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Gwyn Morgan served as SNC-Lavalin’s chairman for six years. (MARIO BEAUREGARD/THE CANADIAN PRESS)
Gwyn Morgan served as SNC-Lavalin’s chairman for six years. (MARIO BEAUREGARD/THE CANADIAN PRESS)

Governance

Lessons I learned from SNC-Lavalin’s woes Add to ...

Could the board have done more to detect the wrongdoings that have since come to light? The answer to that question is as troubling to SNC-Lavalin board members as it must be to all corporate directors. 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, even with good controls in place. This has proven to be true at corporations around the world.

One of the most widely accepted corporate governance principles is the clear separation of the role of board members from that of management. Directors select management, examine strategic plans, review budgets and ensure suitable control and compliance systems are in place. The role of management is to run the company. As a long-time CEO and more recently a chairman, I have experience on both sides. I know that a corporation cannot function without trust between directors and executives. They are in many ways a team, dedicated to the organization’s success. But that trust must be kept in careful balance.

What did I learn from SNC that might be useful to other corporate directors? The first lesson would be that, since non-executive directors receive essentially all information from people in the company, boards should do everything possible to strengthen and diversify those communication channels.

For example, internal auditors should report directly – and only – to the chair of the audit committee, not to management. The chief financial officer should have a strong, direct reporting relationship to the audit committee chair – as strong as his relationship to the CEO. Operating division comptrollers should report to the CFO, not to the division leader or the business-unit head. There should be a robust whistleblower system, independent of management, so employees can be confident of passing on information to directors without fear of reprisal.

The second lesson is that while strong financial controls, operational compliance and codes of conduct are very important, they will fail unless all people in leadership roles, from the CEO on down, follow those best practices diligently and consistently.

Finally and most important, corporate culture must be built upon a bedrock of strong ethical values that penetrate every level in the company. It is said that corporate culture is defined by how people act when no one is looking. But it is also defined by how employees react when they see behaviour that is inconsistent with the values of the organization. When their intrinsic cultural reaction is, “We’re not going to let this happen in our company,” the organization is built upon a solid ethical foundation. One of my great regrets is that, for some reason, SNC employees who saw signs that code of ethics violations may be happening didn't feel comfortable in speaking up.

I have long believed in the importance of Canadian-headquartered companies that rank among the world’s best. This belief was a driving passion behind the building of Encana, which was Canada’s most valuable company when I stepped down as CEO at the end of 2005. When I announced my retirement, I received offers of board membership from many companies. For me, both as an engineer and a believer in Canadian-headquartered global champions, SNC-Lavalin stood out as my top choice. It has grown from a one-man operation into one of the world’s premier engineering and construction companies, and is the most global enterprise Canada has ever produced. My fervent hope is that, like Siemens AG, it will move beyond this difficult period into an even stronger second century as a flagship Canadian enterprise.

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Information is key

Because directors get most of their information from people within the company, they need to do everything they can to build and diversify their sources. There should be a robust whistle-blower system, independent of management, so employees can pass on information to directors without fear of reprisal.

Financial reporting structures matterInternal auditors should report directly – and only – to the chair of the audit committee, not to management. The chief financial officer should have a direct reporting relationship to the audit committee chair. Operating division comptrollers should report to the CFO, not to the division leader or the business-unit head.

Focus on leadership

It’s important to have strong financial controls and ethical codes, but they will fail unless all people in leadership roles, from the CEO on down, follow them diligently and consistently.

Culture, culture, culture

It is said that corporate culture is defined by how people act when no one is looking. But it is also defined by how employees react when they see behaviour that is inconsistent with the values of the organization. When their reaction is, “We’re not going to let this happen in our company,” the organization is built upon a solid ethical foundation.

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