Central America is at an inflection point regarding acceptable compliance and conformity. Among all the anxiety and instability that change will bring, it is welcoming to see that separate disciplines are pushing towards similar objectives in Corporate Governance. A quick discussion on Director´s Responsibility provides a glimpse on how new Governance issues will reshape slanted interpretations of the law.
We´ll try to make a point for “Consilience” in Corporate Culture by using a short hypothetical case. We will make a looser use of the concept of Consilience than what has been recently used by Edward O. Wilson, (a term apparently coined in 1858 by William Whewell) as a de-fragmentation and a coming together of knowledge of different fields.
We have recently had the opportunity to collaborate towards the adoption of standardized compliance norms in Guatemala while separately, discussing the interpretation of a Director´s responsibility norm in Guatemala´s commercial code. We´ll maintain this example at a theoretical level, assuming a case where company directors are allegedly involved in serious misconduct for personal gain. Under Guatemala´s Commercial Code, in order for minority shareholders to bring a personal liability case against encumbered directors, it is required that minority shareholders, representing more than 10% of voting stock, must have voted beforehand against the decision of a general shareholder´s meeting to exempt such directors of their responsibility (as determined by article 175 of the Guatemalan Commercial Code “CC”). In this hypothetical case, the directors are appointed by the majority shareholders who allegedly benefit from such conduct. This same majority avoids issuing a vote approving (or rejecting) the Director´s conduct and thus the minority shareholderswill allegedly never be able to bring about a Directors Responsibility case, creating a de facto protection by the majority shareholders and its appointed directors. The law provides for actions against illegal decisions or decisions conflicting with the by-laws but is not explicit regarding the avoidance of decisions.
The suspect behavior originates from something Barry Staw devised in the 70s as “Escalation of Commitment To a Loosing Course of Action” now a common term for organizational psychologists. In this case, Escalation of Commitment is exemplified by the systematical use of company funds for personal gain and an escalating attempt to generate more company revenue in order to cover such expenditures. The expenses escalate and turn soon enough into large company loses and thus incentivize bigger bets that require larger cover-ups. The behavior, as it is relatively frequent in these type of cases, is exacerbated by the need to maintain a certain social standing acquired through the misuse of the funds.
It is hard to think that the law meant to protect such behavior, but a slippery interpretation may try to insist it did, since no approval vote has been issued an no action can be apparently taken by minority shareholders; a closer look at the law may find a more comprehensive explanation, especially taking into account a Director´s fiduciary duty (art. 52, 55 CC) and the general prohibition for stockholders from using company funds for private purposes (art. 39 CC). Companies are required (although no direct sanction exists) to hold yearly shareholder´s meetings, where, among other things, financial statements and a Director´s yearly report (art. 134,1, CC) must be discussed and eventually approved or rejected. It should be clear that avoiding such obligations by the General Shareholder´s meeting or any situation created to obstruct such approval or rejection constitutes a de facto approval and should allow minority shareholders to initiate a discussion on Director´s liability.
Nevertheless such arguments are still frequently discussed in courts in Guatemala where legal positivism is misunderstood and law interpretation is limited to its literal meaning, upon closer inspection these conducts should also be viewed more as corporate fraud than civil wrongs.
Fortunately, mounting pressure coming from Law, Organizational Psychology, Applied Philosophy and Ethics to name a few disciplines, are converging into firmer Compliance and Governance requirements for organizations.
If current tendencies continue to build up, avoidance of a Director´s Accountability should no longer be a valid defense for any type of Organization and should not be put up with by any court.
Directors Accountability is no longer limited to the interpretation of the law. Let´s review recent ISO19600 on Compliance Management Systems:
“Organizations that aim to be successful in the long term need to maintain a culture of integrity and compliance, and to consider the needs and expectations of stakeholders. Integrity and compliance are therefore not only the basis, but also an opportunity, for a successful and sustainable organization. ”… “ An effective, organization-wide compliance management system enables an organization to demonstrate its commitment to compliance with relevant laws, including legislative requirements, industry codes and organizational standards, as well as standards of good corporate governance, best practices, ethics and community expectations.”
Under Standardized Compliance norms Top Management is expected to ensure that the commitment to compliance is maintained and that noncompliance and noncompliant behavior are dealt with appropriately. Organizations require such skewed behavior to have effective governance systems in place that detect possible non-compliant behavior and trigger actions in order to suspend activities that may lead into a “loosing course of action” by an encumbered management set on an “escalation of commitment”.
The OECD has recently (2015) issued its Revised Principles of Corporate Governance with a special section on the responsibilities of the board, emphasizing the duties of care and loyalty.
“Where board decisions may affect different shareholder groups differently, the board should treat all shareholders fairly. In carrying out its duties, the board should not be viewed, or act, as an assembly of individual representatives for various constituencies. While specific board members may indeed be nominated or elected by certain shareholders (and sometimes contested by others) it is an important feature of the board’s work that board members when they assume their responsibilities carry out their duties in an even-handed manner with respect to all shareholders. This principle is particularly important to establish in the presence of controlling shareholders that de facto may be able to select all board members.”
It is reassuring to see that pressure is building from many disciplines and players, converging into more standardized and fair behavior expected from corporations. Companies will soon need to take a more decisive approach that will require adapting their bylaws, decision process and structures to not only fulfill legal requirements but to respond to a broader requirement in aligning its behavior to more “standardized” acceptable corporate behavior.
While Central America is in the midst of a marked inflection point, it is not yet clear the exact vector it will eventually end up taking. While actions towards transparency and anticorruption brush with historical political and legal cultures , it makes it hard to determine what are the true drivers of many of the different efforts under debate. Nevertheless entrenched corporate cultures are definitively under review from many sides and will most probably be forced to adapt to more standardized norms. It will be interesting to see how resilient culture will stand out against consilient forces coming from many disciplines that promise a more integral view of life reflected in applied sciences.
José E. Quiñones
Founding Partner at QIL+4 Abogados