or regularly reviewed and audited will not displace that inference.

There is no-one-size-fits all prescription for effective corporate compliance programs and even less is there such a prescription for the establishment of a corporate culture of compliance. What is necessary will depend upon a variety of factors including:

1. The nature of the law concerned including its subject matter, complexity and moral clarity.
2. The size and complexity of the company involved.
3. The management structure and geographical dispersion of the company and in particular whether there are distinct profit centres under managers with strong incentives to maximise performance.
4. In the case of companies selling goods or services, the level of education and training of those responsible for marketing of the company’s products and the rate of turnover of sales staff.
   

The importance of the complexity and moral clarity of a law is not to be underestimated in relation to making compliance programs work and developing an appropriate corporate culture. There are some laws which are relatively easy to understand in principle and which reflect commonly held values. In the case of such laws a culture of compliance may be relatively easy to establish. Laws mandating honest conduct and prohibiting false or misleading conduct, laws about sexual harassment, laws about occupational health and safety may be sold internally as requiring no more than decent moral conduct according to widely accepted community values. Indeed a compliance program in respect of such laws could reflect and implement a code of ethical conduct.

But not all laws command moral assent. Competition law walks a tightrope between vigorous, legitimate, commercial conduct and conduct which unlawfully damages competition. Lawful competition is an amoral process which may damage competitors. The Trade Practices Act is concerned with the protection of competition, not competitors. The distinction which sounds clear in theory may be anything but clear in practice. Difficulty may arise in deciding whether a proposed course of conduct is a misuse of market power and therefore a contravention of s 46 of the Act. When does price competition become predatory pricing? When is refusal to supply a competitor, anti-competitive? When do the ethical codes of professional or other occupational groups, including such things as restrictions on advertising, become anti-competitive horizontal arrangements? There are not always clear-cut answers to these questions. Section 46 which prohibits misuse of market power is perhaps the most acute case in point of difficulty in construction and application. This is well illustrated by recent litigation on that section which has led to varying interpretations of its meaning.[5]

Not only may the law lack moral clarity. The corporate culture may regard that which is prohibited as perfectly reasonable conduct. One example of this phenomenon can be seen in Australian Competition and Consumer Commission v Real Estate Institute of Western Australia Inc.[6] The REIWA Rules of Practice restricted competition between its members in a number of ways. One rule required all franchisees of any real estate group to become REIWA members if any of the group were to be REIWA members. Another rule prevented members from offering incentives such as prizes or reward points to the public. Another rule prevented members from approaching vendors who had entered into exclusive listing arrangements with other agents.

REIWA ultimately consented to declarations that these rules contravened s 45 of the Trade Practices Act and submitted to injunctive orders and an order to implement a trade practices compliance program. Before that point was reached REIWA had actively sought to enforce its rules and had been critical of the ACCC for being involved in issues relating to them. Following advice from independent counsel, it removed them. In making the consent orders, largely along the lines proposed by the ACCC and REIWA, the Court observed at [51]:

‘The proposed Compliance Program is limited to Pt IV of the Act. The admissions made in the defence and the Joint Submission indicates that there was, prior to resolution of these proceedings, a strong, indeed it might be said righteous, belief within REIWA of its entitlement to behave in the way that it did, which was in blatant contravention of various provisions of Pt IV. In the light of that entrenched culture of non-compliance, no doubt based upon misunderstanding of the application of Pt IV, there is a need for the development in REIWA of an institutional sensitivity to and understanding of the principal provisions of Pt IV. Such institutional sensitivity and understanding of the law is indispensable to the culture of compliance which will minimise the risk of further contraventions of the Act in this area. The development of that culture is not going to happen overnight. There will plainly be a need to build up appropriate infrastructure, supporting internal practices and procedures, which over a period of time will bring about the necessary changes.’[7]

These remarks were directed to orders imposing a compliance program. They are, however, relevant to the difficulty of framing any compliance program which is counter-cultural in the corporate context. The explanation of such a program and the rationale for it and the law it seeks to apply requires a high standard of clear communication.

Elements of effective compliance programs are set out in the Australian Standard 3806-1998. It is sufficient for present purposes to draw attention to its salient features:

1. Structural Elements comprising the following:

(i) commitment to effective compliance at all levels of the organisation;

(ii) a clear statement of commitment in a compliance policy;

(iii) responsibility for compliance vested in all managers;

(iv) sufficient resources to implement compliance;

(v) a commitment to continuous improvement.

2. Operational Elements:

(i) identification and management of compliance requirements;

(ii) integration of compliance requirements in corporate operating procedures;

(iii) consistent enforcement, appropriate remedial measures and continuous training;

(iv) system for complaints handling and compliance failure;

(v) systematic recording of components and applications of the compliance program;

(vi) classification, investigation and rectification of compliance failure;

(vii) identification and rectification of systemic and recurring problems;

(viii) internal reporting arrangements;

(ix) management supervision.

3. Maintenance:

(i) practical education and training of staff;

(ii) visibility and communication of program to staff, agents, contractors and other relevant third parties;

(iii) monitoring and assessment;

(iv) regular review to ensure effectiveness;

(v) ongoing liaison with regulatory authorities;

(vi) accountability – reporting on operation of compliance program against documented performance standards.

The standard is expressed in language that is aspirational and recommendatory. It is in form a communication to those seeking guidance setting up a compliance program. It provides a useful general guide for assessing whether a compliance program has been established to be effective in a way that affects a judgment about corporate culture. It does not, however, readily translate into court orders. Generally speaking, the standard may assist the court in weighing up an existing compliance program. However, it should not be seen by regulators as a ready made court order for the content of compliance programs.

Other suggestions have been published for the construction of effective compliance programs. In a paper presented to the Financial Planning Association of Australia National Convention in December 2000, Professor Allan Fels focussed upon the Structural and Operational Aspects of Compliance Programs in the trade practices content. The maintenance element was incorporated as part of the operational elements.[8]

Doctor Christine Parker at Sydney University has referred to a combination of behavioural and procedural controls.[9] Behavioural controls are directed to the conduct of individuals by education and training of management and employees. They include:

1. Regular and ongoing training.
2. Trade practices being part of induction and annual development.

3. Penalties including disciplinary measures or dismissal where an employee has broken the law.
4. Incentives for compliance, eg for job selection criteria and performance reviews.
5. No incentives for non-compliance, eg no bonuses for increased sales by reason of price fixing.
   

Procedural controls involve management systems designed to prevent breaches and include:
1. Checking contracts.
2. Checking systems for labels.
3. Clearing systems for promotional and advertising material.[10]

The Canadian Competition Bureau, in a 1997 publication entitled Corporate Compliance Programs, identified elements of an effective compliance program. These were:

1. The involvement and support of senior management.
2. The development of relevant policies and procedures.
3. The ongoing education of management and employees.
4. Monitoring, auditing and reporting mechanisms.
5. Disciplinary procedures.
   

While the elements of the Canadian Guide are directed to compliance with competition law, they are plainly of more general application. A concise checklist of essential elements in this form can be very useful to a court in analysing the effectiveness of a compliance program. No such checklist can be exhaustive and cover all circumstances but it can set a framework for analysis which is of practical benefit.

The Interactions Between Compliance and the Law – Corporate Liability for Contraventions
The existence of effective compliance programs interacts with the law in two ways. It may go directly to the question whether the company is liable at all for a breach of the law. It may also go to the penalty that it to be imposed when a contravention is made out.

When a criminal offence against a law of the Commonwealth is committed by an officer of the company and requires proof of a state of mind such as knowledge, intention or recklessness, that state of mind may be attributed to the company which may be held liable for the contravention. The ways in which such a state of mind may be attributed to the company are set out in the Commonwealth Criminal Code. Such attribution may occur where a corporate culture of non-compliance is shown to exist or where there has been a failure to create a corporate culture of compliance. The scope of this provision and the definition of corporate culture referred to earlier is yet to be the subject of any significant court decisions.

The existence or non-existence of effective compliance systems may determine corporate liability for contraventions of the law in another way. So in s 85(1)(c) of the Trade Practices Act it is a defence to a criminal prosecution under the Act that the defendant ‘took reasonable precautions and exercised due diligence to avoid the contravention’. This defence covers a number of criminal offences set out in Pt V(C) of the Act. These include a variety of unfair marketing practices (Div 2) and offences relating to product safety and product information (Div 3).

The defence of reasonable precautions under s 85(1)(c) may be raised on the basis of certain kinds of compliance systems designed to avoid the kinds of contravention that occurred. In Universal Telecasters (Qld) Ltd v Guthrie[11], a company was prosecuted for falsely representing that tax savings on new car sales would end after a certain date. In relation to a defence raised under s 85(1)(c) that Universal Telecasters took reasonable precautions and used due diligence, Bowen CJ said:

‘... it appears to me that two responsibilities which Universal Telecasters would have to show it had discharged, in order to establish this defence, would be that it had laid down a proper system to provide against contravention of the Act and that it had provided adequate supervision to ensure that the system was properly carried out.’[12]

His Honour went on to observe that the mere fact the system and its supervision had proved inadequate to prevent error did not necessarily mean that the system was defective. He recognised that even the best systems break down because of human error.

A company which has an effective procedure which it fails to supervise may be held not to have taken reasonable precautions. So where a company fails to supervise brochures produced by its agent which turn out to be false and misleading, the existence of a compliance system will not amount to a defence under s 85(1)(c) – Videon v Beneficial Finance Corporation and Others.[13] The compliance system put in place must have been designed to avoid the contravention charged, not merely as a general business system, if it is to be relied upon as amounting to a reasonable precaution – Adams v Eta Foods Ltd (1987) 19 FCR 93.[14]

A ‘reasonable steps’ defence is available under s 106 of the Sex Discrimination Act 1984. The vicarious liability of an employer for unlawful sexual harassment and sex discrimination by employees is avoided if the employer ‘took all reasonable steps to prevent the employee or agent’ from doing those acts. Similar provisions may be found in State Equal Opportunity Acts. Referring generally to the case law on these provisions, Parker and Conolly observe:

‘Although the courts and tribunals have decided liability on a case-by-case basis, usually a medium or large sized organisational employer will only escape liability if it can give evidence that it has taken active measures to prevent sexual harassment by issuing a sexual harassment policy, effectively communicating management disapproval of such practices, and training staff about their responsibilities (in effect a sexual harassment compliance system).’[15]

Beyond providing a legal basis for negating liability in some cases effective compliance systems will reduce the risk of contraventions happening in the first place. Indeed they have become such an accepted part of business systems today that a failure to provide them may expose company directors to liability for derivative actions.

The Interaction Between Compliance and the Law – Directors’ Liabilities
A leading American authority on the issue of the liability of directors for failure to provide for effective compliance systems in their company is the decision of the Court of Chancery of Delaware in Re Caremark International Inc 698 A 2d 959 (Del Ch 1996). Caremark had contravened federal and state laws and regulations applicable to health care providers. As a result it paid out civil and criminal fines and made reimbursement payments totalling $250 million. A derivative action was brought in 1994 against the directors seeking recovery of these losses. The action was settled and the decision of the Court was required to determine if the settlement was fair. The remarks made in the course of that decision led to it being treated as an authority for the proposition that the failure to provide a compliance program may be a head of civil liability sheeted home to company directors.

The judge made it clear that corporate boards have a duty to assure themselves that information and reporting systems exist in their organisations that are reasonably designed to provide to senior management and to the board itself timely and accurate information to enable each, within its proper sphere, to reach informed judgments about their company’s compliance with law and business performance. The court allowed for a ‘business judgment’ standard on the level of detail required. It also accepted, as did Bowen CJ in the Universal Telecaster’s case in Australia, that no information system and reporting system could remove the possibility that senior officers or directors might be misled or fail to detect acts of non-compliance with the law. At the heart of the judgment in Caremark was the following observation:

‘But it is important that the board exercise a good faith judgment that the corporation’s information and reporting system is in concept and design adequate to assure the board that appropriate information will come to its attention in a timely manner as a matter of ordinary operations, so that it may satisfy its responsibility.’

The focus of those remarks was upon information and reporting systems. Such systems, of course, are just one element of an effective compliance program which will extend to training and education, enforcement and audit. But the remarks seem equally capable of application to the directors’ duty to exercise at least a good faith business judgment in the provision of effective compliance programs generally.

Before leaving Caremark it should be noted that the settlement of the plaintiff shareholders’ action in that case involved no monetary payment by the directors. Caremark was required to improve its compliance practices in specified ways and to pay $869,500 in fees to the attorneys for the plaintiff shareholders.

The Caremark standard was followed in later decisions in the United States – Dellastatious v Williams [2001] USCA4 42; 242 F 3d 191 (4th Circuit Feb 22, 2001); and in Re Abbott Labs – Derivative Shareholder Litigation (Northern District of Illinois March 28, 2001). The Dellastatious court rejected a claim against directors of a company for failing to prevent violations of the Securities Exchange Act, observing that directors avoided liability for alleged insufficient supervision by showing:

‘... that they attempted in good faith to ensure that an adequate corporate information gathering and reporting system was in place.’

On similar grounds, the Northern District of Illinois rejected a claim in the Abbott Labs case that directors had failed to monitor and remedy violations of food and drug regulations.[16]

The issue of directors’ duties in relation to corporate compliance programs in Australia is subsumed in the laws directed to directors’ duties generally. These may be found stated in the Corporations Act 2001.

Part 2D.1 deals with the duties and powers of the officers and employees of companies, including company directors. There is a general duty of care and diligence in the exercise of directors’ and other officers’ powers and duties. The standard of care is that of ‘a reasonable person’ in the position of that director or officer (s 180(1)). That standard and the equivalent duties at common law and equity will be met where the director or officer who makes a business judgment:

(a) makes the judgment in good faith for a proper purpose;

(b) does not have a material interest in the subject matter of the judgment; and

(c) informs himself or herself about the subject matter of the judgment to the extent he or she reasonably believes to be appropriate;

(d) rationally believes that the judgment is in the best interests of the corporation.

This is a civil penalty provision. So too is s 181 which requires directors to exercise their powers and discharge their duties in good faith in the best interests of the corporation and for a proper purpose.

Section 180 allows the special background, qualifications, responsibilities and position within the corporation of the particular director to be taken into account when evaluating an officer’s compliance with the duty of care and diligence.[17] The section reflects the comments of Rogers J in AWA Ltd v Daniels t/as Deloitte Haskins & Sells[18] that the duties of directors and officers would depend on the company’s size and the terms of his or her employment (as a full-time, part-time, executive or non-executive director or officer). Account might also need to be taken of the variety of executive positions which may exist, particularly in large companies.[19] The Explanatory Memorandum to the Corporate Law Reform Act 1992, which introduced the fore-runner to s 180, s 232(4), stated:

‘... what constitutes the proper performance of the duties of a director of a particular corporation will be influenced by matters such as the state of the corporation’s financial affairs, the size and nature of the corporation, the urgency and magnitude of any problem, the provisions of the corporation’s constitution, and the composition of its Board.’[20]

Importantly, s 189 provides, in substance, that good faith reliance on professional or expert advice, given or proposed by an employee, professional adviser or expert whom the director believes on reasonable grounds to be reliable and competent, is taken to be reasonable. If directors and officers have a common law duty or a duty arising under the general provisions of Pt 2D.1 to provide for effective compliance systems, reliance may be placed upon competent advice. Such reliance may be an answer to a common law claim that directors have acted negligently in failing to provide an effective compliance system. It may also be an answer to an allegation that the directors have breached their statutory duty of care and diligence.

Prior to the enactment of s 189 the Court in Daniels v Anderson[21] had raised doubts as to the extent to which it was permissible for directors – non-executive directors in particular – to delegate functions to, and rely on the judgments of, others. Ignorance, a failure to enquire, or blind reliance on the judgments of others were held not to protect directors from liability for breach of the duty of care and diligence.

Section 189 now presumes such reliance is reasonable if the director acted in good faith and made an independent assessment of the information or advice (having regard to the director’s knowledge of the corporation and the complexity of the structure and operations of the corporation.

The application of the general language in which duties of company directors is expressed is worked out case-by-case. The determination by judges of what it is reasonable to expect of directors within the parameters of statutory language will be informed, inter alia, by contemporary good practice. There is plainly an increasing emphasis on the utility of effective corporate compliance programs in minimising the risk that the agents and employees of companies will breach the law in a way that can be attributed to the company. The existence of an Australian Standard for Compliance Programs, the burgeoning literature about them, their recognition in court orders, their recognition, at least by implication, in the Commonwealth Criminal Code and the very existence of the Compliance Institute will not fail to have an impact on the question whether and to what extent company directors have a duty to ensure that there are compliance programs in place in relation to the areas of law affecting a company’s operations.

The particular circumstances and responsibilities of an individual director, particularly where a director is engaged in a specific or discrete capacity, may influence judicial consideration of the director’s personal responsibility for overseeing a corporate compliance program, and the appropriate penalty to be applied in the circumstances.

It is also relevant to note that under par 4-10 of the ASX Listing Rules, publicly listed companies are required to include in their annual report a statement of the risks facing the company and the measures being taken to address them. It has been suggested, in the context of the Trade Practices Act, that ‘trade practices risks’ should be included in such a statement with the most effective preventive strategies against such risks being an effective compliance program.[22] Whether that suggestion unduly inflates the operation of the listing rule may be debatable. It is indicative however of the attention which it seems any prudent board and management should be giving to the need for compliance programs in areas of the law affecting their company’s operations.

At the same time in the context of directors’ duties and good practice generally, it is important to maintain a balanced view. A multiplicity of detailed and disparate compliance programs supported by seminars, manuals, procedures, audits and enforcement may end up clogging the corporate arteries with sclerotic growths. Companies are vehicles of economic activity and they must be able to operate as such for the benefit of the whole community. Statutory or judicial prescriptions should not undermine that fundamental social good.

So too those professionals who are in the business of selling advisory or planning services in relation to compliance programs need to identify the areas of greatest risk requiring attention for the development of full-scale programs.

An area of concern for company directors arises where they are subject to statute-imposed liability for breach of the law by their company. This is a liability imposed not through general provisions relating to directors’ duties but directly and specifically by particular statutes.

Environmental protection is one such area. Liability may be strict as in the case of the Protection of the Environment Operations Act 1997 (NSW) s 169. It may be dependent upon the involvement of the person charged in failing to prevent the breach – Environment Protection and Diversity Conservation Act 1999 (Cth) s 494(1). Professor Hill of the University of Sydney Law School has observed that:

‘The regulatory justification for this development is the hope that imposition of personal liability on directors and officers will prompt them to monitor more effectively their corporation’s activities and ensure compliance with environmental laws.’[23]

Another area of potential exposure for company directors and officers is in occupational health and safety. The Victorian Crimes (Workplace Deaths and Serious Injuries) Bill 2001 included a provision which had it been enacted, would have reversed the onus of proof to establish liability of company officers charged with workplace deaths. This did not pass through the Victorian Legislative Council. Under current legislation – The Occupational Health and Safety Act 1985 (Vic) a company officer has secondary liability where the offence was committed with the ‘consent’ or ‘connivance’ or by the ‘wilful neglect’ of the officer.[24]

In all of these areas where the law imposes responsibility for corporate compliance on to the shoulders of directors and corporate officers there will be a powerful incentive to introduce effective compliance programs and, beyond that, to establish a corporate culture of compliance.

The Interaction Between Compliance and the Law – Penalty and Disposition
The cases involving the imposition of penalties under the civil penalty provision of the Trade Practices Act seem to provide the most extensive source of judicial consideration of the importance of a corporate culture of compliance and corporate compliance programs. That consideration has been done having regard to a range of factors relating to penalty in particular cases. In the CSR case a non-exhaustive list of factors, largely gleaned from earlier decisions, was set out as relevant to penalty. These were:

1. The nature and extent of the contravening conduct.
2. The amount of the loss or damage caused.
3. The circumstances in which the conduct took place.
4. The size of the contravening company.
5. The degree of power it has, as evidenced by its market share and ease of entry into the market.
6. The deliberateness of the contravention and the period over which it extended.
7. Whether the contravention arose out of the conduct of senior management or at a lower level.
8. Whether the company has a corporate culture conducive to compliance with the Act, as evidenced by educational programs and disciplinary or other corrective measures in response to an acknowledged contravention.
9. Whether the company has shown a disposition to co-operate with the authorities responsible for the enforcement of the Act in relation to the contravention. [25]
   

The judgment identified as the principal and probably the only object of the penalties imposed by s 76 of the Trade Practices Act, putting a price on contravention that is sufficiently high to deter repetition by the contravener or by others who might be tempted to contravene the Act. There has been debate in the case law about whether civil penalties under the Trade Practices Act might also have a punitive element.[26]

The importance of compliance programs in setting the level of a deterrent penalty was adverted to in the joint judgment of Burchett and Kiefel JJ in NW Frozen Foods Pty Ltd v Australian Competition and Consumer Commission [1996] FCA 1134; (1996) 71 FCR 285 at 298:

‘Particularly in the case of a proceeding under s 76, where the object is to secure compliance with the Act by deterring contravention, a corporation which gives a court reason to believe that this object has been achieved, so far as it is concerned, by its co-operation with the Commission and its entry into a compliance program the form of which has been agreed with the Commission, should be entitled to full credit, whether or not it receives incidental advantage from the amendment of its conduct.’

The factors set out in CSR including the reference to a corporate culture of compliance have been referred to with approval on a number of occasions. And although they were framed in the context of contraventions of Pt IV of the Act a number of them, including the corporate culture of compliance, have wider application.

Each case turns on its own facts but it is useful to refer to some in which there has been explicit reference to corporate culture. In Australian Competition and Consumer Commission v Australian Safeway Stores and George Weston Foods[27], the two respondent companies admitted to contraventions of the Trade Practices Act, including price fixing and retail price maintenance. In the course of his reasons for decision in relation to penalty Goldberg J referred to the duties of the board of directors and senior executives:

‘It is very important in this area that responsibility be assumed and discharged by the board of directors and senior executives and management for compliance by the corporation with its obligations under the Act. It is the board of directors which supervises and ultimately controls the executive and operational aspects of a corporation’s commercial activities.’[28]

That observation was made by his Honour in rejecting an argument that the penalties should be assessed by treating the Victorian Division of the business as a separate entity.

In that case there was a company wide compliance program which included a compliance guide revised and adopted by the board in 1996 and which had been distributed to all employees. Moreover, seminars relating to compliance with the Act had been attended by over 800 employees since December 1995. The guide itself made clear that conduct of the kind which was in issue in the case was ‘strictly prohibited’.

His Honour posed two questions about the compliance program. The first was whether there was a substantial compliance program actually implemented by the company. The answer to that question was yes. The second was whether the implementation was successful. The answer to that question was no. The existence of the program and its implementation was a mitigating factor. But the failure of the program was not isolated. It occurred on different occasions with different officers. This was taken into account against the company in fixing penalty. His Honour said:

‘The contraventions were blatant, implicating the top Victorian management of the Tip Top bread division of GWF. True it is that a compliance program was in place but the program in the circumstances of the contravention under consideration was not effective. It was disregarded or ignored by the top Victorian management of the Tip Top division. If it is not effective with management at the level involved in these contraventions it must be brought home to GWF and its officers at every level that they must obey the law.’[29]

So it would seem that the compliance program in that case did not reflect a corporate culture of compliance and it did not win the assent of significant executives within the organisation even though supported by the board and senior management.

George Weston Foods fell again with conduct in contravention of the Trade Practices Act which occurred three days after the penalty decision was delivered in the Australian Safeway Stores case. This contravention involved an attempt to induce two competing retailers to give effect to a price fixing arrangement in respect of the sale of packaged biscuits in Southern Tasmania.

The facts were admitted. In delivering penalty, Goldberg J again referred to the company’s compliance program. The failure of the program in that case was not a factor in aggravation of penalty but rather neutralised the mitigating weight of the program. His Honour accepted that the company had taken ‘significant steps to review, revise and upgrade its trade practices compliance program’. It had engaged a very experienced trade practices practitioner for that purpose. This appointment was regarded as a significant step forward because of the level of seniority established for it. Changes made in the compliance program related to the training of staff, communications of the way in which trade practices issues might arise and how they should be resolved and the availability of expert advice for employees with trade practices issues. His Honour was satisfied that George Weston Foods was taking a ‘most serious approach to its trade practices compliance program’ and that there was ‘an appropriate culture of compliance at George Weston’. Returning to that theme his Honour said:

‘I am not prepared to find that there was no culture of compliance in George Weston. There was certainly a culture of compliance at senior levels. Rather, the circumstances suggest that there was, in certain respects, less than rigorous attention to detail in the implementation of the compliance regime.’[30]

In Australian Competition and Consumer Commission v Rural Press Ltd [31], Mansfield J found there was not shown to be ‘any underlying cultural attitude on the part of the respondent corporations, except that demonstrated by the conduct of [four officers], which indicates ignorance or disregard for the provisions of the Act’. His Honour said that the attitude of a contravener to compliance with the Act is a relevant factor in determining penalty. Importantly he added:

‘The absence of an appropriate compliance culture may warrant a higher penalty.’[32]

In Australian Competition and Consumer Commission v Allans Music Group[33], Tamberlin J regarded the failure to have any satisfactory process in place to ensure compliance with the Act as ‘... an important consideration when examining the conduct of the defendant’. However the establishment of an extensive compliance program in response to the acknowledged contravention was a mitigating factor.

Earlier this year in Australian Competition and Consumer Commission v SIP Australia Pty Ltd [34], Goldberg J considered penalties for price fixing. In that case the evidence did not show that the company or its directors had any consideration or regard for the Act in the manner in which they conduct SIP’s business. His Honour proceeded on the basis that at the time of the contraventions ‘... there was a complete lack of any corporate culture of compliance with the Act’. The late implementation of a compliance program was ‘... very much a case of shutting the stable door after the horse has bolted’.

Enough has been said to indicate that in fixing pecuniary penalties the existence of a corporate culture of compliance evidenced by a substantial and effective compliance program is a mitigating factor. Failure of the program has to be considered in all the circumstances to determine whether it reflects the absence of a culture of compliance. The absence of a culture of compliance or the existence of a culture of non-compliance may be regarded as aggravating factors. Even after the event a genuine, serious attempt to establish a revitalised compliance program may be taken into account in mitigation and penalty.

Compliance Programs – Court Orders
In concluding, reference should be made to the provisions of s 86C which empowers the court to make a variety of non-punitive orders including a ‘probation order’ (s 86C(2)(b)). A ‘probation order’ is defined in s 86C(4) thus:

‘probation order, in relation to a person who has engaged in contravening conduct, means an order that is made by the Court for the purpose of ensuring that the person does not engage in the contravening conduct, similar conduct or related conduct during the period of the order, and includes:

(a) an order directing the person to establish a compliance program for employees or other persons involved in the person’s business, being a program designed to ensure their awareness of the responsibilities and obligations in relation to the contravening conduct, similar conduct or related conduct; and

(b) an order directing the person to establish an education and training program for employees or other persons involved in the person’s business, being a program designed to ensure their awareness of the responsibilities and obligations in relation to the contravening conduct, similar conduct or related conduct; and

(c) an order directing the person to revise the internal operations of the person’s business which lead to the person engaging in the contravening conduct.’

Plainly such orders may be made where there is no or no adequate compliance program in place. Where a company has responded to action against it by instituting or upgrading a compliance program to an effective level, the court will not necessarily impose an ACCC alternative even if the latter is specifically designed to meet the requirements of AS3806-1998:

‘... the capacity to point to particular features of AS3806-1998 which do not find expression in the trade practices compliance program to be undertaken by Rural Press does not mean that its program is not a sound or sensible one.’[35]

The program adopted by Rural Press in that case was based upon independent expert advice. Mansfield J said:

‘I accept that it is a program genuinely directed to ensuring a culture of compliance with the Act within its organisation.’[36]

Court ordered compliance programs need to be carefully framed to minimise the risk of debate about the meaning of the order and concomitant ongoing supervision by the Court. AS3806 is not really a suitable candidate for incorporation into a court order, except perhaps on a best endeavours. In determining whether to order a trade practices compliance program the court may have regard to the objectives of a corporate culture of compliance within the organisation which is the subject of the order.

CONCLUSION
The concept of the corporate culture of compliance is a useful framework within which to assess the effectiveness of existing or proposed compliance programs. Given the deterrent principle which informs the imposition of civil penalties it has an important part to play in their assessment. It may also be a relevant factor in the imposition of criminal penalties. And as has been seen, it has a role to play in determining criminal liability. The concept requires refining an clearer definition. It will also be assisted by some consensus about what may be necessary to demonstrate its existence. There is no doubt however that it is an idea whose time has come and which has a useful role to play in corporate law enforcement.

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[1] Hill J, Corporate Criminal Liability in Australia: An Evolving Corporate Governance Technique, JBL, 2003, Jan 1 – 44.
[2] ACI Website www.compliance.org.au
[3] (1991) ATPR 41-076 at 52,155.
[4] Ibid at 52,155
[5] Melway Publishing Pty Ltd v Robert Hicks Pty Ltd t/as Auto Fashions Australia (2001) 205 CLR 1; [2001] HCA 13; Boral Besser Masonry Ltd (now Boral Masonry Ltd) v Australian Competition and Consumer Commission (2003) 195 ALR 609; [2003] HCA 5; Universal Music Australia Ltd v Australian Competition and Consumer Commission [2003] FCAFC 193.
[6] (1999) 95 FCR 114.
[7] Ibid at 134.
[8] Fels A, Effective Trade Practices Compliance Programs – Within the Form Remember the Substance ACCC Journal No 31 pp 9-13.
[9] Parker C, Evaluating Regulatory Compliance: Standards and Best Practice (1999) 7 TPLJ pp 62-73.
[10] The functional division of controls referred to in Doctor Parker’s paper was derived from Dee, Characterising Conduct as ‘Behavioural’ or ‘Procedural’: A New Paradigm for More Effective Compliance and a New Corporate Compliance Ethos (1998) 5 Compliance News 5.
[11] (1978) 32 FLR 360.
[12] Ibid at 363.
[13] (1981) ATPR 40-246.
[14] See also with respect to directors’ due diligence responsibility in environmental law SPCC v Kelly (1991) 5 ACSR 607 at 609.
[15] Parker and Conolly, Is there a Duty to Implement a Corporate Compliance System in Australian Law? (2002) 30 ABLR 273 at 287 citing Aldridge v Booth [1988] FCA 170; [1988] EOC 92-222 at 77,091; Dippert v Luxford [1996] EOC 92-828 at 79,114; Hill v Water Resources Commission [1985] EOC 92-127 and see also Parker, Public Rights in Private Government: Corporate Compliance with Sexual Harassment Legislation [1999] AUJlHRights 7; (1999) 5 AJHR 159.
[16] There is a helpful discussion of the cases and issues to which they gave rise in an online article Jay Martin G, Corporate Compliance Programs at the Cross-Roads – New Challenges for Corporate Compliance Winstead Sechrest and Minick – Houston Texas, March 7 2002.
[17] CLERP Paper No 3 p 45.
[18] (1992) 7 ACSR 759; 10 ACLC 933.
[19] Ford’s Principles of Corporations Law (Looseleaf) Butterworths [8.305].
[20] Ibid.
[21] (1995) 37 NSWLR 438
[22] Shafron P, Australian Trade Practices Compliance CCH Australia Ltd at 1-200; Godfrey K, Trade Practices Compliance Programs – Ignore them at your Peril! (2003) 11 TPLJ 22 at 26.
[23] Hill J, Corporate Criminal Liability in Australia: An Evolving Corporate Governance Technique JBL 2003, Jan 1 – 44 p 22.
[24] Hill J op cit p 49.
[25] (1991) ATPR 41-076 at 52,152. These factors have been approved and adopted in a number of subsequent cases including ACCC v Australian Safeway Stores Pty Ltd [1997] FCA 450; (1997) 145 ALR 36; NW Frozen Foods Pty Ltd v ACCC (1996) 141 ALR 40; Trade Practices Commission v TNT Australia Pty Ltd (1995) ATPR 41-375; Trade Practices Commission v CC (New South Wales) Pty Ltd (1995) ATPR 41-406; Trade Practices Commission v Axive Pty Ltd (1994) ATPR 41-368.
[26] NW Frozen Foods Pty Ltd v ACCC [1996] FCA 1134; (1996) 71 FCR 285; J McPhee & Son (Aust) Pty Ltd v ACCC [2000] FCA 365
[27] [1997] FCA 450; (1997) 145 ALR 36.
[28] Ibid at 42.
[29] Ibid at 53.
[30] Australian Competition and Consumer Commission v George Weston Foods Ltd [2000] FCA 690 at [51].
[31] [2001] FCA 1065.
[32] Ibid at [47].
[33] [2002] FCA 1552.
[34] [2003] FCA 336.
[35] Rural Press at [32].
[36] Rural Press at [32].