The Charbonneau Commission: Governance Lessons for All

November 11th, 2013

1. Why Are These Lessons for All Corporations?

It would be wrong to assume that the instances of wrongdoing revealed at the Charbonneau Commission are limited to the fields of activity covered by the Commission’s mandate, which is why it is important to take away the appropriate lessons to be learned from those revelations.

The Commission’s proceedings have shown that no level of management of an organization, whether a service provider or a public-sector client, is immune from the commission of illegal – if not criminal – acts within its ranks.

How is it that such activities went undetected for so long by the auditing and monitoring mechanisms instituted by these organizations? Of what use are these internal and external audit and control mechanisms if they can be so blind?

Why were most of the wrongdoers not fired, or at least temporarily relieved of their functions, upon being summoned to testify? What were the corporations’ expectations vis-à-vis these individuals? Were they to be absolved?

2. Conventional Notions of Governance Seriously Challenged

Today most corporate websites feature page upon page of governance rules, codes of ethics and policies promoting whistle-blowing and protecting whistleblowers from any type of reprisals. The inescapable conclusion is, however, that despite all these rules and reporting policies, not only did illegal activities take place, but they continued, unreported, for years.

Why were these activities not reported? Is this some sort of cultural phenomenon?

a) “Human nature being imperfect, corruption will exist in all human endeavours.”

Based on the testimony before the Commission, it is evident that protecting one’s own interests, not wanting to get involved in a process that could prove to be unpleasant and the fear of treading on the toes of the more powerful are all partial answers to that question. The excuses given for not taking action were but easy cop-outs such as the most frequently heard “Everyone was doing it!” and it’s kin “We had no choice!”

The 16th century theologian Saint Francis de Sales coined the adage “Là où il y a de l’homme, il y a de l’hommerie” which can be loosely translated as “Man will do what man will do”. The truth of that adage is being amply borne out each day the Commission is in session.

Professor Yvan Allaire1, one of Canada’s foremost authorities on governance, has observed that:

[TRANSLATION] “[What] characterizes most men and women, apart from certain saints and heroes, is that their resistance to the pressures of self-interest is not limitless. Everyone has a breaking point when it comes to their own values, the tipping point between integrity and avarice.”2

Professor Allaire’s observation echoes that of Saint Francis de Sales, and indicates that there is no ready solution to this problem, which appears to be almost genetic in nature.

b) Ethical lapses in the era of modern media

Corruption in corporate circles is not a new phenomenon. “Corruption is as old as the world itself”, stated former French police inspector and jurist Antoine Gaudino3 during an interview. He correctly pointed out that entire civilizations have collapsed because of this curse. What is new today, however, in the era of modern media, and particularly social media, is the speed with which it all comes to light. Everything the media learns or believes to be true spreads with the speed and force of a tsunami.

Ever since the scandals that precipitated the world financial crisis beginning in 2007, including those close to home such as Norbourg, Mount Real and Norshield, Québec Inc. is no longer above suspicion or venerated as it once was!

c) Crisis management in the era of modern media

Whether or not a corporation is subject to statutory continuing disclosure obligations, silence is not an option when a crisis looms. Moreover, choosing the content of the disclosure message is a delicate exercise requiring a balance between transparency, which implies full disclosure, and protecting the interests of the corporation. These two goals are often hard to reconcile.

All too often, when the message is drafted, the self-protection reflex of the corporate directors prevails over the need to protect the interests of the corporation and its shareholders. While this is a very human reaction, directors should fully appreciate the risks their position entails before agreeing to accept it!

3. Rethinking Governance

a) Trust

Trust is the single most important factor for successful human relationships4, and in the area of corporate management and governance trust plays a particularly important role.

b) From trust to mistrust

Traditionally, case law and legal writers on corporate governance have consistently recognized that trust is the essential basis of the relationship between corporate directors and management. While trust has not yet been ruled out as the key element in that relationship, courts are now insisting more and more on the need for directors to equip themselves with sufficient means to verify the sufficiency and reliability of the information provided by management. Ongoing monitoring is required, proportionate to the risks the corporation is exposed to, and human selfishness and greed are definitely prominent among those risks!

The pitfall faced by directors and officers, now more than ever, lies in the words “or ought to have known” from the Supreme Court’s dictum in the Wise decision5. This is evident from many of the abuses revealed before the Charbonneau Commission.

c) Risk management

When the concept of fiduciary duty is considered in light of the advisability of a business decision gone wrong, the business judgment rule protects directors and officers. However, the decision to engage in or ignore wrongdoing does not fall within the category of decisions covered by the business judgment rule, notwithstanding the insistence on the part of many of the witnesses before the Commission that their conduct was simply the way business was done. Managing the risk of wrongdoing is a fundamental aspect of modern corporate governance.

d) A double-edged sword

The current context highlights the need for corporations to tighten up their governance rules, adopt codes of ethics, institute processes that encourage and protect whistle-blowing, ensure that all their activities are socially acceptable and see to it that such measures become known to the public and to the regulators that monitor their activities. However, these measures can readily backfire against a corporation, because its conduct will now be assessed in light of the new higher standards it has set for itself. Those standards must therefore be realistic and practical.

4. What Are the Implications for In-House Counsel?

a) The notion of “gatekeeper”

In-house corporate counsel should obviously be paying particular attention to the revelations being made before the Charbonneau Commission. In an article published in 1994, Stanley Beck, a lawyer, former professor and chair of the Ontario Securities Commission from 1984 to 1989, adopted the notion of “gatekeeper” as proposed by American legal writers to delineate the role of in-house corporate counsel and what should be expected of them.

As in-house counsel are routinely called upon to advise both the corporation and its directors and officers, they are often faced with delicate situations where decisions are being contemplated for their self-benefit that while not conflicting with the interests of the corporation, require a candid assessment of their timeliness in light of potential risks for the corporation.

5. Some Concluding Remarks

It is unfortunate that the Commission did not delve deeper into the governance practices and procedures of the corporations that certain of the witnesses represented. In most cases, at the conclusion of the witness’ testimony, the impression was that the disclosed wrongdoing was the result of individual initiative and that other departments and levels of management were unaware of it.

What causes a senior officer to knowingly breach the code of ethics he or she has undertaken to abide by? A total lack of scruples? A complete failure to appreciate the seriousness of his or her conduct and the risks it represented for the corporation? The prospect of personal financial gain due to an overly aggressive performance-based bonus plan, or just pure old-fashioned greed? Perhaps all of the above? It’s in our common interest to know the answer.

6. Universal Lessons

The board and management must ensure that effective audit and control mechanisms are in place and being constantly monitored. This is perhaps stating the obvious, but it is a truism worth repeating.

All those in the service of the corporation must be made to appreciate that it is in their own best interest to protect and preserve the integrity of the corporation.

Directors and officers must realize that the safe harbour protecting them from personal liability is shrinking, as more and more decisions and actions are being excluded from the scope of the business judgment rule, and that now more than ever, the major pitfall they face lies in the words “or ought to have known”. This is patently obvious from much of the wrongdoing brought to light by the Charbonneau Commission.

Managing the risk of wrongdoing and the crises ensuing therefrom have become the two fundamental tiers of modern corporate governance.

Today, governance procedures must of course seek to protect the corporation against liability risks, but they must also seek to protect the corporation’s image and ensure the acceptability of its operations within the communities where it carries on business.

Finally, with respect to in-house counsel, an important part of their mission is to act as “gatekeepers” so as to ensure the legal and regulatory compliance of not only the corporation, but each of its directors and officers as well. It is in-house counsel’s responsibility to ensure that the self-interest of the corporate directors and officers does not put the corporation at risk.

It is hard to resist the temptation to suggest, in light of the revelations made before the Commission, that governance is now based on a spirit of mistrust rather than trust. Be that as it may, what is important to take away from all this is that every individual in the service of a corporation must remain on their guard and be prepared to immediately report to senior management, including the board of directors, any activity smacking of wrongdoing that could compromise the integrity of the corporation.

1 Executive chair of IGOPP and chair of the Global Agenda Council on the Role of Business.

2 L’éthique et la cupidité [Ethics and greed], blog, les 03-12-2012 (modified on 03-12-2012 at 12:59 p.m.).

3 Antoine Gaudino was the lead investigator in France’s fight against corruption in the 1990s, during which he exposed the Urba scandal involving Socialist Party financing.

4 Kenneth Arrow, “Gifts and Exchanges” in Philosophy and Public Affairs, vol. 1, 1972, pp. 343-362, cited and translated by Yann Algan and Pierre Cahuc in La société de défiance : Comment le modèle social français s’autodétruit, Paris, CEPREMAP collection, Éditions Rue d’Ulm/Presses de l’École normale supérieure, 2007, pp. 88-9.

5 Peoples Department Stores Inc. (Trustee v. Wise, 3 S.C.R. 461 at par. 67