In May, I retired as chairman of SNC-Lavalin Inc. after serving for six years. That was one year longer than my original commitment. The need to stay beyond my original term became clear in early 2012, when I received a phone call during a trip to Hong Kong, where I was attending board meetings of HSBC Holdings PLC.
That call was when I first learned of two large payments made by SNC-Lavalin under so-called "agency agreements" whose documentation was tied to construction projects that did not exist. The following 16 months turned out to be the most disturbing and challenging of my four-decade career in business, and I want to set a few things straight.
The news of the payments seemed surreal. SNC-Lavalin had recently celebrated 100 years of progress to becoming one of the world's most respected engineering and construction firms. I hoped that it was all some sort of accounting mix-up, but after a conference call with the chairman of the audit committee and external auditors, that hope was dashed. There were many unanswered questions, including how the payments came to be made and who received the tens of millions of dollars involved.
The directors were deeply concerned and we took action. Our audit committee hired independent counsel to conduct an extensive internal review, the results of which were made public in March, 2012. That report, along with other information gathered during the review, was turned over to authorities and the company continues to collaborate with their efforts to bring wrongdoers to justice. Several former SNC employees now face charges and recent public comments by investigators indicate the company may have been the victim of embezzlement by two trusted, long-time executives.
With former CEO Pierre Duhaime's termination, the most urgent priority was top-level leadership. Ian Bourne, a respected Canadian businessman and SNC director, agreed to step in as interim CEO. He stabilized the troubled company during the ensuing six months. Under his leadership, we reinforced standards of conduct and implemented better internal controls. Remarkably, the staff managed to retain the confidence of clients and win important new projects. It is said that some are destroyed by adversity, while others rise to overcome it. The people of SNC-Lavalin are clearly in the latter group. History will show they are the ones saved their company.
The next crucial task was recruitment of a new CEO. I'd been involved in other CEO searches before, but none like this. The very survival of the company was at stake. Clients, employees and shareholders were allowing the board some time to get the company stabilized, but that clock was ticking. We knew that the famous Apollo 13 quote – "Failure is not an option" – applied to our task. The global engineering and construction business is highly complex and competitive, so we needed a person with an outstanding operational track record. And given the crisis that had engulfed the company, we needed a person of extraordinary character, determination and resilience. Last but not least, the new CEO had to bring a reputation for the highest ethical values.
It was a daunting set of criteria. Did such a person even exist and, if so, could we attract that leader to our company? Following a global search, we found such a person in Bob Card, one of the engineering and construction industry's most accomplished leaders. He has drawn a zero-tolerance ethical red line and has been able to recruit several world class executives who share his belief that SNC-Lavalin has great future potential.
Still, I know the waves roiled by this storm will continue to pound against the stern. The investigations continue and lengthy trials for those charged have yet to begin. As we saw in recent stories in the Globe and Mail, disclosures by investigating authorities will bring negative headlines about things that happened before Ian Bourne and Bob Card took over leadership of the company.
Containing the damage from that fallout will make rebuilding the SNC-Lavalin brand a challenge – but far from an impossible one. In 2006, when German engineering company Siemens AG was rocked by an international bribery scandal on a breadth and scale beyond the allegations currently facing SNC-Lavalin, many thought that the company could never regain its reputation. Today, Siemens is a global colossus with one of the world's most respected brands. One of Bob Card's first moves was to hire Andreas Pohlmann, the man who was at the centre of rebuilding the Siemens brand, as SNC-Lavalin's chief compliance officer.
This difficult chapter in SNC-Lavalin's history raises some fundamental questions about corporate governance. Why didn't these errant behaviours come to the board's attention earlier? Shouldn't we have known about these payments? Were we, as some have suggested, "asleep at the switch"?
These questions are understandable. And yet, over my career as founding CEO of Encana Corp., and as a director of four other major global firms, I still believe SNC's board is perhaps the most diligent I have ever seen. Major projects were put through the wringer, with thorough analysis of financial, operational and security risks. When a project failed to meet expectations, it was examined in-depth by the audit committee – as were all indications of possible financial irregularities or failure to comply with the company's Code of Conduct. With some 10,000 projects in more than one hundred countries, the workload for the board and the audit committee was large, requiring long and frequent meetings. In 2011, before we found out about the illegal payments, many independent directors had between 16 and 20 meetings. Last year, some directors had 35 or more.
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.
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.