March 21, 2019

What was the story behind SNC-Lavalin’s supposedly ‘excellent’ corporate governance regime?

Yvan Allaire | Financial Post

Excerpted and translated from “Le fiasco SNC-Lavalin: crime, culture, governance?” by Yvan Allaire, executive chairman of the Institute for Governance of Private and Public Organizations, published in Policy Options March 18, 2019. 

The tragedy of SNC-Lavalin was in the making between 2000 and 2012. To outside observers, these were years of quiet profitability for the company. And yet, these years were teeming with fraudulent and corrupt activities carried out by some managers and executives of SNC-Lavalin. For reasons that are little understood (but should be), a culture of duplicity, greed, and flouting of ethical norms had taken root in the management of the company — with the board of directors totally unaware, it seems.

Yet at the time, SNC-Lavalin was highly rated for the quality of its governance. According to the annual ranking of some 250 Canadian companies for the quality of their governance published by The Globe and Mail, SNC-Lavalin got top ranks: 1st in 2005 and 2009, 2nd in 2006, 3rd in 2008, 7th in 2003, 2011 and 2012. How could it be that such “excellent” corporate governance did not detect any sign of malfeasance nor trigger any alarm?

All boards of directors rely on the information that is passed on to them by management, which is assumed to be honest and reliable. That is the Achilles heel of governance.

So, if management lies to the board or provides false information, how can the board be blamed? This argument, although legally valid, is not fully satisfactory. What could SNC-Lavalin’s board of directors have known? What questions should have been asked of management of the company at the time?

For instance:

— Who decides, and on what basis, to seek contracts in countries with exotic political mores?

— Who has the authority to approve sales agent contracts and assess that the amounts paid to them are appropriate?

— How does the company manage to be so successful in these countries?

— What is the opinion on these matters of the seven (out of 12) board members who indicated on the Skills Matrix that they “are familiar with the geographic areas where the company operates”?

The board of directors at the time may have raised these issues and management might not have been forthcoming. Except for its somewhat limited curiosity, the board observed all the rules of “good” governance (according to The Globe and Mail). Boards of directors, in the traditional form of governance, are always a bit like skaters making arabesques on a frozen lake, unaware of the teeming activities under the ice. This form of governance must be changed…

Has the company sacked or sued all the managers responsible for this corrupt culture in the years 2000 to 2012? The Canadian anti-corruption law makes that a key factor in deciding whether to come to a deferred prosecution agreement with an indicted company.

If no such factors can be invoked, it is difficult to understand why the prosecutors of the Canadian justice department refuse to come to an agreement with SNC-Lavalin.

Indeed, the Canadian anti-bribery legislation should be modified and stipulate that a corporation is liable to criminal charges if its board of directors has authorized or endorsed criminal acts or failed to put in place all necessary safeguards and exercise appropriate oversight of management. However, this argument has not been raised so far in the present case.

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