March 31, 2023

SVB disaster, what Legal Ops can learn

The recent news of Silicon Valley Bank’s collapse sent shockwaves through the industry. But what can in-house legal teams learn from the SVB disaster?

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Silicon Valley Bank was a trusted partner and influential player in the fast-paced world of startups and venture capital for many years.

The recent news of Silicon Valley Bank’s collapse sent shockwaves through the industry, leaving many wondering what went wrong and how it will impact their business and the wider tech ecosystem.

With risk mitigation and regulation being ever-evolving topics that in-house legal teams need to navigate, it’s critical to understand the legal context surrounding the SVB disaster and what it means for future legal operations.

In this article, we explore what happened, why it happened, and the legal implications of the collapse. We consider the potential impact on the startup ecosystems in the US, the UK, and the EU, as well as what in-house legal teams can learn from this event.

In this article, we will cover the following:

So, what happened with Silicon Valley Bank?

On March 10 2023, Silicon Valley Bank (SVB), one of the largest and most trusted banks in the startup and venture capital industry, collapsed without warning.

The bank, which had $212bn of assets, is the biggest lender to collapse since the 2008 global financial crisis.

In March, SVB faced a huge number of deposit withdrawal requests, totaling $42 billion, which pushed the already wavering bank over the edge. Regulators were required to step in and close the bank when it couldn’t raise the cash necessary to cover such outgoings.

The news came as a shock to many in the industry who had relied on SVB for their banking and financing needs for many years. Moreover, it has emphasized the need for robust compliance and controls for companies and their legal departments globally.

While the U.S. government took action to protect uninsured deposits at SVB, the bank’s downfall will likely create a series of question marks and concerns around the startup ecosystem.

What caused the collapse of SVB?

The collapse of SBV has been attributed to several factors. While it seems to have been a sum of numerous failings pushed over the edge by an incident in the face of inadequate risk mechanisms, below we explore a few of the key reasons thought to have caused the demise of SVB.

A lack of diversity in the SBV portfolio

A lack of diversity in a bank’s portfolio can create several problems. A concentrated portfolio exposes vulnerabilities to economic downturns or industry-specific events. This vulnerability can translate into increased credit risk and greater exposure to compliance violations.

Many are pointing their finger at the SVB’s overexposure to certain tech sectors including the cryptocurrency market. An article in Politico states:

This is the point where the outbreak of risk in the crypto industry might have jumped species into the banking sector.

Ed Moya, senior market analyst at Oanda, explains that SVB may not be alone. He suggested that banks that are disproportionately tied to cash-strapped industries like tech and crypto may be in for a rough ride.

SVB had invested heavily in cryptocurrency – including Bitcoin and Ethereum – and had lent money to startups that were focused on blockchain technology. However, as the cryptocurrency market experienced a significant downturn, SVB’s investments and loans began to lose value, leading to a substantial loss of capital for the bank. Evidently, failing to ensure a balanced and diverse portfolio put the bank in a precarious situation.

Regulatory challenges

Regulatory challenges played a significant factor in the collapse of SVB. The bank was subject to a range of regulatory requirements that were designed to ensure its safety and soundness, but these requirements also imposed significant costs and limitations on the bank’s operations.

One of the primary regulatory challenges facing SVB was the requirement to maintain high levels of capital and liquidity. This meant that the bank had to maintain a large sum of reserves to protect against potential losses, which limited its ability to lend and invest in new business opportunities (a common frustration but the nature of the industry for many bankers).

In addition, SVB was subject to a range of regulatory restrictions on its lending and investment activities. For example, the bank was required to comply with strict anti-money laundering (AML) and anti-terrorism financing regulations, which imposed additional costs and compliance burdens.

The bank also faced intense regulatory scrutiny in the wake of the 2008 financial crisis, which resulted in increased oversight and supervision from regulatory authorities. This scrutiny placed additional pressure on the bank and its executives to maintain high levels of compliance and risk management, which further limited its ability to pursue new business opportunities.

Despite the external pressures, SVB failed to adequately address these regulatory issues. Instead, the bank continued to operate in a manner that was not fully compliant with regulatory requirements, which ultimately led to significant fines and legal penalties.

In fact, SVB had been under investigation by the US Securities and Exchange Commission (SEC) for potential violations of anti-money laundering regulations. The investigation had been ongoing for several months, and it is believed that the potential fines and penalties associated with the investigation may have played a role in the bank’s decision to file for bankruptcy.

Inadequate risk management

Effective risk management is critical for the long-term success of any organization, particularly in the banking industry due to the significant risks associated with lending and investing.

Unfortunately, SVB failed to effectively manage its risks, which many believe played a major role in the bank’s collapse.

A lack of oversight and accountability concerning risk management was certainly an issue at SVB. The extent of this oversight was highlighted by the fact that the bank’s CFO – who was responsible for overseeing risk management – was absent for an extended period of time. This curbed the focus on risk management and created a leadership structure and culture that allowed for risky lending practices and conflicts of interest to go unchecked.

SVB did indeed engage in risky lending practices including lending money to high-risk clients without proper due diligence. As a result, SVB suffered significant losses and defaults that undermined its financial stability and reputation.

Furthermore, SVB failed to implement adequate risk management policies and procedures, which left the bank vulnerable to potential fraud and misconduct. This lack of control and oversight left room for some employees to engage in fraudulent activities, which further eroded the bank’s stability and reputation. In fact, a recent LinkedIn poll from investor and news editor Marcel van Oost found that 74% of people believed the former CEO and CFO of SBV should be sued for their actions.

Screenshot 2023-03-26 at 23.40.24.png

Had SVB’s legal department prioritized risk management and ensured that the appropriate controls were in place to prevent and manage such failures, it’s likely that the impact of such activities would have been less severe.

Ineffective leadership

In recent years, SVB’s reputation has been tarnished by a series of scandals, including allegations of mismanagement and fraud. Since the collapse, bad management has been cited as a key reason for the bank’s downfall.

The bank was plagued by a lack of accountability and oversight, which allowed for risky lending practices and conflicts of interest to go unchecked.

For instance, former CEO Greg Becker was criticized for his close ties to certain clients and for failing to properly disclose potential conflicts of interest. This lack of transparency eroded trust in the bank’s leadership and ultimately led to Becker’s resignation.

In addition, SVB was accused of engaging in risky lending practices, including lending to high-risk clients without proper due diligence. This situation highlights the importance of Know Your Customer (KYC) procedures. Proper KYC procedures could have helped identify any red flags or suspicious activities associated with clients, potentially preventing or limiting the impact of these issues. Overall, this lack of executive direction resulted in a number of defaults and loan losses, which put the bank’s financial stability at risk.

Not to mention, it’s said that the bank’s employees received large bonuses that were paid out just hours before regulators seized the bank. This might be deemed as carelessness and can reflect a lack of effective leadership from the top.

Screenshot 2023-03-26 at 23.46.08.png

At a higher level, management at SVB was slow to respond to changing market conditions and, ironically, technological advancements, which left the bank ill-prepared to compete in a rapidly evolving industry. This failure to innovate and adapt likely also contributed to the bank’s decline.

Insider trading

In-house legal teams play a crucial role in ensuring that their organizations comply with relevant laws and regulations. In the banking industry, insider trading is an area of particular concern.

In 2003, the Securities and Exchange Commission (SEC) accused a former SVB executive, Keith Ligon, of engaging in insider trading. According to the SEC, Ligon had tipped off several hedge fund managers about upcoming mergers involving SVB clients. The hedge fund managers then traded on this information, making significant profits at the expense of other investors.

The SEC’s investigation revealed that Ligon had not acted alone. Several other SVB employees were also implicated, including one who is said to have leaked information to Ligon in the first place. The investigation also uncovered evidence of lax internal controls at the bank, which had allowed the insider trading to occur.

The fallout from this event was severe. SVB was forced to pay a $5.5 million fine and to implement stricter internal controls to prevent future incidents of insider trading. Several executives, including Ligon, were also charged with criminal offences and faced jail time.

This scandal highlights the importance of vigilant compliance management by legal departments. By implementing robust internal controls and ensuring that employees are aware of their obligations under the law, in-house legal teams can help to prevent insider trading and protect their organizations from the reputational and financial damage.

Withdrawal frenzy triggered by a powerful VC

Peter Thiel, a prominent venture capitalist and co-founder of PayPal, has been widely credited with helping to shape the early years of the Silicon Valley technology scene. However, in recent years, Thiel has become something of a controversial figure, particularly when it comes to his involvement with SVB.

It was reported that Thiel advised his portfolio companies to withdraw their money from SVB, apparently due to his concerns about the bank's increasing risk exposure, particularly in the areas of real estate and international lending.

While Thiel's concerns may have been valid, his advice to withdraw money from the bank had serious consequences. The bank saw a significant outflow of deposits as a result of Thiel's advice, which meant the bank was unable to meet its regulatory capital requirements. This resulted in the bank being placed under increased scrutiny by regulators and, in turn, led to the series of regulatory sanctions and fines that ultimately led to the bank's downfall.

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The impact on the startup ecosystem

The collapse of SVB has had significant implications for the startup ecosystem, particularly in the US. Roshan Patel, Founder & CEO of Walnut, shared a conversation he had with one of the company’s investors on Twitter. The investor shared their concerns that this is a “sector-wide issue”, but with a comic twist. So what do we need to understand about how this event will impact the ecosystem?

A more cautious funding and investment landscape

There’s no denying the boom in tech funding, and venture capital in particular, over the last decade or so. Significant funding rounds and lavish celebrations have glamorized raising capital from particular sources.

However, this approach and the growth-at-all-costs attitude have fostered a culture of unsustainable practices and unprofitable business models.

SVB was a major lender to startups and venture capital firms. The bank’s downfall has created a void in the funding and investment landscape, which may lead to tighter credit conditions, increased competition for capital, and a shift in the balance of power between startups and investors.

Emphasizing this point, Maelle Gavet, CEO at Techstars, stated in a LinkedIn post:

Thanks to the explosion in tech startup investing, the proliferation of VCs, and the scale-at-all-costs culture it unleashed, we created a world where unprofitable startups (AKA nearly all startups) are perpetually fundraising, and require continuous lines of credit.

The potential for greater financing options for startups (but not yet…)

The demise of SVB will no doubt leave a gap in the market. Considering the startup ecosystem in the US, UK, and Europe does bring in economic and cultural value, there is the potential that mainstream financial institutions will view the collapse as an opportunity to offer their own versions of funding for this segment. Might we see a reinvention of the banking industry and how it supports startups more broadly? Only time will tell.

The potential for a more healthy risk appetite as it relates to funding

One of the great appeals of SVB for startups was the lack of liability required. SVB was one of the only banks on the market that offered such financing without the need to put up collateral. While it will take time and a significant shift in the perception of funding in the sector, there is an opportunity to reimagine financing in the startup ecosystem. This may be using different financing mechanisms or shifting mindsets to view offering collateral in exchange for capital as a motivation to operate more sustainably and profitably – in some cases, offering collateral can encourage more innovative enterprising activity.

Regulatory scrutiny

SVB’s insider trading scandal was only the first step that attracted regulatory scrutiny, with the SEC imposing fines and sanctions on the bank and some of its employees. This increased regulatory attention may result in more rigorous compliance requirements for startups and venture capital firms, potentially increasing the cost and complexity of doing business.

Reputational damage to the tech ecosystem

The downfall of SVB has tarnished the reputation of the bank, as well as the wider startup ecosystem in which it operated. In-house legal teams may need to work harder to rebuild trust and restore confidence in the industry, including through improved transparency, accountability, and ethical conduct.

Reduced barriers to entry

Lastly, the demise of SVB may create opportunities for new players to enter the market and fill the void left by the bank’s departure. In-house legal teams should be aware of new entities in the market, and be prepared to assess the risks and opportunities associated with working with these new players.

The demise of SVB serves as a valuable lesson for in-house legal teams on the importance of robust legal and cultural practices. Below we explore the top five learnings that legal departments can take from the bank’s downfall.

1. The importance of risk management

SVB’s demise was due, in part, to its exposure to high-risk sectors, such as the technology industry. In-house legal teams should work with their organizations to identify and manage potential risks, including exposure to high-risk industries, investments, or counterparties.

2. The need for robust internal controls

As mentioned, SVB’s inadequate internal controls played a role in both the insider trading scandal and ultimately the bank’s downfall. Legal departments should ensure that their organizations have strong internal controls in place, including policies and procedures for risk management, compliance, and reporting.

3. Build a culture of compliance

A strong culture of compliance is essential for preventing misconduct and ensuring that employees act in the best interests of the organization. In-house legal teams should work to promote a culture of compliance throughout their organizations, including through training, communications, and incentives that encourage ethical behavior.

4. The value of transparency and accountability

The demise of SVB highlights the importance of transparency and accountability in ensuring that organizations are operating in a responsible, ethical, and sustainable manner. In-house legal teams should work to promote transparency and accountability throughout their organizations, including through robust reporting mechanisms and a commitment to ethical conduct at all levels. These qualities must be evident both internally and externally - and you can learn more about the value of transparency in corporate governance here.

To evidence the impact of these themes, you simply need to look at the Wirecard fraud case currently being tried in Germany. This is a significant corporate fraud case and one that reflects poorly on the country’s regulatory authorities. You can learn more about it in our “Challenges in Corporate Governance” blog here.

5. Innovative financing options

Finally, among the drama, there is an opportunity to be creative. The startup ecosystem might see an emergence of different funding options for growth, focusing on sustainability and risk management. Whether it be bootstrapping or crowdfunding, in-house legal teams will no doubt have a rise in responsibility when it comes to strategic matters such as business and financing strategies.


The collapse of Silicon Valley Bank serves as a reminder of the importance of risk management, strong internal controls, a culture of compliance, and transparency and accountability in ensuring long-term business viability. By taking steps to address these areas, in-house legal teams can help to protect their organizations from potential legal and reputational risks, and promote a culture of ethical behavior and responsibility.

How can Newton help with corporate governance?

Newton delivers an easy and intuitive platform to manage and automate your legal entities’ information, governance, and compliance. If your entity management processes have an important role to play in the sustainability and performance of your business (which they do for most), be sure to get in touch to explore how Newton can help you have everything you need to be in control of your entity portfolio.

Following the SVB disaster, you’ll understand the importance of having strong KYC (Know Your Customer) and KYB (Know Your Business) processes in place. But you also know how time-consuming and complex it can be to ensure compliance with ever-changing regulations and requirements.

That’s where Newton comes in. We are working on customized KYC/KYB processes where you can streamline your administrative procedures and simplify previously intricate tasks. This not only helps you save time and resources, but it also helps you establish better B2B relationships and ensures adequate legal support.

But that’s not all. By partnering with Newton, businesses can establish internal compliance policies that cover a wider range of issues related to their dealings with customers and suppliers.

So if you’re looking to help your business stay ahead of the curve when it comes to compliance and legal support, chat with our team about partnering with Newton today.

About this article


EY (2021). The General Counsel Imperative: How can you evolve entity management into effective governance?
ACC (2022). Legal Entity Management Practices
The Wall Street Journal (2023). What Happened With Silicon Valley Bank?
Fast Company (2023): Silicon Valley Bank: An ‘It’s a Wonderful Life’ bank run for the digital age
Politico (2023): The crypto ‘contagion’ that helped bring down SVB
CNN Business (2023): Silicon Valley Bank collapses after failing to raise capital

Featured Image: Photo by Robert Bye on Unsplash
Featured CTA blog post: Photo by Jurica Koletić on Unsplash / Photo by Christina @ on Unsplash

March 3, 2023

What is Legal Entity Management?

Discover the foundations of legal entity management, entity management identifiers, requirements, and the benefits of LEM software.

Dear Legal Ops!
Welcome to this week’s Let’s talk about Legal Ops, offered by Newton. We tackle corporate legal departments, speed up processes, and career growth. Please send us your questions; in return, we come back with real insights and actionable tips.
If you find this post valuable, don't miss the chance to check out our latest posts.

Subscribe to get access to more posts like these!

As businesses scale and adapt, companies must keep track of an ever-growing number of legal entities. These entities become increasingly complex and include subsidiaries, partnerships, trusts, and joint ventures, each with its own legal and regulatory requirements.

During this evolution, to ensure compliance and effectively manage risk, in-house legal teams are responsible for defining the framework in which their company can operate within the bounds of legal and regulatory requirements. This framework is what we call “legal entity management”; without which companies risk non-compliance, financial penalties, damage to reputation, and operational inefficiencies.

With this in mind, to effectively protect and propel your company, it’s important to understand the wider legal entity management landscape, its role in effective business governance, legal entity requirements, and the benefits of adopting legal entity management software vs more traditional solutions.

In an effort to support the 89% of companies that report facing challenges in managing their legal entities, let’s delve into the details to help you better understand the topic and how it can benefit your in-house legal team in managing legal entities effectively and efficiently.

In this article, we will cover the following:

Legal entity management is the process of managing all the legal entities that make up a company. These entities can include subsidiaries, partnerships, trusts, and joint ventures. This task becomes increasingly complex as your entity landscape expands, and each has its own legal and regulatory requirements.

Legal entity management is the process of organizing, tracking, and managing all the legal entities that make up a company to ensure compliance, mitigate risk, and achieve strategic objectives.

The ultimate goal of legal entity management is to ensure that the business operates effectively, complies with all legal requirements, and achieves its strategic objectives.

Legal entity management plays a critical role in ensuring effective business governance. Effective entity management enables companies to manage their legal and regulatory obligations, including compliance, risk management, and financial reporting. When done well, it also ensures that legal entities operate effectively and that the company meets its strategic objectives.

One crucial aspect of legal entity management is the use of legal entity management identifiers. Legal entity management identifiers are unique codes or numbers assigned to each legal entity within a company which allows for easy identification and management of these entities.

Entity management identifiers are used to track and manage legal entities and are an essential component of entity management. Examples of entity management identifiers include the legal entity identifier (LEI) and the global entity identifier (GEI).

According to a study by EY, 68% of companies report the lack of access to accurate, up-to-date information on legal entities as a major challenge.

The use of legal entity management identifiers can improve compliance, mitigate risk, and improve corporate governance. In addition, legal entity management identifiers facilitate due diligence activities, which can improve merger and acquisition outcomes.

Legal entity management is a critical function for in-house legal teams, but who is responsible for managing legal entities? The answer is not always straightforward and can depend on various factors, such as the size and complexity of the organization, the jurisdiction, and the type of legal entity.

68% of companies report only having 1 to 3 employees involved with legal entity management processes.

Below, we explore the different roles that may be responsible for legal entity management and how they might be involved.

Corporate secretaries

Corporate secretaries are typically responsible for managing legal entities’ day-to-day operations, ensuring compliance with legal and regulatory requirements, and maintaining accurate records. They play a crucial role in corporate governance by providing support to the board of directors, coordinating shareholder meetings, and ensuring the company’s policies and procedures are followed.

The legal ops function is responsible for optimizing the legal department’s processes and systems to enhance efficiency, reduce costs, and improve outcomes. They often oversee legal entity management to ensure compliance with legal and regulatory requirements, improve the accuracy of legal entity data, and mitigate risk.


If available, paralegals can play an impactful role in legal entity management by providing support to in-house legal teams in managing legal entities’ day-to-day operations. They typically assist with maintaining legal entity records, drafting legal documents, and managing compliance with legal and regulatory requirements.

Board of directors

The board of directors plays an important role in legal entity management by providing oversight and direction to the organization’s legal entities. The board ensures that legal entities align with the company’s strategic goals and objectives and comply with legal and regulatory requirements. They also approve significant transactions involving legal entities and monitor legal entity performance.

Management/senior leadership

Working in conjunction with the board of directors, the management team is responsible for overseeing legal entity operations and ensuring they align with the company’s strategic objectives. They also work with corporate secretaries, legal ops professionals, and other stakeholders to manage legal entities’ day-to-day activities, including compliance with legal and regulatory requirements, risk management, and improving performance.


By nature, shareholders have a vested interest in legal entity management as they own a portion of the company. They can influence legal entity decisions by voting on proposals and electing board members who oversee legal entity operations.

Legal entities have various legal and regulatory requirements that must be met to ensure compliance and mitigate risk. Compliance with these requirements is critical to ensure that the company operates effectively, complies with legal and regulatory requirements, and manages risk. There are three core requirements when it comes to legal entity management.

1. Risk mitigation

Legal entity management helps organizations mitigate risk by ensuring compliance with legal and regulatory requirements, managing litigation risks, and protecting intellectual property rights. If you fail to manage risk through legal entity best practices, you risk financial, operational, and brand damage challenges.

2. Compliance

Legal entity management is crucial for ensuring compliance with legal and regulatory requirements, including tax laws, data privacy regulations, and labour laws. Non-compliance can lead to financial penalties, legal liability, and damage to reputation. Effective legal entity management helps organizations maintain compliance and avoid legal and regulatory issues.

3. Achievement of strategic objectives

Legal entity management plays a crucial role in working towards business goals and achieving strategic objectives. Organizations can use legal entities to structure their operations, expand into new markets, and raise capital. Effective legal entity management ensures legal entities align with the organization’s strategic goals and objectives.

To ensure effective legal entity management, companies should consider the following best practices as a starting point:

  1. Centralization – centralize legal entity management to ensure consistency and accuracy across the organization
  2. Automation – automate legal entity management processes to improve efficiency and reduce errors
  3. Standardization – standardize legal entity management processes and procedures to improve consistency and accuracy
  4. Integration – integrate legal entity management with other business processes and systems to improve efficiency and data accuracy
  5. Regular review – regularly review legal entity data to ensure accuracy and relevance

Excel has long been the go-to tool for in-house legal professionals for many purposes, one of which has been entity management. However, as organizations become more complex and regulations more stringent, using Excel for legal entity management is no longer sufficient.

Excel is a versatile tool that can be used for many different tasks, but it is not designed for legal entity management. There are several limitations of Excel that will hold you back if you attempt to use it for legal entity management in this day and age.

Heavily manual

87% of General Counsel report their department spends too much time on repetitive tasks such as legal entity compliance.

While you can write formulae, Excel is still a very manual and time-consuming way to complete the sometimes high-volume but low-value entity management tasks.

Limited data validation

Excel lacks the ability to validate data and ensure accuracy. Without data validation, errors can go unnoticed, leading to compliance issues and operational inefficiencies.

Limited collaboration

Excel is not designed for collaboration, making it difficult for multiple stakeholders to work on legal entity data simultaneously or keep track of version control.

Limited scalability

Excel is not designed to handle large amounts of data, making it difficult for organizations with many and a growing number of legal entities.

Limited reporting

Excel lacks the ability to generate sophisticated reports, making it difficult for legal teams to provide insights into legal entity management.

Lack of data security

As it is not a build-for-purpose platform, Excel does not have the capabilities to meet modern-day data security needs.

As companies scale, Excel becomes increasingly inadequate so businesses must consider more robust solutions for legal entity management.

Outsourcing legal entity management can provide many benefits to companies, including access to expert professionals, reduced costs, increased efficiency, and improved compliance. Outsourcing entity management enables companies to focus on their core competencies and strategic objectives while ensuring that their legal entities are managed effectively and efficiently.

Over 70% of companies expect their legal entity management staffing levels to decrease or remain the same in the next 12 months.

Adopting a legal entity management software like Newton provides companies with a comprehensive solution for managing legal entities in a more automated manner. In turn, this allows in-house legal teams to manage their legal entities more effectively while requiring less time.

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Legal entity management is a critical function for in-house legal teams. Effective legal entity management can mitigate risk, ensure compliance, and achieve strategic objectives. Legal departments should prioritize implementing best practices for legal entity management including centralizing the matter, automating and standardizing processes, and regularly reviewing legal entity data.

By adopting best practices and, importantly, capitalizing on modern software such as Newton, companies can ensure effective legal entity management, leading to improved outcomes and reduced risk.

Newton delivers an easy and intuitive platform to manage and automate your legal entities’ information, governance, and compliance. If your entity management processes are currently creating friction for your team (which they are for many), be sure to get in touch to explore how Newton can help you have everything you need to be in control of your entity portfolio.

About this article


EY (2021). The General Counsel Imperative: How can you evolve entity management into effective governance?
ACC (2022). Legal Entity Management Practices.


Featured Image: Photo by Olawale Munna on Unsplash
Featured CTA blog post: Photo by Jurica Koletić on Unsplash / Photo by Christina @ on Unsplash

February 24, 2023

The value of Transparency in Corporate Governance

Law is ever-evolving, and new challenges and regulations are constantly arising. This article dives into the unifying value of transparency in corporate governance and how this can be compared across three key jurisdictions: the UK, Europe, and Luxembourg.

Dear Legal Ops!
Welcome to this week’s Let’s talk about Legal Ops, offered by Newton. We tackle corporate legal departments, speed up processes, and career growth. Please send us your questions; in return, we come back with real insights and actionable tips.
If you find this post valuable, don't miss the chance to check out our latest posts.

Subscribe to get access to more posts like these!

The huge advances in technology made over the course of the last decade mean that the requirement for transparency in corporate governance is more important than ever. As online platforms and social media have become integral to doing business, especially globally, companies must quickly adapt to ensure their efficiency in this new digital age. This is why corporate governance policies must fit the new requirements imposed on companies, especially in relation to corporate transparency. Who can forget the Enron Scandal, and the tale of a successful company that reached illustrious heights only to experience such a bewildering descent?

Corporate governance is vital to any business, and transparency and accountability are crucial components of good governance. This article discusses how each country has implemented corporate governance policies and practices to encourage transparency and accountability.

In this article, we will cover the following:

The Crucial Role of Disclosure, Transparency and Accountability

Enron’s Devastating Collapse: What Can We Learn from It?

The abrupt collapse of this powerful corporation Enron, once one of the largest in the world, remains astonishing even today. It’s especially difficult to comprehend how its management succeeded in deceiving regulators for years by placing bogus assets and deceitful accountancy practices. Yet the scandal inadvertently highlighted the crucial importance of transparency in corporate governance. It revealed how the unethical behaviour of specific figures within the company – illustrated through the extensive insider trading and absence of visibility into corporate and government entities – contributed to the collapse of the global financial markets.

The shocking revelations sparked the implementation of a worldwide program of proactive and vigorous reforms, as business leaders and governments understood all too well how if left ignored, such an inherent lack of transparency might one day result not only in the collapse of the markets but in worldwide economic disaster. Indeed, just last year, in an investigation into auditing problems at companies, journalists at Bloomberg News pointed out that:

It’s not clear that investors are any safer today than they were before Enron Corp. failed.

Enhancing Corporate Governance with Accountability and Transparency

Corporate governance is a wide term. Ultimately, however, it refers to the effective system of governance that companies should have in place to ensure the existence of confidence between all the different parties involved in various markets, notably the capital market, the labour force, as well as customers and suppliers. Understanding how entities react to the need for a solid legitimate, regulatory, and institutional framework in which market participants can place their faith is critical from both a local perspective as well as a global standpoint – as the devastating effects of Enron demonstrated. Various European nations' corporate governance codes and acts showcase a wide range of progressive developments, from fresh boardroom practices to new statutory regulations. Indeed, Europe is among the world's most rapidly evolving corporate governance climates.

Accountability and transparency are the key principles relevant to the efficacy of corporate governance codes in any company and in any jurisdiction, although there are subtle differences in focus between the legislation in various countries.

In the United Kingdom (UK), for example, the principles inherent to the Corporate Governance Code focus primarily on the rights and responsibilities of the company board, the shareholders and other relevant stakeholders, whilst in Germany, the Deutscher Corporate Governance Kodex establishes the key standards expected from company behaviour and outlines a company’s expected responsibilities of its board of directors, management, and shareholders.

It is critical to be aware of the rights of shareholders to safeguard them from the misapplication of corporate assets by management, as well as the power of auditing and accounting standards in assessing the level of information asymmetry, particularly from an international angle. These corporate governance characteristics determine the power balance between shareholders and the management of entities.

The Importance of Disclosure

Disclosure is highly valued in corporate governance, and it is an obligation for companies in Luxembourg, Germany, and the UK to guarantee their transparency in operations, decision-making processes, and financial reporting to maintain appropriate corporate governance.

This requires that firms are answerable to their stakeholders and furnish periodic reports on their activities and financial performance. Moreover, companies should highlight any risks or doubts that might impact their business and present regular financial statements that are easy to comprehend and available to all stakeholders.

Transparency in corporate governance means that businesses must observe the best practices. This includes the establishment of solid internal controls, the implementation of a clear command hierarchy, and the fostering of open communication and collaboration among all stakeholders. Companies must ensure the diversity of their board of directors and that it represents all their stakeholders, as well as monitor the performance of its duties.

The Key to Eliminating Market Abuse

These days, following the implementation of European wide legislation such as the EU Market Abuse Regulation, which was long awaited for its framework for preventing, detecting, investigating and punishing market abuse, the outrageous misuse, manipulation and outright deceitful appropriation of company assets has hopefully been, for the most part, eliminated.

One egregious example of such abuse occurred at the UK car manufacturing company MG Rover Group when it was discovered that four of the company’s directors had paid themselves huge dividends while simultaneously running it into the ground. The directors took large bonuses for five years until MG Rover Group finally went bankrupt in 2005.

When their greed and dishonesty were finally discovered, it was too late to rectify the £1.3 billion of debt they had left behind, along with the thousands of local people they had caused to lose their jobs, causing hugely negative implications for the local economy. Yet this is just one example.

Another case that comes to mind is the case of the Dutch international retailer Royal Ahold, which in 2003 revealed the numerous accounting irregularities of its various subsidiaries. Its CEO, CFO and, shamefully, the executive responsible for its European operations were all charged with fraud. Then in May 2006, they were judged guilty by a Dutch federal court of the falsification of paperwork and handed suspended prison sentences and substantial fines. The proliferation of fraud and the abuse of company assets at the director level across Europe was a key contributor to the development of European Union (EU) legislation on corporate governance.

Defining and Establishing Best Practices

The European Commission (EC) “Corporate Governance” Directive 2006/46/EC mandated that all publicly listed companies are required to include a corporate governance statement in their annual accounts for shareholders for the first time.

Various long-term strategies followed, such as the EC’s Europe 2020 and EU Action Plan, as the EU attempted to bolster corporate governance, enhance competitiveness, and foster sustainability among firms across the EU. To a great extent, these projects have been highly successful, with a range of EU corporate governance changes achieving substantial changes.

However, across the EU, and specifically in the UK, LUX and Germany, significant challenges continue in relation to ensuring the success and complete acceptance of corporate governance initiatives. A complicating issue with regard to the unification and harmonization of corporate governance concerns the variation in the legal forms of businesses across jurisdictions. This includes the public, private as well as in the not-for-profit sectors.

Each sector has its own particular governance issues, which must be met through the application of the best practice principles developed for their application from the German Corporate Governance Code (Deutscher Corporate Governance Kodex) that lays out the necessary rules for the oversight and administration of publicly traded German businesses, and comprises internationally and domestically accepted guidelines and suggestions to promote responsible and conscientious corporate governance to the overarching corporate legislation of the Companies Act 2006 in the UK, and then to the lattice of various statutory regulations in Luxembourg, which has not yet established any official code of best practice for the benefit of shareholders.

In the past two decades, multiple transformations have taken place with regard to corporate governance conventions among EU member states. Nowadays, numerous European businesses comply with the principles of excellent corporate governance. These practices come with certain advantages, such as improved disclosure and transparency in respect of: accurate financial statements, minority shareholder rights, connected dealings, remuneration, and acquisitions. Owing to the European Union corporate governance initiatives, a substantial amount of convergence has been accomplished regarding corporate governance practices, though conflicts continue.

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The Need for Harmonization

Yet the divergence of corporate governance best practices across the European Union (EU) still remains. In Luxembourg, the United Kingdom (UK), and Germany, the corporate governance law, statutory regulations, and models for governance in public and private business remain very different. This means that there is substantial room for improvement in terms of harmonizing corporate governance practices across the EU.

Analysis of corporate governance best practices

In the following articles, we will explore how the corporate governance law, regulations, and models of governance in public and private business in Luxembourg, the UK, and Germany, in particular, are developing. We will examine each region's current regulations and models and how each nation's corporate governance laws and regulations evolve. We will also analyze the approaches to corporate governance adopted in each region and evaluate their effectiveness. Finally, we will consider the potential for harmonising corporate governance best practices across the EU and discuss how it could occur. Through our analysis of corporate governance best practices in Luxembourg, the UK, and Germany, we hope to provide readers with a comprehensive overview of the current state of corporate governance in the EU and highlight the potential benefits that harmonization could bring.

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Regulation (EU) No. 596/2014 of the European Parliament and of the Council on market abuse as complemented by the Act of 23 December 2016 on Market Abuse as last amended by the Act of 27 February 2018, implementing Regulation (EU) No. 596/2014, Directive 2014/57/EU and Directive 2015/2392/EU.
Directive (EU) The European Commission (EC) Directive 2006/46/EC amending Council
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