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Is "CEO" too big a job for one person?

Nigel Morris-Co...

The "did he jump or was he pushed" departure of Brian Hartzer, the CEO of WestPac Banking Corporation in Australia after it became known that it had more than 23 million cases in which it did not act correctly under counter-money laundering laws is the latest example of a CEO going from his job under a cloud. In the past, that's usually been an end to at least some of the discussion. But this time it's different. This time the failures were so big and so fundamental that it calls into question conduct of the entire organisation including the full board and much of the management structure. It also raises something else. In large, complex, highly regulated groups, is the role of CEO too big for one person? As the financial services sector moves inexorably (and I would argue rightly) towards personal responsibility, is it time to review where responsibility lies in relation to specific areas of management.

If one is to take this to the logical conclusion, then every director of every company would be personally responsible for every failure within the organisation. On some level, this would seem attractive: after all, in a partnership, all partners, including those held out to the public as partners even if they have, vis-à-vis the partnership, an indemnity, are personally liable. That liability is "joint and several, to the full extent of their assets." That means that each of them can be sued as an individual, or all or some of them can be sued as an individual. Even if all the partners are successfully sued, the plaintiff can decide which of the defendants to enforce the order against. He may choose one or more. It is then up to the partners how to share, between themselves, the loss.

If this is to be the end result, then there are two preliminary points to consider: in a partnership ownership and management are not separated, unless the partnership agreement specifies that it should be. In a corporation, ownership and management are often separated: the shareholders may not be members of the board. The larger the company, the more likely this is to be the case. In a corporation, personal liability of the shareholders is limited to the extent of their investment.

There are some other important points: bondholders are not shareholders; their authority comes from what is a form of loan agreement between the lender as "bondholder" and the company. Also, there are a variety of forms of business entity that have been created for tax avoidance purposes: the Limited Liability Partnership or LLP is the most common. It is a company that is taxed and managed as if it is a partnership and in which membership is restricted. An alternative view is that it is a partnership in which the partners subscribe capital and their liability is limited to the amount they have subscribed. Whichever way one looks at it, those dealing with it lose the rights they have when dealing with a partnership and its management committee acts more like a board than like a true partnership. There has been remarkably little litigation relating to the legal position in relation to either responsibility or regulatory obligations of the management committee of LLPs and their ilk. It is important to note that LLPs are creatures of statute and as such every jurisdiction has its own laws relating to them. The above description is general and not applicable to any specific jurisdiction. It is however a vital area because many financial services businesses and professional businesses are organised as LLPs - and from a financial crime risk perspective, it is a popular vehicle for money laundering, etc.

Incidentally, the genesis of the LLP can be found in the European Joint Venture vehicle colloquially known as an "earwig" which allowed for the formation of a company in which other companies were the members and which was transparent for corporate tax purposes.

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