Report to the Minister on the Resignation of the CEO of British Columbia Lottery Corporation Internal Audit & Advisory Services Ministry of Finance July 2014 Table of Contents Section Page No. Abbreviations ............................................................................................. i Introduction ............................................................................................... 1 Purpose, Scope and Objectives .............................................................. 2 Approach ................................................................................................... 4 Comments and Recommendations ......................................................... 5 1.0 Conflict of Interest and Confidentiality ................................................... 5 2.0 Employment Termination Process .......................................................... 7 3.0 Post-Employment Restrictions ................................................................ 9 Appendix A – Summary of Recommendations ..................................... 10 Abbreviations BC British Columbia BCLC British Columbia Lottery Corporation CEO Chief Executive Officer CGC Community Gaming Centre GPEB Gaming Policy and Enforcement Branch government Government of British Columbia Report to the Minister on the Resignation of the CEO of BCLC  i Introduction British Columbia Lottery Corporation (BCLC) is a Crown corporation with responsibility for the conduct and management of commercial gaming in British Columbia (BC), including casino gaming. On January 29, 2014, Michael Graydon, Chief Executive Officer (CEO) of BCLC advised the BCLC Board of Directors that he was resigning effective March 31, 2014 to accept a position in the private sector. His resignation was accepted by the BCLC Board who subsequently established February 4 as his last day at work. It was publically announced on February 7 that Michael Graydon had accepted the position of President at PV Hospitality ULC, a newly formed company, affiliated with Paragon Gaming Inc., 360 VOX Corporation and Dundee Corporation, effective February 11. Mr. Graydon’s first priority was announced as being the oversight and operations of a new “urban resort” to be located adjacent to BC Place in Vancouver, BC. Paragon Gaming is the operator of the Edgewater Casino in Vancouver and has been in negotiation since the spring of 2009, with the City of Vancouver and BC Pavilion Corporation, to move the casino to a permanent location and develop an urban resort. Edgewater Casino’s current location has always been regarded as temporary. Internal Audit & Advisory Services was asked to review the circumstances regarding the exit of BCLC’s CEO to a BCLC gaming service provider to determine if there was a conflict of interest or a breach of confidentiality. Report to the Minister on the Resignation of the CEO of BCLC  1 Purpose, Scope and Objectives This review evaluated and, as appropriate, made recommendations with respect to the following:  whether Michael Graydon was in a conflict of interest as CEO of BCLC while in negotiation for employment with a gaming service provider;  whether there was a breach of confidentiality with respect to information held by Michael Graydon as CEO of BCLC; and  other matters identified during the course of the review. The review evaluated conflict of interest as defined by BCLC in their Standards of Ethical Business Conduct for BCLC Employees. The Standards apply to all BCLC employees and contain the following Conflict of Interest guidelines:  An apparent conflict of interest exists when there is a reasonable apprehension, which reasonable well-informed persons could properly have, that a conflict of interest exists. This applies even when no conflict is found to actually exist.  A real conflict of interest denotes a situation in which you have knowledge of a private economic interest that is sufficient to influence the exercise of your duties and responsibilities as an employee of BCLC.  BCLC employees must avoid any situation or decision-making in which there is a real or apparent conflict of interest or an apprehension of bias.  BCLC employees must disclose any circumstances that could be perceived as a real or an apparent conflict of interest. In addition, the guidelines include a section on outside employment, business interests and other activities which states that:  BCLC employees must not accept a position as an officer or director of an organization that has a relationship with BCLC unless that interest has been fully disclosed and addressed to BCLC’s satisfaction. A copy of the Standards can be found at: http://corporate.bclc.com/content/dam/bclc/corporate/documents/so ebc-for-employees.pdf 2  Report to the Minister on the Resignation of the CEO of BCLC The review also noted that the Gaming Policy and Enforcement Branch (GPEB) have statutory responsibilities pursuant to the Gaming Control Act. These responsibilities extend to the regulation of gaming in BC, including the operations of BCLC, and maintenance of a registry of gaming service providers and gaming workers. An April 16, 2007 directive to BCLC from the General Manager of GPEB states that BCLC employees are required as a condition of registration to disclose to the General Manager without delay “any new involvement or interest by the employee in the gaming or horseracing industry in any capacity”. GPEB were advised of Michael Graydon’s resignation on January 30. The review did not encompass an evaluation of compliance with GPEB policies and directives as this is more appropriately a role for GPEB. Report to the Minister on the Resignation of the CEO of BCLC  3 Approach The approach included:  conducting interviews with Michael Graydon, key executive and staff across BCLC as well as related stakeholders;  reviewing and analyzing electronic and physical files including telephone records, emails and calendars;  reviewing casino correspondence and contracts;  reviewing and analyzing employment practices, contracts and policies;  reviewing and analyzing other key documentation; and  researching other jurisdictions and comparable organizations. 4  Report to the Minister on the Resignation of the CEO of BCLC Comments and Recommendations 1.0 Conflict of Interest and Confidentiality BCLC standards of conduct requires employees to avoid real or apparent conflict of interests, and requires individuals to report them promptly so the conflict can be addressed. BCLC is a Crown corporation, owned by the province, with responsibility for the conduct and management of commercial gaming in BC. BCLC sets and oversees operating standards, as well as policies and procedures for all lottery and gaming in BC, including BC’s casinos and community gaming centres (CGCs). Service providers are contracted by BCLC to provide gaming facilities on behalf of the corporation, and BCLC manages its service providers according to their unique business demands such as site location, host local government terms and/or local market conditions. Games and equipment for gaming service providers are provided by BCLC. Michael Graydon was employed as CEO of BCLC until February 4, 2014. As CEO, Mr. Graydon had limited involvement in the day-to-day operations of casinos and CGCs but was the person ultimately responsible for the oversight and management of commercial gaming and would be in a position to be able to influence BCLC interactions and approvals regarding their service providers. Further, in his role as CEO, Mr. Graydon had access to government, service provider and stakeholder information including strategies and performance results. As CEO, Mr. Graydon would, and did appropriately have a role in facilitating strategic and high priority initiatives such as the Edgewater Casino relocation and the proposed Surrey Casino development. In December 2013 and January 2014, Michael Graydon was in employment discussions with Paragon Gaming which culminated in him resigning from BCLC and accepting a position with PV Hospitality ULC, a company affiliated with Paragon Gaming. Given BCLC’s conflict of interest guidelines and the above information, it is our opinion that Michael Graydon was in a conflict of interest that was not disclosed. As an individual, Mr. Graydon would have a private economic interest in his prospective employment with an affiliate of Paragon Gaming. This interest could be considered significant enough to at least establish a reasonable apprehension that it would influence the duties and responsibilities of a CEO of BCLC. Report to the Minister on the Resignation of the CEO of BCLC  5 Had Mr. Graydon advised the Board of Directors of this conflict earlier than January 29, 2014, it is possible that steps to address it could have been taken. BCLC manages service providers according to their unique business demands such as site location, host local government terms and local market conditions. The review, while finding some differences in BCLC’s handling of service providers, found no evidence of Paragon Gaming or Edgewater Casino receiving preferential treatment. Casino service providers interviewed expressed some concern that Michael Graydon’s knowledge could provide an advantage in the development and expansion of future gaming facilities. Interviews and a review of electronic and physical records indicated no evidence of removal or inappropriate use of confidential information. Further, as a condition of his employment with BCLC, Michael Graydon signed a confidentiality agreement requiring his commitment not to disclose confidential or proprietary information garnered through his employment. The obligation under this agreement extends indefinitely beyond his term of employment. 6  Report to the Minister on the Resignation of the CEO of BCLC 2.0 Employment Termination Process Employers must have robust processes in place to ensure information and assets are properly managed and safeguarded when employees are leaving the organization. While no loss of information or assets during Michael Graydon’s exit from BCLC was observed, opportunities were identified for improvement in the control of information access. Resignation Terms & Conditions Michael Graydon’s letter of resignation provided notice until March 31; however, it was the decision of the Board of Directors to pay Mr. Graydon out to March 31 and have him leave immediately given he was going to a company affiliated to a casino service provider. Final payment made to Michael Graydon upon his departure included two months’ severance, accrued vacation pay due and salary holdback to March 31. While at the time of Michael Graydon’s departure the holdback targets had not yet been reached, they were on schedule to being achieved and a pro rata amount for the fiscal year worked was already earned. BCLC has since advised that the required performance targets have been met. Information & Systems Access BCLC advised that the departure processes conducted for Michael Graydon’s exit followed BCLC’s normal employee departure practices. Mr. Graydon was allowed to retain his mobile devices, as other executive staff have been allowed to do when leaving BCLC. When a device is transferred to a departing employee, any outstanding contract obligation is also transferred relieving BCLC of the related expenses. BCLC’s Information Security policy requires that remote access to information systems be terminated within one business day after an employees’ departure; however, Michael Graydon’s BCLC system accesses were not terminated until 10 days later. Outgoing emails were sent via his BCLC email account on February 5 and 6 demonstrating that the access and information had not been properly secured. BCLC was unable to demonstrate that the mobile devices were adequately cleansed of data; however, there was no evidence of confidential information being inappropriately used. Had Mr. Graydon’s server access been immediately terminated, and the devices been retained by BCLC, these issues would have been avoided. Report to the Minister on the Resignation of the CEO of BCLC  7 On February 7, 2014, BCLC incorporated additional controls into their exit procedures. Notification of exit processes, including deactivation of physical and system accesses, are now the responsibility of Human Resources rather than the exiting employee’s manager. Having a single point of responsibility for exit notifications reflects government’s recommended practice and encourages a more consistent application of the process. Recommendations: (1) BCLC should ensure it has a robust, consistently applied exit process that includes timely removal of access to corporate systems and information. (2) BCLC should develop policy and procedures regarding mobile devices when an employee leaves the organization. 8  Report to the Minister on the Resignation of the CEO of BCLC 3.0 Post-Employment Restrictions Michael Graydon’s BCLC employment contract did not include any post-employment restrictions which would have prevented him from accepting employment with a company involved in gaming in BC. BCLC did have a no-contact provision added to Michael Graydon’s resignation settlement requiring him to not contact BCLC for 90 days following his departure, which was subsequently extended until this review was completed. While Mr. Graydon breached this provision by having contact with BCLC staff after February 4, the contacts related to inconsequential matters. BCLC, through legal counsel, reminded Mr. Graydon of the no-contact provision in a letter dated February 12 and sent an email to all BCLC staff informing them of this provision. No evidence was found of any subsequent contact. A survey of other BC Crown corporations shows that post-employment restrictions are not commonly used for executives or key staff. BC Public Service Executives are subject to a cooling-off term of one year after employment ends, limiting their employment with outside entities. Post-employment clauses used in other jurisdictions range from six months to one year, and limit an individual from being employed by organizations with which they had significant dealings. Restrictions in employment contracts such as non-compete or non-solicitation clauses help to safeguard public interests by ensuring that individuals charged with management and oversight in key industries are not seen to benefit from knowledge or confidential information acquired through their employment to the detriment of the industry or public. Such restrictions must be drafted in a manner that is reasonable and not overly broad to ensure they can withstand any legal challenge. Recommendation: (3) Government should develop guidelines for post-employment restrictions for appropriate staff of Ministries, Crown corporations and Agencies. Report to the Minister on the Resignation of the CEO of BCLC  9 Appendix A – Summary of Recommendations 1 BCLC should ensure it has a robust, consistently applied exit process that includes timely removal of access to corporate systems and information. 2 BCLC should develop policy and procedures regarding mobile devices when an employee leaves the organization. 3 Government should develop guidelines for post-employment restrictions for appropriate staff of Ministries, Crown corporations and Agencies 10  Report to the Minister on the Resignation of the CEO of BCLC