Blogs & Comment

Alleged misconduct at SNC-Lavalin and RBC: Where was the Board?

The board of directors is responsible for corporate conduct: full stop.

If the CEO of SNC-Lavalin allegedly overrode his own CFO and breached the company’s code of ethics in authorizing $56 million of questionable payments to undisclosed agents that the RCMP are now investigating, did the board of directors of SNC-Lavalin have a role to play?

If RBC made ‘material false statements‘ in connection with non-arms length trades, which is being alleged by a U.S. regulator, did the board of directors of RBC have a role to play?

The answer is ‘yes’ in these and similar cases. Speaking generally, as all allegations have yet to be proven, it is not credible to argue that boards do not have a determinative role to play in compliance and reputational failure, or that directors simply did not know. A board is the only body that has the legal authority and power to control management and designate all compliance and control systems. It alone acts or fails to act. A board is paid, handsomely paid at the senior most levels in Canada, to take all reasonable steps consistent with best practices, to ensure that it does know.

New corporate regulations, such as the UK Bribery Act, and the SEC Whistle-Blower Rule, are attempting to hold directors responsible and accountable for failing to direct proper anti-corruption and whistleblowing systems. The SEC rule enables employees to report wrongdoing directly to the regulator, thereby completely bypassing toxic work cultures where whistleblowing is neither independent nor anonymous. This legislation is putting the heat on boards and senior management, or at least it should be.

The Ontario Securities Commission last month released a scathing report about governance, risk management, internal control and auditing failures in companies operating in emerging markets.

In SNC-Lavalin’s case, how could anomalous payments of this magnitude and internal controls be allegedly manually over-ridden, as is being reported, and not receive explicit board or committee approval? Where was the board? SNC’s own internal report reveals a shocking lack of disclosure of contracting parties and improper documentation and passwords. The board chair, Gwyn Morgan, said the board wasn’t “able to really determine the use of those payments.” If this is the case, this is a massive governance and internal control failure by the board and senior management.

The departing CEO, Pierre Duhaime, is receiving almost $5 million dollars in severance. A portion of this is stock options awarded before an independent review was completed, as is reported in the press. Some regulators recommend penalties, whereby for example (at page 38 of this report) vesting of shares would occur only if there is no breach of the code of conduct. Boards may wish to consider similar provisions.

Speaking generally, it is impossible for fraud, bribery or ethical breaches to occur in a vacuum. Employees know. The 2011 National Business Ethics Survey reveals that those who reported bad behavior they saw reached a record high of 65% and retaliation against employee whistleblowers rose sharply to more than one in five employees. The Conference Board’s Directors Notes, in ‘Lessons for Boards from Corporate Governance Failures’ (see the PDF at page 3), reveals defects in whistleblowing systems that include lack of anonymity, lack of independence, lack of communication and training, lack of incentive, and lack of a proper investigation. These defects are exactly what the SEC rule is designed to address. As Chairwoman Schapiro has argued, “I find that many of the business ethics problems severe enough to be investigated by us are the result less of individual greed than of individuals succumbing to pressure from their peers.”

Whistleblowing defects are all faults of a board. If the board is getting its information only from management, this is a red flag. Management may not even possess accurate knowledge, as we see in cybercrime. Independent assurance over anti-fraud and whistle-blowing procedures must occur for any prudent board. And ‘independence’ does not mean the company auditor or legal counsel who assess their own or their firm’s work, nor any firm who does, has done, or seeks to do work for company management. Any assurance provider in this area could likely recommend action adverse to incumbent management or service providers.

Directors and boards themselves also need to step up. This includes initiatives such as electing international directors, moving board meetings to emerging markets, understanding corrupt business practices, “deep dives” by directors, receiving third party assurance and information that is not funneled by management (including culture surveys), and using alerts and social media.  Check out ‘What Better Directors Do,’ by NACD Directorship.

Both SNC Lavalin and RBC received governance recognition and were among the top twenty-five companies in the Globe and Mail’s Board Games for 2011. SNC Lavalin was the 2007 award winner from the Canadian Coalition for Good Governance. This shows you the perils of rating boards on tick the box systems from the outside rather than a methodical internal review.

The question therefore, is, could this happen on other boards of directors? If you are a director on a board and cannot reasonably answer ‘no,’ to this question, perhaps you should consider some of the above recommendations.