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Anthony Hilton: Following the law matters for future of multinationals

Following the law matters for future of multinationals
Following the law matters for future of multinationals / Alamy Stock Photo
22 October 2019

nvestors obsess about financial controls but rarely if ever about legal ones. Yet they are as important, perhaps more so, particularly if companies hope to survive Brexit. Yet most boards don’t engage. Rule-of-law stuff is delegated to the company secretary or a general counsel and largely forgotten by directors.

Nyasha Weinberg, on behalf of The Bingham Centre of the Rule of Law, surveyed a range of multinational businesses about the legal implications for them of the Rule of Law. She found, perhaps not surprisingly, that it is a fundamental component of their environment, a shorthand for governing behaviours in business life.

So to leave the EU on October 31 and any other later date will leave a raft of thorny issues which are fundamental to companies.

Business engaged in overseas trade will have no idea if the UK will have a Free-Trade Agreement with the EU or US in five years’ time; or whether the UK will ever remedy the loss of EU agreements with third countries that the UK hasn’t yet managed to carry over.

And it is difficult to make plans around the contents of the not-yet-enacted Brexit bills. Nor can they depend upon the arrangements for citizens that are based only on policy papers, and not underpinned by legislation.

Even if the Government does manage to “do” Brexit by October 31, it is important to note that this will have been done by sacrificing other crucial components. In the rush to prepare for exit vast swathes of delegated legislation have been passed that make significant legal changes without having received proper parliamentary scrutiny.

But there is also a wider issue. Guy Beringer, former head of Allen & Overy, has been trying to get companies properly to engage with the concept of the law for several years now.

He hopes companies will join in the Bingham Centre’s efforts to main the primacy of English law across the globe, way beyond Brexit, combating the efforts in Asia and other places to supersede it. In effect he wants a risk register of Rule of Law issues. He says there are four core principles: certainty, where business knows from the outset what applies to them; fairness, where the law applies to everyone; enforceability, where there is redress in the courts if the law is broken; and a level playing field, where there is no bias in favour of one group over another.

But with this as a base, companies should then look for specific legal problems in artificial intelligence and data; supply-chain integrity; bribery; climate change; modern slavery; and of course regulatory fairness.

This latter issue is where companies can fork out billions of pounds to settle lawsuits without admitting liability. The action which they have settled never goes to trial so the law is never really tested and no one outside really knows what the issues are. But it should matter to companies in case they are next in line.

However, Beringer only has a dozen or so of the multinationals signed up even though the fee is only £10,000 — the likes of Nestlé, Shell, BP etc. It is, Beringer says, the tragedy of the commons — companies agree that the law is important and English law is one of its crown jewels. They agree that the Bingham Centre should do research on the issues. They are glad that this initiative exists and is making progress. But then they say they don’t want their company to be involved and their lack of interest makes it impossible to develop a shared system where all would benefit.

He has tried the institutional shareholders too, on the basis that if companies are ignorant of, or simply ignore the law it may affect their share price. Institutions have these risks across their portfolio, even if they don’t know specifically who may be at fault. But again they refuse to open their wallets. They thought this was a matter for companies.

There has been some progress though. The Governor of the Bank of England Mark Carney has been vocal about climate change; Parliament has pledged five years of funding to the Centre for Modern Slavery; the US World Justice body has begun compiling a Rule of Law index; and the rating agencies are looking at the legal implications of debt.

But that does not go far enough. Companies simply cannot afford to leave it to others, and neither should the institutions.