2021 Litigation Forecast - Organisational integrity: Increasing court action in 2021
One of the litigation trends over the past 10 years or so has been an increased focus by government agencies on corporate misconduct. We see this trend continuing and expanding beyond government court action into private prosecutions and civil actions, as the broader public becomes more concerned about matters of integrity than ever before.
Since the establishment of the Serious Fraud Office (SFO) 30 years ago, progressive New Zealand governments have increased the regulatory and criminal response to corporate misconduct. Insider trading has been criminalised, new anti-money laundering and terrorist financing laws implemented, and the Financial Markets Authority (FMA) and other regulators have seen a significant increase in enforcement obligations and budgets. Most recently, New Zealand’s privacy law has been updated to bring it into line with international norms, and cartel misconduct has now been criminalised, with new offences and potential for criminal convictions and imprisonment taking effect in 2021.
The trend underlying all of this is an increased public awareness of organisational integrity. Beyond a mere focus on financial misconduct, the public now expects corporations to behave more ethically across the board, and for the government to regulate and police such behaviour more comprehensively. The #metoo movement has been focused strongly on society’s changing expectations around how women are treated, particularly in the corporate environment, with numerous high-level executives, and their organisations, coming under close scrutiny for sexual harassment and discrimination in the workplace. Consumers are increasingly concerned about ethical conduct by organisations also, including in respect of modern slavery and ethical supply chain matters, and corporations’ responses to the challenges we face regarding climate change. Investors are also increasingly concerned to ensure that the corporations they support engage in ethical investments and behaviours.
The increasing public and regulatory pressures on organisational integrity mean that directors and managers need to ensure that their organisations are operating with integrity, and are prepared for litigation and public scrutiny should they not.
Organisational integrity risk management in 2021 and beyond
Expect increased Government/regulatory activity
The trend of increased investigation and enforcement of corporate misconduct by governmental regulatory agencies is set to continue. The SFO, Police, FMA, Department of Internal Affairs (DIA), Reserve Bank, NZ Customs, Commerce Commission and the Ministry of Business Innovation and Employment (MBIE) are just some of the government agencies tasked and resourced to investigate and undertake enforcement action where corporations are acting unethically and in breach of the law. The public expects this conduct to be policed, and it is a political imperative that this increased scrutiny by the regulators continues.
Not all Court action will be by the Government
2020 saw the first private claim in the High Court against corporations in relation to the environment, and in particular, their alleged contribution to the effects of climate change. This private action will not be the last we see in the climate change space, nor in other areas of organisational integrity. Expect to see Non-Governmental Organisations (NGOs) and private citizens take legal action against corporations, and potentially high profile executives, in respect of a range of corporate misconduct, including ethical supply chain/modern slavery matters, and to see investor groups taking action around alleged unethical investments particularly where they are not fully disclosed.
“Organisational integrity” will become a more significant aspect of corporate due diligence
It has been common place offshore for some time to undertake a more comprehensive review of a target assets’ risk profile than has been the common approach in New Zealand. In our view, this should become best practice, particularly when a transaction involves parties with connections into the United States, United Kingdom and continental Europe. Particular areas of focus are:
- International trade and financial sanctions
- Anti-bribery and corruption
- Anti-money laundering and countering the financing of terrorism
- Human rights, including modern slavery and supply chain integrity
- Competition law, including cartels and fair trading
- Environmental impacts and mitigation
- Privacy and data protection
Simply put, the best way to avoid the damage associated with a scandal is to avoid it in the first place. Corporations that take genuine steps to identify risk before acquiring assets will be well-positioned to avoid scandal and litigation, and to present a strong position to counter any suggestion of intentional malfeasance in litigation (particularly regulatory or criminal prosecutions) by doing so.
Demonstrating a genuine culture of compliance and ethical behaviour will be a differentiating factor in the market
Complacency, or even worse, ignorance, regarding risks in your existing business operations, is also a major risk factor for potential scandal. Alongside more comprehensive due diligence, a review of existing operations to identify and combat organisational integrity risks will be a critical step for management and boards in 2021 and beyond.
As with meaningful due diligence practices, a proper risk assessment of your existing business can help avoid the risk of integrity breaches and scandals. In the event an organisation is caught up in litigation nonetheless, position the organisation so as to avoid the aggravating effects of being found to have a ‘cowboy culture’, which was simply asking for such a scandal to occur.
In our experience, organisations that implement both an internal risk management function and utilise external support to review and advise objectively on their organisational integrity risks, position themselves best to avoid scandal and the consequent damage. Utilisation of external legal advice in particular, which can be done under the protection of legal privilege, enables organisations to obtain an honest and objective assessment of their risk management practices and potential legal liability. It also enables organisations to identify areas of improvement to ensure that risk management isn’t stagnant. This will put the organisation in the best position to identify potential litigation triggers early, and where they cannot be avoided, enables you to work with your legal team from an early stage to develop and implement the best litigation strategy.
Everyone loves a scandal, unless you are involved in one.
Everyone loves a scandal, unless you are involved in one. Increasingly, it is also the case that regulators, and other watchdogs, like to make examples of organisations that do not act ethically. Litigation in this space is likely to increase, and we encourage all managers and directors to think carefully about organisational integrity risk, and to discuss early how you can best manage it, and be prepared for litigation should it occur.