Three reports posted on the State Ethics Commission website this month....
First, watch how a CEO manages to serve on a Board which gives away over $100K cash to his company. Take notes ....
Bonus Points: Which of these State Boards gave away cash prizes in excess of $100K at their Board meeting in June, 2019? (LINK)
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State Ethics Commission issues Advisory Opinion regarding whether a state board member’s private employer is prohibited from receiving a benefit from the board member’s state agency.
ADVISORY OPINION NO. 2019-6, September 6, 2019
From Hawaii State Ethics Commission, Posted on September 24, 2019
A state agency (“Agency”) requested an Advisory Opinion from the Hawaiʻi State Ethics Commission (“Commission”) as to whether the State Ethics Code, Hawaiʻi Revised Statutes (“HRS”) Chapter 84, permits the Agency’s award of a state benefit to a Private Company (“Company”), given that the Company’s Chief Executive Officer (“CEO”) is a member of the Agency’s Board of Directors (the “Board”). (The CEO is hereinafter referred to as “the Board Member.”) As discussed below, the Commission believes that the Agency is not prohibited from awarding the benefit to the Company. However, the Commission cautions the Agency that: (1) given the potential overlap between Board members’ private business interests and state positions, Board members must take care to avoid violating the Conflicts of Interests law; (2) Board members and staff must not give Board members or their businesses preferential treatment, and should avoid any conduct creating the appearance of preferential treatment, so as to avoid any violation of the Fair Treatment law; and (3) Board members and staff should identify potential conflicts of interests as early as possible and seek guidance from the Commission as appropriate.
A. The Board Member’s Private Employment by the Company
The Company, a for-profit corporation, is a holding company for several other businesses. The Board Member became the CEO of the Company many years ago and remains employed in that capacity today. The Board Member works part-time – approximately twenty hours a week – as CEO and is also currently listed as an officer and director of the Company. In those capacities, the Board Member formulates the long-term strategic vision of the Company and its affiliated businesses, but does not manage the Company’s day-to-day operations. Those duties are left to the Company’s President. The Board Member is also the CEO and President of one of the Company’s affiliated businesses and has leadership positions with the Company’s other affiliated businesses, but does not manage the day-to-day operations of those businesses.
B. The Agency and the Benefit Program
The Agency is governed by a volunteer Board, whose members (including the Board Member) must have proven expertise in relevant fields.
The Agency recently launched the Benefit Program (“Program”), which was established by statute, and thereafter promulgated administrative rules. The purpose of the Program is to promote particular industries in Hawaiʻi, and to expand and diversify Hawaii’s economy, by promoting business development. Businesses that qualify for the benefits are eligible to receive awards up to a certain maximum amount per year. Benefit applications to the Agency are initially reviewed and evaluated by a subcommittee of the Agency’s Board (“Committee”), which evaluates and scores the applications and recommends awards to the full Board. The Board then votes on whether to accept the Committee’s recommendations.
Once a benefit is approved, the Agency and the awardee enter into a memorandum of agreement setting out the terms of the benefit and any applicable milestones or progress payments. The Director of the Agency negotiates these contracts, formulates the milestones, and otherwise handles the day-to-day interactions between the Agency and the awardee. The Board would not otherwise be involved in an approved benefit unless a default occurred and the Agency had to initiate collection proceedings. According to the Agency’s Director, this is unlikely.
C. The Board Member’s Appointment to the Board and the Company’s Benefit Application
The Board Member was recently appointed to the Agency’s Board; by the time the Board Member joined the Board, the Legislature had already statutorily established the Program and the Agency was working to promulgate administrative rules for the Program. The administrative rules were drafted by the Agency’s staff with input from the Department of the Attorney General and other state agencies. The Board Member did not participate in drafting the administrative rules, nor did the Board Member engage in substantive discussions of those rules. However, the Board Member did vote to: (1) approve the draft administrative rules; and (2) delete a provision of the draft rules regarding a different state benefit. The administrative rules were adopted in 2019.
After the administrative rules were adopted, the Agency accepted benefit applications. Unbeknownst to the Board Member, the Company submitted a benefit application to the Agency. The Company’s application was submitted under the direction of its President, who learned of the Program in 2019 in an email that the Board Member received from a business association. The Company’s President consulted with its Controller and other individuals before deciding to apply for a benefit. The President has stated that he did not discuss the Company’s application with the Board Member because he (the President) recognized the need to “keep things independent” due to the Board Member’s role with the Agency. It is undisputed that the Board Member had no knowledge of the application or involvement in preparing it, nor did the Board Member ever speak to Company personnel about the Program until after the Agency had contacted the Commission for guidance in July 2019.
The Agency’s Committee reviewed and scored the applications, including the Company’s application, based upon criteria set forth in its statutes and administrative rules. Applicants were scored on four categories, worth up to five points each, for a total of up to 20 points per applicant; the Committee gave each score a weighted average, applying a formula to ensure that each Committee member’s score carried equal weight (and that one Committee member’s aberrant high (or low) score would not make or break an applicant). The Board Member was not a member of the Committee and had no involvement in the Committee’s review of benefit applications.
The Company’s application included an executive summary which described the Company and its affiliated businesses and identified the Board Member as the founder of one of the businesses. Although Agency Board members and staff were already aware of the Board Member’s position as the CEO of the Company and one of its associated businesses, there is no evidence that this resulted in more favorable treatment for the Company’s application. Agency staff stated that the Board Member’s ties to the Company and its associated businesses were never discussed during the review of the Company’s benefit application by the Committee or the Board.
At a Board meeting in 2019, the Committee presented its scores and recommendations to the Board. The Company was one of two applicants recommended by the Committee to receive 100% of the benefit authorized under the Program. The Agency’s administrative rules provide that in determining the distribution of the benefits, preference is given to businesses that agree not to claim another state benefit for similar activities. The Agency’s benefit application form disclosed this information to applicants and asked applicants to “respond accordingly.” The Company and one other applicant received the highest scores by the Committee; these two applicants were also the only two applicants (out of a total of seven applicants) that agreed not to claim the separate state benefit. Accordingly, the Committee recommended that the Company and the other applicant be awarded 100% of the benefit funding allowed them under the Program.
The Agency’s Board approved the Committee’s recommendations at its June 2019 meeting and the Company was awarded a benefit in excess of $100,000. The Board Member, who was out of the country and did not attend the Board’s June 2019 meeting, was unaware that the Agency had awarded a benefit to the Company.
In early July 2019, the deputy attorney general for the agency contacted the Commission’s staff for guidance as to whether the Agency’s award of the benefit to the Company was prohibited by the State Ethics Code. The Board Member first became aware of this matter in July 2019 when the Agency’s Director informed the Board Member of the Company’s benefit application and the ethics questions raised by the Agency’s award to the Company.
The Commission recognizes that this is a close case. In light of the facts presented, however, the Commission concludes that the Agency may proceed with the award of the benefit to the Company based on the following considerations: the Board Member did not assist or represent the Company in any way in its benefit application to the Agency, nor was the Board Member involved in any Agency action as a Board member affecting the Company’s application, thus avoiding any concerns under the Conflicts of Interests law. The fact that the Board Member did not assist or represent the Company in applying for a benefit from the Agency also avoids concerns under the Contracts law. And finally, there is no indication that the Company received any unwarranted or preferential treatment from Agency Board members or staff because of the Board Member’s state position, thereby addressing the Commission’s concerns under the Fair Treatment law….
read … Full Report
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State Ethics Commission issues Advisory Opinion that State Ethics Code prohibits employee from taking action on applications submitted by spouse’s company and that company’s parent/subsidiary companies.
ADVISORY OPINION NO. 2019-4 July 18, 2019
From Hawaii State Ethics Commission, Posted on September 20, 2019
The chair of the governing board of a state agency that regulates a particular industry sought guidance from the State Ethics Commission (“Commission”) on behalf of an agency employee. The chair asked whether the employee could take action on matters involving a company within the industry regulated by the agency (hereinafter, “Company A”) and Company A’s subsidiaries (hereinafter, “Company B” and “Company C”). The employee’s spouse is employed by Company A. For reasons discussed below, it is the Commission’s opinion that, because of the spouse’s employment with Company A, the Conflicts of Interests section of the State Ethics Code, Chapter 84, Hawaiʻi Revised Statutes (“HRS”), prohibits the employee from taking action on matters affecting Company A, Company B, and Company C.
The employee’s agency is governed by a board that regulates companies within an industry. Companies seeking action by the agency file applications with the agency, which applications are then reviewed and analyzed by a team of agency staff. Team members represent different subject matter sections within the agency and are assigned to review different portions of the case before the agency. After reviewing a case, a team member typically writes a memo summarizing the topic; the team member might also make a recommendation regarding the topic. This memorandum and/or recommendation is then reviewed by the team member’s section chief and the team leader. The entire team may also discuss the case before presenting the matter to the agency’s board for the board’s review. The agency board has final decision-making authority on all cases.
The employee regularly participates in these team reviews, but the employee has not participated in the reviews of any applications filed by Companies A, B, or C. The employee’s spouse works for Company A, a company that is regulated by the agency and regularly submits applications to the agency. Companies B and C are wholly owned subsidiaries of Company A. Company A, in turn, is a wholly owned subsidiary of another company within the industry regulated by the agency (hereinafter, “Company D”). The employee likewise did not participate in the reviews of any applications filed by Company D. Companies A, B, and C have officers in common. An office within Company A appears to manage and coordinate the agency application filings of Companies A, B, and C.
read … Full Report
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State Ethics Commission issues an Advisory Opinion regarding the post-employment law and whether a former state employee is prohibited from representing a client in a lawsuit against the former employee’s state agency.
ADVISORY OPINION NO. 2019-5 August 15, 2019
From Hawaii State Ethics Commission, Posted on September 20, 2019
The Hawai‘i State Ethics Commission (“Commission”) received a request for an advisory opinion as to whether the post-employment laws in the State Ethics Code, Hawai‘i Revised Statutes (“HRS”) Chapter 84, prohibits a former state employee (“Former Employee”) from representing a client in a federal lawsuit against the Former Employee’s state agency (“Agency”). Based on the facts in this case, the Commission concludes as follows: under the State Ethics Code, the Former Employee is not prohibited from representing a private client in an employment lawsuit against the Agency, as long as the legal representation does not involve the use or disclosure of confidential information acquired during state employment.1
Based on the information provided by the Former Employee, the Commission understands the facts to be as follows:
The Former Employee was employed as a staff attorney with the Agency. The Former Employee’s duties included advising Agency employees regarding the interpretation and application of state law and handling administrative enforcement actions.
The Former Employee left the Agency and returned to private practice in late 2018. Shortly thereafter, the Former Employee began representing a former co-worker in a discrimination lawsuit against the Agency and other defendants. The lawsuit is currently pending.
read … Full Report