If business school professors are looking for new material about the importance of having a strong and effective board of directors — the Alberta Energy Regulator provides a gripping case study of what not to do.
The AER's board oversaw a regulator whose executives travelled by air first-class and stayed at $500-per-night hotels, plotted how to privatize the province's intellectual property, and spent millions of dollars in public money on a private venture in order to secure their future employment.
In some instances, the board knew of the behaviour and allowed it to happen, while at other times, it was completely unaware of activities. Board members not only failed to provide oversight, but they often didn't even question senior leadership.
These are the conclusions of three different investigative reports by Alberta's Auditor General, Public Interest Commissioner and Ethics Commissioner. Each agency launched separate probes into the AER last year after whistleblower complaints about senior management.
Costly side project shut down
The AER, which is funded by a levy charged to the energy sector, oversees the province's massive energy sector and is expected to ensure the safe and environmentally responsible development of the industry.
The reports focus largely on the AER's failed attempt to launch a side project, called the International Centre for Regulatory Excellence (ICORE). The private venture was supposed to provide training to foreign energy regulators. In the end, ICORE was shut down less than two years after it launched and cost the AER millions of dollars.
Investigators found Jim Ellis, who was president of both the AER and ICORE, was anticipating a significant pay cut because of a change in Alberta's provincial government and he was looking for a way to maintain his compensation level as one of the highest paid civil servants in the province. In 2017, his total compensation is stated as $728,000.
At ICORE, he and his inner circle planned to continue with lucrative salaries and luxury travel. They planned to get the venture running with AER resources, then take senior jobs there. In text messages to each other, they mused about collecting hefty compensation, suggesting $650,000 for Ellis and $500,000 for his close colleague, with a profit-sharing model as a bonus.
Even as recently as September of last year, when problems with ICORE were apparent, the AER board reasserted its support for the international project.
Hiding money, misleading board
By definition, a board of directors is supposed to provide oversight of management.
The regulator spent more than $5 million creating and operating ICORE, although investigators say the total figure is difficult to pinpoint considering how poorly expenses were recorded.
Executives hid costs and staff were told to "remove references to ICORE in their expense reports," according to the Public Interest Commissioner's report, to purposely "avoid attracting attention when the expense reports were posted on the AER website."
Ellis displayed "reckless and wilful disregard" for the proper management of public funds, according to the government watchdogs.
From the beginning, Ellis withheld information and misled the board, according to details in the investigative reports.
For instance, in early 2016, Ellis introduced a training concept with the board that would improve the skills of AER staff, however, he was already planning to use the training material internationally, selling it through ICORE, and was reportedly holding meetings with Mexico.
In February 2017, Ellis told the board that ICORE was created with a board consisting of AER staff. He did not disclose that he was actually the only board member nor did he mention how he was holding private talks about securing future employment related to ICORE.
In addition, investigators say Ellis also told the board that Mexico had formally joined ICORE and at least two other countries were also interested. The Auditor General discovered Mexico never formally joined ICORE and there wasn't any evidence that two other countries were seriously interested in joining.
The board never did approve the creation of ICORE. The board also wasn't even aware Ellis had applied for a $30-million federal grant for ICORE (which the government ultimately rejected).
According to investigators, one way Ellis tried to raise money was by monetizing a software program developed by the AER by transferring it to ICORE. OneStop is an online tool for the energy industry to submit project applications, reclamation work and renewals, among other information.
Ellis wanted to boost the coffers of ICORE by offering the software to foreign countries like Ukraine, which expressed interest.
This amounted to selling Alberta's intellectual property. No wonder lawyers at the AER pushed back against the plan, highlighting concerns about the use of AER resources and pointing out how the OneStop program could be used to raise money for the AER itself.
Still, Ellis persisted, and according to the reports, suggested renaming the program before selling it through ICORE, writing "There must be another option. Take the experts out of the AER and recreate it. Call it something else."
One of the Public Interest Commissioner's recommendations is for the AER to "take any necessary measures to protect its intellectual property" relating to OneStop and to AER training programs.
Ellis and the AER's vice president of national and international affairs, Zeeshan Syed, travelled frequently and often would book business class airfare, upgrade their seats, and stay at $500-per-night hotels.
The luxury travel was against AER policy, which states staff should use the most cost-effective method of transportation and accommodation.
One trip by Syed from Calgary to Copenhagen and London cost $8,089, while one trip by Ellis to London cost $8,789. Ellis also racked up more than $5,000 in flight change fees between March and November last year.
The ICORE-related trips were covered up, according to the reports, by often classifying them as "AER reputation meetings."
At times, there were multiple vacancies on the AER board between 2015 and 2018.
Those who were on the board did not pay enough attention to ICORE, did not ask useful questions about ICORE, and lacked certain expertise to be effective, according to the reports.
Specifically, board members needed more experience with information technology and corporate law.
Among the information they failed to gather was an ICORE business plan, governance structure, AER staff involvement, and how AER policies and legislation would be followed.
The board's general lack of interest in ICORE was noticeable, since ICORE was not included as an agenda item at their meetings for more than a year while ICORE was ramping up.
While the board was often oblivious to ICORE activities, the chairman seems to have had more knowledge than the others.
Former chair Gerry Protti had his own ICORE email address and travelled abroad to promote the initiative, according to the provincial watchdogs. He also actively recruited prospective members for ICORE's advisory board.
AER board members are supposed to list any potential conflicts, but Protti never disclosed his involvement with ICORE.
The overwhelming support for ICORE by Ellis and Protti "deterred [other board members] from questioning ICORE further," according to the Auditor General's report.
Protti knew Ellis was planning to leave his job to head ICORE and also envisioned a role with ICORE himself, according to the Ethics Commissioner's report.
"He now remembers very little and is trying to distance himself from ICORE," the commissioner wrote in her report after interviewing Protti.
Neither Ellis or Protti returned messages seeking comment.
"The AER Board ... did not receive complete and accurate information about ICORE. The AER board's challenges were further aggravated by the former AER board chair's failure to disclose his involvement in ICORE," the Auditor General's report states.
Since the ICORE affair, the provincial government replaced the board of directors. Ellis and members of his inner circle are also no longer with the AER or ICORE. Despite the personnel change, it's not clear whether fundamental improvements have been made.
When presenting her findings, Ethics Commissioner Marguerite Trussler said she was troubled by the senior management culture at the AER under Ellis, one which attempted to mislead the board and the government.
"It still needs to be ascertained if that culture still exists," she said.
The Auditor General's recommendations to improve oversight of the AER board:
- Establish effective processes to evaluate corporate culture and senior executive performance.
- Obtain formal and periodic assertions from management that activities comply with legislation and AER policies, including policies related to conflict of interest.
- Ensure officers in key risk management, compliance and internal control roles are well-positioned and supported to provide complete information about AER activities.
- Review and approve CEO travel and expenses.
- Ensure the primary channel of communication to the responsible ministers is through the board.
- Establish processes to engage with executive staff, and other staff within the organization, to gain comfort that all significant matters have been brought to the attention of the board.