Boardroom blunders at SNC-Lavalin

How things went terribly wrong under the watch of one of the most distinguished boards in Canada
Pierre Duhaime leaves SQ headquarters in Montreal, Wednesday, November 28, 2012. The former head of Canada’s biggest engineering firm, who once mused that Quebec was taking sufficient measures to fight corruption in the construction industry, was arrested Wednesday by the squad at the centre of those efforts.THE CANADIAN PRESS/Graham Hughes.
Graham Hughes/Canadian Press

Less than a week before its former CEO, Pierre Duhaime, was arrested by Quebec police investigators, SNC-Lavalin announced it had received an award for excellence in corporate governance from the Canadian Institute of Chartered Accountants—the seventh time it won the award in the past decade.

As one of the world’s largest engineering firms, with 32,000 employees and projects ranging from airports to water-treatment plants in more than 100 countries, SNC-Lavalin has cultivated a board of directors that could serve as a who’s who of Canadian business. It includes: EnCana Corp. founding CEO Gwyn Morgan, former York University president Lorna Marsden, Canadian National Railway Co. CEO Claude Mongeau, and, until recently, Conservative Senator Hugh Segal. Among them are three recipients of the Order of Canada. Many of the directors have served on SNC-Lavalin’s board for years.

Yet despite the board’s impeccable credentials, on its watch, senior executives at the firm are now alleged to have misappropriated millions to influence the awarding of big contracts both at home and abroad, and then covered their tracks by earmarking the payments for unrelated projects. The Quebec police have charged Duhaime—who resigned in March—with fraud, reportedly in connection with a contract to build and design a new $1.3-billion “super hospital” in Montreal. Authorities are also looking to charge Riadh Ben Aissa, who led SNC-Lavalin’s construction business from the company’s office in Tunisia. Ben Aissa has been indicted in Switzerland as part of an investigation into a money- laundering scheme, which reportedly involved $139 million worth of payments by SNC-Lavalin. Both he and a company vice-president and financial controller, Stéphane Roy, were fired by SNC-Lavalin earlier this year.

So far, SNC-Lavalin has suggested it is the victim of a couple of rogue employees who were promptly dismissed once their transgressions were discovered. Morgan, who has chaired SNC-Lavalin since 2007, said earlier this year that the company is working “to put this behind us.” A new CEO—Robert Card, a company outsider—was hired in August. This week, a spokesperson said there have been “substantial advances” to address deficiencies identified by the board.

Yet, despite the reassuring message from SNC-Lavalin, there remain more troubling questions than answers as the scandal continues to unfold. Why was Duhaime permitted to “step down” with a generous settlement, given the mounting questions about the depth of his involvement? What about the role of chief financial officer, Gilles Laramée, who had a problem with the suspicious payments, but apparently took no further action after being overruled by Duhaime? And, given the board’s own admission to “material weaknesses” in some of its corporate policies, why weren’t measures taken to guard against questionable behaviour in the first place? (A spokesperson for SNC-Lavalin told Maclean’s that no one from the board was available to comment.)

“[SNC-Lavalin] have done work in emerging markets for a long time, and these types of practices—bribes or illegal payments to agents—are, in many cases, how business gets done in these places,” says Richard Powers, a business ethics professor at the University of Toronto’s Rotman School of Management. “So [the board] either knew, or ought to have known, that this was a risk that they faced.”

But the most damning indictment of the board so far has come from SNC-Lavalin’s biggest shareholder, investing mogul Stephen Jarislowsky. “We have a board that didn’t keep its eye on things,” Jarislowsky, whose firm holds about 14 per cent of the company’s stock, told Bloomberg News in April. “And the executive more or less operated on its own.”

The public airing of SNC-Lavalin’s dirty laundry took a dramatic turn when Duhaime was arrested at his home in Dorval, a suburb of Montreal, on Nov. 28. Until that moment, much of the attention had been focused on Ben Aissa’s activities in North Africa—namely, a bizarre plot cooked up by a couple of outside contractors, once hired by SNC-Lavalin, to smuggle one of the late Moammar Gadhafi’s sons out of Libya after the regime fell last year. Suddenly, the scandal returned to Canada—landing smack in the middle of SNC-Lavalin’s own backyard.

The province’s anti-corruption unit charged Duhaime, 58, with fraud, conspiring to commit fraud and forgery. Although investigators revealed few other details, the charges came on the heels of a police raid of the McGill University Health Centre, or MUHC, which has said the investigators were looking into how the hospital contract was awarded. When SNC-Lavalin announced it had won the contract back in July of 2010, Ben Aissa was quoted as saying that “for SNC-Lavalin and its partners, this is the materialization of a major project that carries both hope and pride for the MUHC, for Montreal and for Quebec.” Now it’s become yet another source of embarrassment for a city in the midst of the Charbonneau Commission’s high-profile corruption inquiry. To add to the company’s grief, Montreal’s La Presse newspaper reported that SNC-Lavalin paid $22.5 million to obtain the hospital contract, although the claims have not been proven.

What is known, according to a “voluntary independent review” conducted by SNC-Lavalin, is that payments totalling US$22.5 million were made by the company in 2010 and 2011 under what it called “a presumed agency agreement.” Morgan explained to analysts and investors in March that SNC-Lavalin frequently makes use of agents or consultants when bidding on big construction projects around the world, although he added the typical payment was around $700,000, far below the multi-million-dollar payments that have come under scrutiny in Montreal. He said agents—often locals—are widely used throughout the industry to help secure necessary permits, arrange to import necessary materials and labour, and can play a role in settling potential contract disputes. “SNC-Lavalin and agency agreements do stipulate that the agent adheres to all applicable laws,” Morgan said. “Of course . . . these very special unusual circumstances that we’ve been investigating, we’re trying to determine whether that was or wasn’t the case.” The same internal review, released in March, found that $33.5 million was paid to another agent in connection with a separate unnamed project in 2011. In both cases, the agreements were allegedly requested by Ben Aissa and were earmarked for “construction projects to which they did not relate,” according to the company.

Morgan declined to name the projects or agents in question or where they were located, citing company policies. Equally unclear was why Duhaime was permitted to resign and collect a severance package worth nearly $5 million after he “authorized or permitted” the suspect payments. When asked why Duhaime wasn’t fired for failing to follow company policy, Morgan said there was no reason to believe Duhaime intended to do anything wrong. He was faced with a signed contract, Morgan said, “and for various reasons, he felt he was obligated to pay the bill. In hindsight, we all regret that.”

The role of Laramée, SNC-Lavalin’s chief financial officer and a company veteran of 25 years, has also come under scrutiny. The company’s internal report revealed that he refused to approve the suspect payments, but was overridden by Duhaime. Did Laramée not have a responsibility to report to the audit committee what he believed to be a violation of company rules? Not according to SNC-Lavalin. Ian Bourne, the board’s vice chairman, has said Laramée “did his job” by passing his concerns along to Duhaime. “We have complete, absolute confidence in our CFO.”

Those who have been following the saga closely question SNC-Lavalin’s handling of the affair. “At the time of the voluntary independent review, the whole thing was described as being isolated,” says Anthony Scilipoti, the executive vice-president of Toronto’s Veritas Investment Research. “But with each passing day, we’re learning how expansive the issues really are.”

Despite what SNC-Lavalin described as an exhaustive internal investigation, including hiring outside auditors with expertise in tracing money, the company admitted earlier that it still had no idea what the payments had been used for, nor who had received them. Senior managers had gone to great pains to cover their tracks, including using private email addresses and “protected devices to which the company does not have access.” The money, it added, was easy to miss: $56 million in a company that had $1.2 billion in cash and coming from within one of its largest divisions, which wasn’t required to break out individual projects in its financial accounting to the board.

“Clearly, our board of directors can’t govern something that they don’t know about, or prevent something they are not aware of,” Bourne told reporters earlier this year. “But what we can do is to examine all of our procedures so that the board can be confident that these kinds of events will not happen again.”

But there was evidence the board had ignored earlier warnings. As early as last December, the company’s directors received an anonymous letter with a series of damning allegations, including that money was being funnelled to the Gadhafi family in Libya. While Morgan said the board “took note” of the allegations, he also made it clear it hadn’t taken them too seriously. “I’ve run pretty major companies, and I’ve received anonymous letters before that have no credibility,” he said in May.

Board members also admitted there were significant “material weaknesses” in some of the company procedures they oversaw, including the fact that a subsidiary called SNC-Lavalin International Inc. had sole control over contracts with overseas “commercial agents,” and that its code of ethics didn’t actually require employees and executives to report their suspicions of wrongdoing.

Since learning of the problems in February, the board says it worked quickly to overhaul its processes. Among the changes, authority for hiring overseas “agents” will now fall to an Agent Review Committee. Agents hired on contract will have to take formal training on the company’s code of ethics. Even as the board defended Laramée’s curious decision not to report concerns he had with the illicit payments, the company now says its CFO will report directly to the chair of the audit committee.

Standing in front of a packed audience at the Toronto Board of Trade for the annual general meeting in May, Morgan said the company was turning a new leaf. “It is hard to imagine any board could have taken more decisive action,” he told investors.

Powers agrees it can be difficult for a board, which meets fewer than a dozen times a year outside of committees, to stop a determined employee from committing a fraudulent act. “Now, hopefully, you’ll have some processes in place to ferret out the fraud, but it’s very difficult to stop it immediately,” he says, estimating that about 85 per cent of the information a board gets about a company’s operators comes directly from management. Similarly, Karl Moore, a business professor at McGill University, says Canadian boards have gradually been moving away from their reputation as part-time figureheads and taking more active role in the companies they oversee. But there remains a precarious relationship between directors and their executives, with board members reluctant to dig too deeply into the day-to-day operations of a company. “After something like this happens, the board is going to pay more attention to it,” Moore says. “But if you start meddling too much, you’re going to frustrate your senior team by putting your long nose in their business.”

However, critics say the SNC-Lavalin board simply wasn’t doing its job. “There’s no justification for a board ducking behind the old excuse, ‘I was deceived by management,’ ” said Don Thain, a professor emeritus at the Richard Ivey School of Business at the University of Western Ontario and an expert in corporate governance. “The board can duck and spin and misrepresent its way out of this, but they are ultimately responsible for the mess, and they should have known better.” The role of a board of directors is to know the ins and outs of company business, police the corporate culture and regularly haul executives into the boardroom for a grilling, he says. The problem is that, too often, executives see their board memberships as prestige appointments that don’t require the same scrutiny as their own companies. “Being well-respected and experienced is no excuse for not doing your job,” Thain says. “Forget about the committees and all the superficial process stuff that goes on. The central issue that every director should be required to answer is: What would I do if this were my company?”

SNC-Lavalin’s scandal is far from over. Ben Aissa is still being investigated overseas and the RCMP is reportedly working with Swiss police. It’s likely more charges will be laid, possibly raising further questions about SNC-Lavalin’s senior executives. It all points to a troubling truth about the anemic state of corporate governance in Canada. “You can have great written procedures,” says Scilipoti. “But if they’re not respected or enforced, then they’re not worth the paper they’re printed on.”