Post Office: Excessive deference to legal advice
The Post Office scandal shows that company board need to have “responsible oversight of legal risk” and must not show “excessive deference” to legal advice, according to the Institute of Directors (IoD).
It recommended that UK Corporate Governance Code be amended to define an explicit legal risk responsibility for a designated board committee, which would report to the board.
A working group put together by the IoD also agreed that one of the standout messages from the ongoing Horizon inquiry was that directors “shouldn’t listen to lawyers all the time”.
The IoD last week launched a policy paper, The Post Office Scandal: A failure of governance, identifying the lessons that could be learnt from one of the worst miscarriages of justice in UK legal history.
One participant in the working group of interested parties convened by the institute to discuss the evidence thrown up by the inquiry said: “I think the irresponsible use of lawyers and irresponsible behaviour of lawyers… is a central issue in the POL [Post Office Ltd] scandal.
“I think they went beyond the rules. This led to evidence being sifted and concealed and presented in misleading ways, almost routinely.”
The report said POL’s legal team, both internal and external, “appear to have fuelled the management team’s instinct to suppress key information with questionable advice about legal privilege”.
It noted that POL’s in-house lawyers advised then chair Tim Parker not to share with the board the 2016 Swift review, which called into question the strength of the evidence that POL had used to secure convictions, on the grounds that the findings of the review were legally privileged.
One working group participant observed that legal privilege was routinely “used or abused” throughout the whole Post Office scandal.
“One of the lessons for directors… would be to advise them on whether that’s ever a justifiable argument that information can’t be shared with the board because of this issue of legal privilege.
“In most cases, it’s clearly wrong that legal advice can’t be shared with the board, because the board… are effectively the company, and the advice is for the company.”
As a result, among the key lessons for directors was that they should demand full access to all relevant information, saying: “It is rarely acceptable to withhold information from board members on the basis of considerations such as legal privilege.”
Another was that “advisers advise, directors decide”. The IoD went on: “Post Office board members demonstrated an excessive deference to the views of internal and external legal advisers.
“Although such advice, and that of other types of consultants and advisers, may be a crucial input into board decision-making, it should not be accepted without question. Directors should apply their own independent strategic judgement and moral compass to any advice that they receive.”
Directors also needed to encourage the “responsible management of legal risk” at board level.
“The UK Corporate Governance Code should be amended to define an explicit legal risk responsibility for a designated board committee (e.g. the risk or audit committee, or where appropriate, a specific legal risk committee).
“The committee should update the board on a regular basis on matters such as litigation, disclosure exercises, investigations and regulatory responses.
“In financial services, this role should be mandated to a designated individual under the senior managers and certification regime.
“The Financial Reporting Council should develop supporting guidance which advises directors on how to manage the advice of internal and external legal counsel, including the ability of senior legal advisers to access the Board when dealing with matters of serious concern.
Among the other recommendations were to reform the law on computer generated evidence, reviewing the presumption that computers producing evidential records are working properly, and introduce a new corporate form for companies operating in the public interest, such as the Post Office, mandating directors to balance shareholder value creation with broader societal/stakeholder objectives.
Whistleblowing protections should be strengthened to include self-employed contractors, such as Post Office sub-postmasters.
Dr Roger Barker, the IoD’s director of policy and corporate governance, said the “roots” of the scandal were “not to be found in the lines of code in the Horizon software, but in the performance of the board, management and ownership function of the Post Office, who should have delivered better supervision and oversight”.
Arguing that “none of the potential shortcomings of directors can be regulated out of existence”, he said that better directors were needed, “with the appropriate knowledge, skills and attitudes to fulfil their crucial societal roles”.
The IoD is due to launch its code of conduct for directors tomorrow.
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