A takeaway from SNC-Lavalin: Long leashes are dangerous

As charges levelled at former executives of SNC-Lavalin work their way through courts around the world, the corruption scandal that rocked investor confidence in the Montreal-based engineering giant appears to be a story that just keeps on giving, at least to journalists. The market, however, has already started to focus on the company’s future potential under new management.

SNC’s shares didn’t perform as well as its peers in 2013, but as the Globe and Mail pointed out earlier this year, the company’s stock price still gained more than 20 per cent, outpacing the S&P/TSX Composite. As CIBC analyst Paul Lechem told Globe reporter David Milstead, SNC shareholders should benefit from the reforms being made under the current leadership of Robert Card because it was previously run “with little coordination between divisions, and little centralized management, systems and control,” which led “not only to operating inefficiencies, but also to the corruption and project control issues that the company now faces.”

That isn’t just good news for investors—it is the lesson that needs to be remembered when everything related to this scandal has been said and done. After all, SNC’s decentralized management wasn’t a fluke. It was purposely put in place by former CEO Jacque Lamarre, who believed in long leashes, at least until they strangled the stellar reputation that SNC developed under his leadership.

Lamarre retired in 2009 after delivering shareholders a 1,486 per cent return during his 13 years at the company helm. I respect his abilities. In fact, I was part of a team of journalists at Canadian Business magazine who named him CEO of the Year in 2003, when he explained to me why he liked long leashes. He grew up with one. Indeed, as long as he performed well in school, his father didn’t ask what he was up to at night. “I was a good student, so I was completely free,” he said. “By the time I was 16, I was living on my own in Quebec City with nobody expecting any reports except for good grades.”

Trust is a good thing. But as noted at a recent Ivey Idea Forum featuring Steve Jacobs, author of The Behavior Breakthrough: Leading Your Organization to a New Competitive Advantage, right behaviour doesn’t just follow when a leader puts in place the right strategy. A culture that supports right behaviour needs to be developed and reinforced. And to do that, management needs to know how deals are getting done. This is particularly important when conducting business in environments that support corruption.

As a CEO, Lamarre wasn’t blind to the ethical challenges that come with competing for business in some parts of the world. As an executive with Lavalin in the early 1980s, he reluctantly agreed to acquire a polar bear for an Algerian military commandant in order to maintain a good relationship with a key business contact. “They come in pairs,” he told me in 2007. “So I got two bears. After that, I don’t know what happened, but one bear slipped, broke its hip and had to be killed.” The Algerian contact ended up with a polar bear skin instead of prize stock for a zoo, but the relationship thrived.

Despite this experience, not to mention the corporate governance movement that followed, Lamarre told me he that he didn’t care to know the details if something went well at SNC, which was especially risky since 50 per cent of total compensation for SNC group leaders was linked to the performance of the divisions they run. As an outdated company history notes, Lamarre “put his trust” in his people and was rewarded with “a more profitable and integrated company.” Unfortunately, the history of SNC now needs to be updated.

Nobody should be shocked by what takes place in the name of business in parts of the world where corruption is a daily part of business, particularly when buying influence takes place every day to varying degrees in our own back yard. As one mining executive told me, “there are certain unavoidable facts of life when doing business in other countries and breaking rules, or bending them, is one of them since the only realistic alternative is often not getting any business done.” Big cash payments probably happen less than cynics think. But things like tipping a local cop to avoid a hassle or handing something shiny to a port official so your load of produce doesn’t rot in a ship’s hold happen relatively frequently.

The question is where to draw the line. And the only effective answer to that question must come from the corner office.

Leashes can be uncomfortable and constraining, but they serve a purpose to keep behaviour inside what is considered acceptable.