The economic and workplace upheaval associated with the COVID-19 pandemic has placed unique and intense pressures on businesses and market sectors.
History has taught us that the more downward pressures there are on businesses, the more likely that bad employee and business partner behavior will occur. This kind of conduct can give rise to class action and regulatory liability.
At the same time, work-from-home protocols, travel restrictions and shifting demands within workplaces can put a strain on investigative priorities. However, proactive, focused and remedial internal review and investigation at the first sign of questionable behavior should continue to be prioritized as a powerful tool to mitigate and neutralize the pernicious effects of misconduct.
This article highlights issues that business leaders should be on the watch for, and how they should mobilize to address them in our changed and challenged workplaces.
Business disruption can cause misconduct
Whether the bursting of the dot.com bubble at the turn of the century, the financial crisis of 2008 or the economic impacts of the current pandemic, major societal events can put multiple internal and external pressures on companies and their personnel. After the recession in 2008, white-collar crime, including fraud, spiked1. We have seen signs of a similar pattern emerging from the pandemic. Financial performance may be down. Share price may be languishing and volatile. Employees are under increased pressure, managing domestic and work stressors. Business partners are subject to similar issues. All these pressures can create a higher than usual impetus for bad judgement and business misconduct.
It is important for business leaders to acknowledge and be sensitive to these pressures and the potential misconduct that may result, including:
- Languishing financials and share price: Can lead to improper adjustments to financial reporting, improper sales practices or public disclosure that glosses over poor results.
- Pressured employees: Employees may have an increased propensity to put their own financial self-interest ahead of client or stakeholder interests, which can lead to misappropriation of corporate opportunities and other personal misconduct. Employees under high stress may also be more likely to mistreat co-workers, giving rise to Code of Conduct violations.
- Stressed business partners: Business partners may offer improper incentives to obtain contractual commitments, engage in misrepresentations or inflated financial reporting to artificially meet targets, or cut corners on diligence regarding business referrals.
Misconduct gives rise to corporate liability
Corporate liability flowing from bad employee or business partner behavior generally comes in two forms: regulatory action and civil litigation, including class actions. Governments and regulatory agencies are often under public pressure to "do something" about bad behavior that affects consumers. Increased regulatory interest in investigating and prosecuting white-collar crime followed the 2008 financial crisis2. Similarly, regulators are likely to investigate the impacts of pandemic-related misconduct.
For example, securities regulators in the U.S. and in Canada have clamped down on businesses engaged in capital raising who have made bogus representations about COVID-19 medical treatments3. Regulatory investigations and prosecutions are usually a harbinger for civil litigation based on the same underlying conduct4. Finally, internal and regulator whistleblower programs increase the chances of any bad behavior being exposed5.
The legal impacts of exposed bad behavior can take many forms, including breach of public company disclosure obligations, violation of health and safety or employment laws as well as bribery and other corrupt business practices.
Mitigation and neutralization of pandemic-related litigation and regulatory exposure
One of the best defences to legal and regulatory liability associated with improper conduct is self-detection and remediation that is made possible through the early identification, investigation and assessment of potentially problematic conduct and its impacts.
While there may be an inclination to suspend or delay investigations until workplaces are "back to normal", this is not advisable. Delayed action can lead to compromised or lost evidence and continued misconduct (and thus continued or increased risk exposure). It can also signal to potential bad actors that misconduct may be undetected or tolerated.
Companies should remain prepared to take steps to manage the risks posed by the pandemic and business disruptions. These steps include:
- Tools to enhance
identification of liability-inducing conduct.
- Maintain a strong compliance culture. It is always important to maintain a strong compliance culture, particularly in times of economic uncertainty. Officers and directors should understand if and how a company's culture is creating or reducing risk. Exemplary tone from the top is even more important in times of business stress.
- Emphasize and enhance reliance on lines of defence. Review lines of defence to ensure that corners are not being cut and that compliance personnel are on heightened watch.
- Encourage whistleblower and other grass-roots reporting. Ensure there are internal processes for self-reporting such as whistle-blower reports.
- Review, assess, and if
warranted, investigate properly.
- Document and report bad behavior. Any questionable conduct should be taken seriously, reviewed, documented and reported. This is particularly important during the pandemic, when corporate processes and decision-making may be decentralized, and normal work-streams may be conducted remotely.
- Be prepared to conduct virtual investigations. If the concerns persist after initial review, investigate. While the pandemic poses practical considerations in how investigations may be conducted, these should not impede organizations from moving forward. Investigation protocols can be adapted. Interviews can be conducted using videoconference platforms (companies should make sure to choose a platform and to put protocols in place to ensure privacy) or in person using appropriate social distancing and health and safety procedures.
- Consider all potential sources of liability. Every investigation should consider all potential sources of liability (including regulatory breach and sanction, civil claims by shareholders, class action risk and employee claims). This is particularly important during the pandemic, as businesses are managing a broad array of risks in rapidly shifting regulatory and litigation environments.
- Remediate and
- Mitigate. Prioritize employee health and wellness. Remind and encourage employees to use mental health and employee assistance programs. Make sure employees take vacation. Emphasize the importance of compliance during these times. Consider tailored training and awareness-raising programs for employees. Take steps to ensure that any misconduct is not perpetuated while an investigation proceeds. To mitigate any regulatory or class action exposure, prioritize and vigilantly investigate and put an immediate stop to potential damaging conduct. Early and effective self-detection and cessation can have a direct impact to lessen regulatory sanctions and damages awarded in litigation.
- Remediate. It is important to be mindful of mitigation strategies after misconduct has been revealed. For example, companies should consider whether the issue should be self-reported to regulators or law enforcement, and whether proactive remedial steps can be taken to resolve any compliance gaps. Many regulators give credit for early self-reporting and remediation6, and a permanent fix to liability-inducing conduct can cap damage claims from third parties.
1. Association of Certified Fraud Examiners, "ACFE Survey of Experts Finds Increase in Fraud During Economic Crisis", April 16, 2009
2. See, for example, Ontario Securities Commission "Statement of Priorities for Fiscal 2010-2011".
4. For example, civil litigation followed regulatory action in AIC v. Fisher, 2013 SCC 69.
5. Ontario Securities Commission, News Release dated June 29, 2018, "OSC Whistleblower Program contributing to a stronger culture of compliance".
6. OSC Staff Notice 15-702, Revised Credit for Cooperation Program.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.