ASIC's sad plans to investigate companies for ''bad culture''

At a time when Australia is in desperate need of investment, Australia's corporate regulator is demonstrating contempt for the rule of law.

On Wednesday, Greg Medcraft, chairman of the Australian Securities and Investments Commission, told a Senate Estimates Committee that ASIC is considering prosecuting companies for poor corporate culture.

This is the latest example of fuzzy law that gives enormous power to regulators and leaves individuals in a position where they don't know whether they are legally compliant.

Paragraph 12.3(2)(d) of the Commonwealth Criminal Code allows a judge to consider whether corporate culture contributed to the "authorisation or permission" of the commission of a criminal act.

This provision violates a basic tenet of the rule of law and ought to be repealed.  No definition of bad corporate culture can effectively capture the concept because it's a subjective idea.  The vagueness in the law allows ASIC to wield considerable power over Australian corporations.  And the appointment of the executive director of the St James Ethics Centre will do nothing to allay fears about ASIC embracing an incoherent approach to corporate governance.

Ambiguity is anathema to black-letter law.  Shunning clear legal obligations for aspirational cultural objectives is not the hallmark of a system based on the rule of law.

Prosecutions for "bad" corporate culture also raise concerning liability issues.

One of the stranger analogies heard in Senate Estimates this week was this one from Medcraft:  "When an employee breaches the law ... and culture is responsible, then not just the employee, not just the fruit, but also the tree, which is the officers and the company, should also be responsible."

It's a troublingly anti-individualist sentiment.  You would be forgiven for thinking that Medcraft is suggesting that parents who raise their children in less than ideal settings should be held liable for the criminal behaviour of those children.  After all, that seems to be a far more appropriate application for the fruit and tree analogy.

But even in the corporate world such a concept makes no sense.  A criminal justice system must be based on the idea that individuals make choices about their own behaviour.  That's not to say that individuals can't work together to achieve goals — both productive and destructive.  But our legal system relies on the reasonable assumption that human beings have free will and are held to account for their actions.  If a company employee commits a crime, that individual is responsible, not his manager or some distant company director.

There is sound logic to such an approach.  But Medcraft's proposal to prosecute companies for "bad" culture is not just a misapplication of basic concepts of valid reasoning, it also runs completely counter to the rule of law.

If ASIC is genuinely interested in rooting out bad corporate culture it should first get its own house in order.  For too long the corporate regulator has ignored the rule of law and argued for increased power over the productive elements of the Australian economy.

One of the most essential features of an economy that attracts investment is a legal and political structure based firmly on the rule of law.  A significant contributing factor to the future growth of Australia's economy will be the reliability of our laws and the consistency with which government agencies apply them.  In this regard, ASIC is doing us all a significant disservice.