I think you should leave: takeaways from the Ethics Commissioner reports on SDTC

On July 24, 2024, the federal Conflict of Interest and Ethics Commissioner, the Hon. Konrad von Finckenstein, released two reports with respect to Sustainable Development Technology Canada (SDTC). The reports further build the body of decisions of the Conflict of Interest and Ethics Commissioner interpreting the Conflict of Interest Act (Canada) (COIA) and provide important guidance for directors and corporate secretaries of federal Crown corporations.

The reports focus on the actions of the Chair of SDTC and another director in participating in decisions regarding grants to companies with which they had relationships.

In his report, the Commissioner concluded that the Chair contravened the COIA by:

1. failing to recuse herself from decisions on seed and start-up funding involving businesses sponsored by two not-for-profit business accelerators of which the Chair was a volunteer and unpaid director, even though she declared conflicts, abstained from the votes in question and had no personal financial interest in the decision; and
2. failing to recuse herself from two decisions on COVID-19 emergency relief funding that benefitted a company of which she was Chair, CEO and majority shareholder, even though she followed external legal advice that she was permitted to vote given (i) the broad-based nature of the funding decision, (ii) that the decision was taken with an omnibus resolution on the consent agenda, (iii) that she had no involvement in determining the eligibility criteria for the disbursement of funding, (iv) that her company was treated in the same way as all other recipients of funding and (v) that she believed she had taken the proper steps to ensure her interests did not interfere with the exercise of her official duties.

The Commissioner also concluded that the Chair did not seek to influence other Board members in the decisions on COVID-19 emergency relief funding merely by making the motion for approval and therefore did not violate the provision of the COIA prohibiting a public office holder from seeking to influence a decision of another person so as to further the private interests of the public office holder or their relatives or friends.

In his accompanying report, the Commissioner determined that the other director did not violate the COIA by participating in SDTC’s decisions to give COVID-19 emergency relief payments to various projects, including a company in which the director held a nominal interest representing 1% of the company’s shares. The Commissioner had concluded that the director was in a conflict of interest within the meaning of the COIA; however, he determined that the director’s interest was of such minimal value that it weighed little on his votes and did not constitute a risk of conflict of interest.

The reports highlight that the conflicts of interest under the COIA regime can be a minefield for Crown corporation directors and CEOs, as well as for corporate secretaries tasked with properly documenting and managing conflicts of interest. In particular, the Chair of SDTC had disclosed her conflicts of interest (even disclosing perceived conflicts of interest, which the Commissioner noted went beyond the requirements of the COIA), had followed the board’s established practices for abstaining on votes taken by consent agenda and had followed legal advice, yet was still found to have contravened the COIA. A part from the Commissioner’s finding about the other director’s de minimis shareholding, the Commissioner has made it clear that nothing short of strict compliance with COIA will be sufficient, even when directors have been transparent and complied with legal advice, and there is no suggestion of improper motive for their actions. Per the Commissioner, “relying on an external legal opinion does not absolve a public office holder from their requirements under [COIA]”.

Directors are expected to live up to the very strict standards derived from COIA and are at risk of significant negative attention if they do not, no matter how harsh this may appear to be to some. Directors of Crown corporations are on notice and should conduct themselves accordingly, while corporate secretaries should consider their conflict-of-interest practices and procedures in light of the reports.

What you need to know

• The Commissioner’s decisions emphasize that it is insufficient for a director to merely abstain from voting on matters in which they have a conflict of interest. Directors must physically recuse themselves from the meeting (whether in person or virtual) at which the matter is being considered, even if the matter is part of a consent agenda or other blanket approval where the individual matter in which the director has an interest is not specifically discussed by the other directors (this was the case for the matters involving the Chair). The non-conflicted directors must be given the opportunity to discuss the matter without the conflicted director present. In subsequent guidance issued by the Commissioner, he explained that “recusing” also means not sending emails or talking about the matter with colleagues and declining to assist an individual or an entity with whom they are in a conflict of interest who contacts the director by telephone or email.
• The Commissioner clarified the meanings of the terms “general application” and “broad class” for purposes of the exemption from the conflict-of-interest rules in the COIA. The Commissioner concluded that matters of general application apply to an “undetermined number of persons without regard to class”. In contrast, a decision or matter “that applies to a particular regulated activity and to an identifiable group, even in a uniform fashion, is not of general application”. The Commissioner’s decision still leaves some uncertainty as to where a matter crosses the line from affecting a broad class of persons to affecting a public office holder as one of a small group. As a result, directors should exercise caution in relying on the exemptions for matters of general application or affecting a broad class of persons, and the safest course of action will be recusal rather than reliance on the exemption.
• The Commissioner concluded that the COIA is not intended to capture conflicts of interest where the private interest of a director or CEO is of a trivial nature. This is a somewhat reassuring conclusion when considering situations where directors may have small personal shareholdings in companies with which a Crown corporation is doing business, although it is still unclear as to the threshold for something to be of minimal value.
• The Commissioner’s decision, as well as a report of the Office of the Auditor General of Canada (OAG) issued in June 2024 concerning SDTC, highlights the need for clear and consistent documentation of conflicts of interest, recusals and abstentions in meeting minutes. The OAG also recommended maintaining a conflict of interest register to assist in the monitoring of conflicts of interest. Corporate secretaries should review their own processes around reporting and management of conflicts of interest. Proper processes and documentation of conflicts of interest and the steps taken to manage them are critical when facing an after-the-fact investigation.