According to a shared understanding, stealing, cheating, or lying are not acceptable behaviors in society, and violations of these norms come with consequences. These same agreements have also become an integral part of responsible business conduct. There are simply certain principles and practices that must be followed to fit into today’s business culture, writes Annika Vait, a partner at RASK Attorneys-at-Law.
The first two foundational pillars of ESG – environmental and social factors – are quite well understood by businesses today. However, the third pillar, governance, presents a more complicated situation. Professionally, this is most reflected in various disputes that arise precisely from conflicts with the principles of responsible governance.
Simply put, we can talk about three central principles of responsible leadership to which we have mentally subscribed, and violating them brings certain consequences. Firstly, lawful behavior is important; stealing and other activities prohibited by law are in conflict with this principle. Secondly, business ethics and transparency are necessary, meaning one should avoid hiding, lying, cheating, or other forms of dishonest and disrespectful behavior. Thirdly, setting goals and managing risks is critically important – actions should be thoughtful and systematic. The impacts and risks of business activities must be considered, and their management should be organized.
Principles That Are Violated
Engaging investors, as well as maintaining and increasing investments, are everyday challenges for businesses. This is especially relevant for growth companies, which are popular in Estonia. Often, things tend to be left to the last minute, which can mean that by the time an investment is sought, the financial situation of the company may already be critical. If, in such a situation, there is a thought to save the day by improving the company’s financial position in an unacceptable way or hiding some important facts, it could end very badly.
If false information is disclosed or important facts are concealed during pre-contractual negotiations, the other party may have the right to claim compensation for damages. If such behavior occurs with a contractual partner, the contract will likely contain a “no lying or concealing” clause and corresponding penalties for violations. Usually, this includes a penalty fee and a claim for compensation exceeding the penalty amount. In the case of more significant violations, there is also the right to unilaterally terminate the contract and withdraw the investment.
A second real-life example could be a situation where, in the excitement of bringing in a new investor, the terms of an agreement with an existing investor are overlooked or kept quiet in front of a new potential investor. Alternatively, existing investors are simply not sufficiently involved in new plans. Generally, agreements with investors contain terms that require prior amendment to make changes to the circle of investors, which often requires longer negotiations in practice. Otherwise, one encounters various contractual sanctions and the risk that it is not legally possible to bring in a new investor in the desired manner. In the worst-case scenario, a poorly thought-out plan to attract additional investment ends up losing both the hoped-for new investor and the existing one.
The Snowball Effect Can Start Quickly
In practice, legal violations often lead to subsequent negative effects. Thus, the actual damage is not limited to what is mentioned above but often includes reputational damage and loss of trust. Besides the societal view, this has a significant impact on cooperation and client relationships, as well as relationships with employees.
For example, the prices of publicly traded stocks are highly sensitive to such situations. In certain service sectors, trust is critically important to operate effectively. Good examples include lawyers, doctors, or investment funds.
All this means that one misstep can lead to even greater losses for the entrepreneur. Such a greater loss could be the termination of another important partnership or missing out on a potential collaboration opportunity, not receiving new investments in the future, or being excluded from public tenders. In highly regulated sectors, it could even mean the cessation of activities.
In practice, the decisive factor besides the initial legal violation is how many snowballs roll and in how many directions on the path of potential greater damages. For a legal advisor specializing in business law, this is often reflected in business disputes between shareholders, which eventually lead to a large number of different disputes and proceedings, often taking on the dimensions of an avalanche.
It is crucial to quickly recognize possible legal violations and the associated risks and to resolve them sensibly. This is where it generally pays off to involve not only lawyers but also a professional crisis manager and, if necessary, the help of a communication manager. While the previous example involved a start-up, a classic example for large companies is significant disputes arising from standard terms. Sometimes, one small contractual dispute that remains unresolved or mismanaged is enough to let a snowball roll that encompasses a large potential loss. Such situations often require not only legal knowledge but also reasonable judgment with management experience.
Challenging Situations Also Offer Opportunities to Win
In crisis situations, it is critical to take responsibility, be honest, and be transparent. Today, one must always be ready for a crisis to erupt. When a crisis does occur, it must be communicated transparently and honestly both internally and externally. This is important for maintaining and/or restoring trustworthiness.
In such situations, leaders should roll up their sleeves and, if necessary, enlist the help of specialists in the relevant field. Observing legal disputes and crises of varying magnitudes in companies, I have increasingly understood how important it is to have a risk management system in place and to set a sufficiently well-thought-out plan for resolving a specific crisis. These steps are generally essential.
The absence of a plan, strategy, and management experience, or insufficient thought about the next steps, can end very poorly. Often, neither legal advisors nor communication experts can then remedy the damage done, and they must deal only with the consequences.
In business advisory practice, it is noticeable that more and more attention is being paid to sustainability issues. Estonian society and business culture are evolving in this regard, which is crucial for ensuring sustainable business success. As always, in the best case, we learn from the mistakes of others, but too often we still fall into the same traps ourselves. Therefore, as a whole, we still have quite a bit of room for development and challenges ahead.
