Compliance & Crisis Communication: Do's & Don'ts - Case Study II
Imagine the following scenario:
A high-performance SME appears to be a role model for family businesses…
- Company X, a family-controlled business, is doing very well. CEO Y, a third generation family member in the company, has managed to transform it from a local to a global player and a leader in its niche market.
- However, for the CEO, neither the annual dividends she receives in her capacity as a shareholder nor her salary package is sufficient to fund her lavish lifestyle. She is prepared to engage in unscrupulous behaviour in order to increase her pay check and ingratiate herself with the company's personnel. In order to keep the peace, the other family shareholders, who have a representative on the board of directors, choose to ignore her actions.
… but still waters run deep.
- The CEO uses company assets for personal ends (for instance, to throw dinners and pool parties at home).
- The CEO uses company funds to pay the membership dues at her local golf club and other expenses which should not be borne by the company.
- The CEO and a few other family members regularly submit invoices to the company for fictitious goods and services which are never provided.
These facts are an open secret which may very soon be uncovered by a curious journalist.
Abuse of corporate assets
Abuse or misuse of corporate assets is an offence to which many directors turn a blind eye and with which, in practice, they often cannot be bothered. While the scope of this offence may appear broad, the legal definition is quite precise. Karel De Smet (Litigation & Compliance Associate) describes it as follows: "abuse of corporate assets occurs when a director makes personal use of the company's assets or credit, thereby causing serious detriment to the company's financial interests and those of its creditors or partners". The law further requires that the act have been committed with fraudulent intent (i.e. the director must have carried out the act intentionally) and the director must have known that his or her actions would cause serious detriment to the company.
Both "assets" and "credit" are construed broadly. In addition, the wording "serious detriment" is open to interpretation. Thus, detriment can be found when damage is reasonably likely to occur but never actually materialises. Indeed, the definition of "serious detriment" will vary greatly depending on the size of the company. To give but one example, use by a director of company funds to purchase a sports car, bearing the company's logo, for his personal use was found not to constitute an abuse of corporate assets. Under these circumstances, the court ruled that the detriment to the company was offset by the vehicle's advertising function.
The CEO's falsification of documents could constitute forgery. However, this offense can only be found when a document is falsified whose content is clearly assumed to be true. This is usually not the case for documents, such as invoices, whose content is typically checked in the context of normal business dealings. However, if substantive controls are rendered impossible by the person who drew up the document, forgery may be found. This could be the case if the CEO approves the false invoices on behalf of the company.
How can the company adequately respond?
The company's best reaction when it detects irregularities will be determined on a case-by-case basis.
One obvious possibility is to bring criminal charges against the CEO. However, legal proceedings entail uncertainty and reputational risk and tend to be lengthy and costly. For this reason, the parties often opt for a settlement agreement. In general, the company agrees not to bring charges provided the CEO compensates it for the harm suffered and agrees to resign. The CEO can be prosecuted and should in principle compensate the company for the damage caused. Within the company itself, there is no reporting obligation when such practices come to light. However, it's not always possible to reach a settlement, especially if serious (criminal) offences have been committed.
Directors: watch out! You may also be held liable.
In any case, the other company officers are advised to act quickly if and when they identity fraudulent acts. Failure to take appropriate measures may result in civil, and possibly even criminal, liability.
The other directors also run the risk of criminal prosecution and civil liability. They can be accused of managerial errors, conflicts of interests and complicity. The legal construct of a crime of omission can be relevant in this context but is not easy to prove. In brief, if the other directors knew with certainty that the CEO was using corporate assets for her own ends, they can be held liable, depending on the extent of their powers within the company.
The tax authorities are also watching!
It goes without saying that the non-disclosure of benefits in kind and the submission of false invoices present significant tax risks, for both the company and its CEO. In a later blog post, we will discuss in more detail the consequences of the non-disclosure of remuneration by the CEO and the submission of fictitious invoices.
Kurt Demeyere (Tax Senior Associate) warns of a third type of liability, of which directors often lose sight, namely liability for unpaid payroll tax and VAT. Although this type of liability has been provided for by law since 2006, many directors are still unaware of it. Indeed, all directors (ordinary, external, de facto and independent) can be held liable for recurring unpaid VAT and payroll tax. It is therefore of the utmost importance that they pay sufficient attention to the company's tax obligations.
Finally, the tax authorities can, after a certain period of time, order that the company be shut down for repeated non-payment of payroll tax unless it can be clearly demonstrated that non-payment is due to financial difficulties experienced by the company's customers which led to the opening of judicial reorganisation proceedings, bankruptcy or involuntary winding-up.
Communication: stealing thunder
The facts described in this case study are often an open secret. Depending on the prominence of the company and the reputation of its CEO, these types of practices can attract press coverage. The greater the media interest in the company and its CEO, the more likely the news is to spread. In this case, it's important to bear in mind that internal communication on the subject will eventually become known outside the company. Kristien Vermoesen (Managing Partner FINN) is crystal clear on this point: "In both listed companies and family businesses, leaks are inevitable. Internal communication is therefore also external communication."
It is thus of the utmost importance to be the first to communicate about a crisis; don't wait until it's "discovered". In this way, you'll have more control over the story and be able to mitigate the reputational harm in the long run. The professional term for this is "stealing thunder". Practice indicates that this approach also causes the public's interest to wane faster. By using a neutral hashtag to communicate about the situation on social media, you can prevent your communication from being "hijacked" by negative comments and keep more control over online coverage. Insofar as possible, it is essential to continually gauge and respond to public perception as quickly as possible.