29 juillet 2013

« Lessons from SNC-Lavalin: The mirage of board governance »

Yvan Allaire | Financial Post

« In a recent commentary in The Globe and Mail, Gwyn Morgan, the former chair of the board of SNC-Lavalin, gives us his take on what happened within the engineering giant and offers some advice to improve corporate governance. The gist of his piece bears on how hard working and diligent the chairman and the board members were after they were informed of malversation by some members of management.

His explanation of why the board could not prevent the abuses at SNC-Lavalin rests on two axioms from the playbook of “good” corporate governance:

  • “Non-executive directors are not involved in day-to-day operations of the company. They must rely on information received from people within the company. When a small number of people deliberately set out to falsify documents, commit bribery and cover up theft, it can be exceedingly difficult to detect…”
  • “One of the most widely accepted corporate governance principles is the clear separation of the role of board members from that of management.” Boards must trust management to be…trust-worthy and let management manage.

After some 15 years of tweaking and polishing the theory and practice of “good” governance, board members, through no fault or inadequacy on their part, remain surprise-prone, dimly aware of various goings-on in the company, poorly informed and lacking the wherewithal to challenge management. In the current form of governance, corporate directors are somewhat akin to skaters making intricate arabesques on a frozen lake, largely unaware of the teeming life underneath.

The governance orthodoxy that became dominant since Sarbanes-Oxley has only reinforced this character of governance: a fiduciary façade for shareholders, a simulacrum of decision-making authority over management.

What has happened recently at SNC Lavalin, a company with stellar Globe and Mail governance scores (1st in 2005 and 2009; 2nd in 2006; 3rd in 2008; 7th in 2003, 2011, 2012) illustrates this point rather eloquently. The SNC-Lavalin board, made up of experienced people, had to face up to a crisis it did not see coming.

But could the board have foreseen and prevented the scandals, legal imbroglios and international embarrassment now weighing on the company’s future? Wisdom after the fact is a most common, and detestable, quality.

Yet, as a dutiful practitioner of “good” governance, SNC-Lavalin provides an abundance of information in its annual “Management Information Circular” which brings forth some relevant questions.

For instance, in this circular for fiscal year 2010, the company informs us that 7 of its 12 board members claim, on a grid of competencies, that “they know well the geographical regions where the company operates” and 9 members check that “they have an international business experience”. One may think that people who know well how business is transacted in, say, Libya (Transparency International corruption score 160th out of 174 countries), Algeria (score 105th), Tunisia (score 75th) would have asked pointed, skeptical questions about the ways of winning large contracts in these markets. Perhaps they did. But would they not want to follow up with policies about which countries should SNC-Lavalin be allowed to prospect for contracts? Perhaps they simply did not know how business is actually conducted in exotic places.

Not that they did not have an opportunity to raise those questions. The management information circular for the fiscal year 2011 reports that board members participated in training sessions where 50 presentations were made on various projects worldwide. Board members, it is reported, were also privy to sessions bearing on global issues and acquisitions strategies in specific countries: India, Brazil, Libya, Southeast Asia.

In its annual report for 2010, SNC-Lavalin lists among the business risks of the corporation “anti-bribery laws”, about which the report states reassuringly: “The Company’s controls, policies and practices are designed to ensure internal and external compliance with these laws”.

One may certainly dare ask how could the board, dependent as it is on the information provided by management, ascertain that every control was in place to ensure compliance? In the 2011 annual report, this blanket guarantee that everything is under control is replaced by a subdued statement: “Our policies mandate compliance with anti-bribery laws.”

The solution to the kind of governance issues raised by SNC-Lavalin will not come from a further tightening and refining of what we call fiduciary governance: the set of punctiliously applied rules, guidelines, and principles, which has come to define “good governance”.

Let’s be clear. In the Anglo-American model of the widely-held, publicly traded corporation, governance is largely a mirage. For those looking from afar, the board of directors looks like a decision-making and controlling body, the ultimate authority over the company and its management. From up close, the mirage dissipates into a stark reality where impeccably independent directors, no matter how impressive their biographies, are the vassals of management, dependent on management with its advantage in information, in time invested, and in specific expertise.

The relative success of “activist” hedge funds (e.g. at Canadian Pacific) and private equity funds underlines the flawed practices of “good” corporate governance. We need “activist” boards, boards that create lasting value for the company and its stakeholders. We must question some of the axioms that support the current practice of governance. We must re-tool and re-think the whole business of corporate governance.

That should have been the lesson learned by Mr. Morgan from his dismal experience at SNC-Lavalin.

Opinions expressed herein are strictly those of the author. »