Your responsibilities as a board member or senior executive

Article in CajaSiete Blog, 26 April 2016

Leopoldo Cólogan

Before the Commercial Code of 1829, Spain in general, and the Canary Islands in particular lacked overarching commercial regulation, which put trade relations at risk and led to conflicts between merchants. At the end of the nineteenth century, in the absence of other laws, merchants from the Canary Islands, who we would now call entrepreneurs, applied the set of rules most recognised by moral authority: las Reales Ordenanzas del Consulado de Bilbao of 1737 (a set of ordinances governing trade). This was so successful, that the ordinances remained in effect and became a reference point for the Commercial Code in more than nineteen Latin American countries until well into the twentieth century. One example of how the ordinances were efficiently applied occurred in the insolvency of a Canarian merchant named Juan Cólogan Valois, a partner of the London based company Cólogan, Pollard & Cooper. When he died in 1799, his brother Tomás had to file for insolvency and make use of these bylaws to deal with the creditors’ claims.

Through his company, Juan Cólogan Valois had developed a successful business as an importer of Canarian wines. He even managed to win contracts with the Board of Commissioners for Victualling of the British Navy, and supplied it for more than two decades. He also maintained close relations with colonial America, specifically with the ports of Newport, New York, Philadelphia, as well as many other European ports.

“There are moments in history that help us understand the reasons behind certain current regulations created because of the practical necessity of the situation.”

There is no doubt that history is a living thing, and thus it is impossible to determine the exact origin of the principles that gave birth to the regulations that currently govern us. However, there are moments in history that help us understand the reasons behind certain current regulations created because of the practical necessity of the situation and enforced, in this case, by merchants to regulate their relationships and conflicts, rather than by lawyers, as is the case today.

So much so, that when these ordinances were drafted, merchants were worried that bad business management from some of their number would cause disruption for others. Because of this, there was a demand for clear accountability, which would determine the causes of insolvency and make sure creditors were paid back without having to wait for the long process of going through the courts, something which is detrimental for a dynamic sector such as trade.

These are issues that are still pertinent nowadays. An example of this is the legal obligation of receivers to declare insolvency within two months from the date they become aware of, or are due to become aware of, a company’s insolvency, and where one or more of the most relevant factors depending on the responsibility of the receivers are serious accounting irregularities, the fraudulent sale of goods and assets, false declaration of assets, and serious discrepancies in documentation provided to creditors.

This worry around business management is also highlighted n receivers’ obligation to convene the company’s board of directors within two months, so they can in turn adopt or reject the dissolution agreement, if the company has losses that leave net assets less than half of share capital, or insolvency if the company was insolvent.

The two obligations mentioned here belong to more general ones within the framework of current corporate government, but they deal with the same old worries and principles. These principles protect the development of free trade without damaging other merchants’ clients, suppliers, or companies. Furthermore, it obliges the members of a board of directors and senior executives to dexercise due diligence in the decision-making process, which is a basic duty of professional business people.

This makes all the sense in the world when we remember the old worry about the order and control of accounts to stay abreast of the financial reality of one’s own company or someone else’s, requiring the aforementioned ordinances, accounting books, even the register of correspondence, that came to be the contracts which accompanied merchants on board. This all required acting in good faith and leaving aside personal interest with sufficient information, and being managed by an appropriate decision making process, as well as conforming to the law and company ordinances. There needs to be sufficient adherence to and the adoption of measures that allow the control, surveillance, and understanding of the reality of the company to ensure it is run well.

And when talking about duties, it is also important to emphasise the fact that on level more linked to internal company relations, a duty of loyalty, is established. This means being a faithful representative, acting in good faith and in the best interests of the company. This means carrying out ones’ duties using independent judgement, without being affected by third parties or the group to which they belong (having to make sure there is a reasonable balance between both interests), and having compliance with the objectives set out in the company goals and specific powers granted to them as a main focus. It also means keeping the information obtained secret, even after the job is done, and abstaining if a direct or indirect conflict of interests arises with someone linked to or who has relations with the company, and to adopt appropriate measures for this.

At this point, remembering that those who successfully drew up the aforementioned ordinances were the merchants who were most practical, intelligent, and had the best concept, according to the principles and values of the time, it makes sense to stop and think about something, which for obvious reasons should not be overlooked; it is just as important to comply with the aforementioned duties as it is to have a real commitment to business ethicsThis is useful in order to minimise the risk of non-compliance with any of the clearly defined principles and company values and, of course, the risk of any criminal conduct during operations.

So much so that, today, following the circular of the Prosecutor’s Office 1/2016 and the recent Supreme Court Judgements (154 and 221/2016), it is abundantly clear that companies are obliged to have and implement effective crime prevention programs that try to avoid, as far as possible, the commission of certain crimes by those who integrate the organisation (representatives, workers or dependents) in the development of their activity and to their benefit, as the company itself would otherwise respond with fines or closures.

The aforementioned circular draws on the existence of a code of conduct and on a prevention program that clearly establishes the obligations of executives and employees, and stresses the importance of them being given importance in the decision-making process of their managers and employees. That is to say, its actual implementation.