New York State
Ethics Commission


Advisory Opinion No. 95-21: Application of the Commission's regulations on Outside Activities, 19 NYCRR Part 932, regarding policymakers holding positions as officers or members of certain for-profit corporations, to a campus president of the State University of New York.

INTRODUCTION

The following advisory opinion is issued in response to an Outside Activity Request submitted on behalf of [], the President of the State University Of New York at [Campus A] ("SUNY - A"), pursuant to the regulations of the State Ethics Commission ("Commission") set forth in 19 NYCRR Part 932, seeking the Commission's approval of her serving with compensation on the board of directors of [], a for-profit corporation that does business with SUNY.

Pursuant to the authority vested in the Commission by Executive Law §94(15), the Commission hereby renders its opinion that, subject to her recusing herself in certain situations, [the requesting individual]'s service would not violate the Code of Ethics contained in Public Officers Law §74. She may accept a fixed annual rate of compensation from [a for-profit corporation] for her service. The Commission concludes that [the requesting individual] may not, however, accept a stock option offered by [the for-profit corporation] to its non-employee directors since a personal, equity interest in [the for-profit corporation] would create the appearance of impropriety under Public Officers Law §74 even after her recusal.

BACKGROUND

On June 24, 1994, the Commission received a letter from the Senior Vice Chancellor for Finance and Management at [SUNY - A] seeking approval for [the requesting individual] to engage in an outside activity. [The requesting individual] wishes to serve on the board of directors of [a for-profit corporation], a computer hardware and software company. According to the information provided to the Commission, [the for-profit corporation] board is comprised of eight directors who meet five to six times each year. Board members receive $30,000 in compensation annually "plus a stock option plan limited to 2,000 shares per Director per year."

[The for-profit corporation] revenues for fiscal year ending March 31, 1994 were approximately $2.1 billion. Approximately $244,377 of this total was generated by on-going computer software and maintenance contracts with SUNY. Of this total, $18,225 represents receipts from a contract with [SUNY - A] for [the for-profit corporation] product acquisition and maintenance services at the school's [facility]. The balance of [the for-profit corporation]'s receipts from SUNY are through two University-wide contracts. In addition, from 1992 to 1994, [the for-profit corporation] made cash contributions or "gifts" to [SUNY - A] totalling $13,300.

SUNY's Senior Vice Chancellor has approved [the requesting individual]'s request based on the following factors:

  1. the relatively small amount of the contracts;

  2. two of the contracts are University-wide and not with the [SUNY - A] campus;

  3. all contracts are of long duration(1979, 1985, 1986);

  4. [The requesting individual] indicates that she is willing to recuse herself from any involvement on behalf of the campus or company in matters relating to these contracts.(1)

On July 29, 1994, the Commission approved [the requesting individual]'s Outside Activity Request on the condition that she disclose and recuse herself from matters concerning [the for-profit corporation] or SUNY (e.g., renewal of the existing contracts, [the for-profit corporation]'s possibly seeking to perform new services for SUNY, [the for-profit corporation]'s giving of property or services to SUNY). In addition, the Commission determined that because [the requesting individual]'s having a personal, financial interest in [the for-profit corporation] could create the appearance of impropriety even after such recusal, she could accept only the fixed annual compensation of directors; she could not participate in the stock option plan offered to [the for-profit corporation] board members.

On August 10, 1994, the Commission received a letter from [], counsel to [the for-profit corporation], regarding the Commission's decision. [The counsel] stated that "[the for-profit corporation] maintains a Stock Option Plan for Non-Employee Directors (Director's Plan) as part of its regular director compensation plan" and that "[o]ptions are (or are not) awarded annually and automatically, without the exercise of discretion by any person or group of people, to directors depending on whether certain return-on-equity objectives were attained in [a for-profit corporation]'s prior fiscal year."(2) [The counsel] argued that participation in the stock option plan might create the appearance of impropriety "only to the extent that the underlying [the for-profit corporation] common stock market price increases after the grant date; and that any increase in stock price is at least partially a function or multiple of earnings (the increase in earnings) . . . . " He, therefore, concluded that the appearance of impropriety resulting from [the requesting individual]'s participation in the plan "would be limited to the extent that [SUNY - A] transactions increased [the for-profit corporation] earnings subsequent to her option grant date."

To resolve this potential appearance problem, [the counsel] recommended employing a "gross revenue test." He proposed that when "total transactions with SUNY equal more than one-half of one percent (.005) of [the for-profit corporation]'s total revenues, [the requesting individual] would at that time, and for as long as transactions with SUNY continued to exceed this threshold, voluntarily refuse any non-employee director option grants." By way of illustration, [the counsel] noted that "SUNY's $244,377 commitment to [the for-profit corporation] would be a $.0002 effect on the net income per share of $2.34, and by extension on [the for-profit corporation]'s share price and ultimately the value of any outstanding options." He has requested that the Commission consider this proposal for purposes of modifying that part of its determination that prohibited [the requesting individual] from participating in the stock option plan.

DISCUSSION

Pursuant to Executive Law §94(16)(a), the Commission has the power and duty to "promulgate rules concerning restrictions on outside activities . . . by persons subject to its jurisdiction." In furtherance of this duty, the Commission adopted regulations on Outside Activities which are codified at 19 NYCRR Part 932.(3) The relevant section of Part 932 is as follows:
932.3 Restriction on holding other Public Office or Private Employment in other Outside Activities.

. . . .

(e) No individual who serves in a policy-making position on other than a non-paid or per diem basis . . . shall serve as a director or officer of a for-profit corporation or institution without, in each case, obtaining prior approval from the State Ethics Commission.

Pursuant to Part 932.4(c), the Commission determines whether to approve or disapprove an individual's outside activity request based upon whether the proposed outside activity interferes with or is in conflict with the proper and effective discharge of such individual's duties on behalf of the State. In making such a determination, the Commission considers the provisions of Public Officers Law §§73 and 74. In this case, §74 is the applicable statute.

This section contains the Code of Ethics. It is concerned with both actual conflicts of interest and the appearance of conflicts. The rule with respect to conflicts of interest, contained in §74(2), provides the following:

No officer or employee of a state agency . . . should have any interest, financial or otherwise, direct or indirect, or engage in any business or transaction or professional activity or incur any obligation of any nature, which is in substantial conflict with the proper discharge of his duties in the public interest.

Standards set forth in §74(3), which further explain and define the above-mentioned rule and which pertain to the present circumstances, include the following:

  1. No officer or employee of a state agency . . . should accept other employment which will impair his independence of judgment in the exercise of his official duties.

  2. No officer or employee of a state agency . . . should accept employment or engage in any business or professional activity which will require him to disclose confidential information which he has gained by reason of his official position or authority.

    . . . .

  3. No officer or employee of a state agency . . . should use or attempt to use his official position to secure unwarranted privileges or exemptions for himself or others.

  4. No officer or employee of a state agency . . . should engage in any transaction as representative or agent of the state with any business entity in which he has a direct or indirect financial interest that might reasonably tend to conflict with the proper discharge of his official duties.

    . . . .

  5. An officer or employee of a state agency . . . should endeavor to pursue a course of conduct which will not raise suspicion among the public that he is likely to engage in acts that are in violation of his trust.

    . . . .

    These standards attempt to assure the public confidence in State officers and employees as they discharge their official duties. A public servant's actions and affiliations must be above reproach, even if no actual conflict of interest is present. Any associations that give rise to the suspicion of favoritism, self-dealing or personal private gain by State officers and employees shake the public's confidence.

    I. [THE REQUESTING INDIVIDUAL]'S SERVICE AS A DIRECTOR OF [THE FOR-PROFIT CORPORATION] AND HER RECEIPT OF FIXED COMPENSATION

    The duties of the position of President at a SUNY campus, according to the job specification, are:

    Serves as chief administrative officer of a University campus and as such provides leadership and directs most complex, demanding, and frequently sensitive responsibilities in the areas of teaching-learning, scholarship-research, and appropriate public service. . . . Recommends policy to Central Administration and implements locally the policies of the Board of Trustees and the Chancellor; . . . directs the preparation, presentation, and administration of the financial budget. . . .

    The Policy of the Board of Trustees of SUNY, under Article IX ("College Officers and Organizations"), Title A, provides that the chief administrative officer of each college shall have the following responsibilities:

    Administer the college for which he or she serves, and shall promote its development and effectiveness. The chief administrative officer shall supervise the members of the professional and non-academic staff of such college . . . prepare and recommend the annual budget requests of the college and shall report and make recommendations to the Chancellor and the Board of Trustees and the college council concerning the operation, plans and development of the college.

    The Commission has previously commented on the outside activities of SUNY presidents. In Advisory Opinion No. 91-7, the Commission held that an appearance of a conflict of interest, in violation of Public Officers Law §74, exists when a president of a SUNY campus serves as a director of the bank in which the college deposits its funds or with which it has an "ongoing and significant business relationship." In reaching this conclusion, the Commission discussed a number of instances in which the interaction between a SUNY campus president and a banking institution could result in a conflict of interest. For example, as chief administrative officer, a SUNY campus president, working with the State Comptroller and SUNY Central Administration, can select a bank to receive local SUNY campus deposits. As one of three votes, the president's choice has a significant bearing on the final outcome. Since the selected bank could potentially generate considerable income from a SUNY account, the Commission concluded that the presence of the campus president on the bank's board could engender a certain degree of goodwill toward the bank and may be viewed as a means of obtaining or retaining SUNY banking business, thereby resulting in a conflict of interest or the appearance of a conflict.(4) In addition, a bank director must observe a duty of loyalty to the corporate interests of the bank or face civil and criminal liability. "Faced with such a duty, it may be impossible for a SUNY campus president, as a bank director, to place the campus' interests above those of the bank in situations where there is a dispute or a disagreement between the two institutions."(5)

    In the present case, the president of a SUNY campus asks to serve on the board of directors of a for-profit corporation that does business with her campus, as well as with the SUNY system generally. The Commission has previously held that careful scrutiny must be given to public servants who wish to serve on the board of for-profit corporations, stating:

    The potential for conflict is more of a problem with the private, for-profit corporation. For, in the case of [such a corporation], the profits that may be received from doing business with the State may appear to have been the direct result of involvement of the requesting individual [State employee], a voting board member [of the for-profit corporation]. . . . We [the Commission] express greater concern about the involvement of public servants in profit making corporations.(6)

    The Commission has carefully examined [the requesting individual]'s duties as a campus president and the potential for conflict with her position on the [the for-profit corporation] board. While the campus president, as chief administrative officer, may play a role in the procurement of computer goods and services, this involvement and its impact is dissimilar from the role played in the bank selection process.

    Generally, a SUNY campus may purchase computer hardware and software by (1) statewide contracts, whereby vendors and products are pre-selected, and purchases are administered and coordinated by the Office of General Services; or (2) direct purchases made by an individual campus in accordance with SUNY Purchasing and Contracting Procedures.(7) In the first method, once the campus submits the appropriate information to OGS, the agency completes the transaction by selecting the product from a pre-determined list of vendors. The potential for a conflict or the appearance of a conflict is, therefore, minimal.

    In the second method, SUNY Procedures provide guidelines for computer purchases by contract amount: e.g., purchases up to $5,000; purchases in excess of $5,000 but less than $10,000; purchases in excess of $10,000 but less than $20,000; and, purchases in excess of $20,000. With the exception of purchases of up to $5,000, the campus is required to solicit either three or five quotations or bids from responsible vendors offering the desired commodity, and, depending upon the contract amount, publish notice of the planned procurement in the New York State Contract Reporter.(8) Computer equipment purchases in excess of $50,000 require prior review and approval of the State Comptroller and the Attorney General before an award can be made. Thus, the opportunity for inappropriate influence on the part of the campus president is not present. Numerous individuals would likely contribute to the procurement process: from identifying the need and preparing the request for proposal ("RFP") to developing the criteria for evaluating the responses and making the final vendor selection. A campus president might oversee all or only some aspects of the vendor selection process. As noted, [the requesting individual] will recuse herself from this process where the company on which she serves as a board member submits a response to an RFP.

    Regarding purchases of less than $5,000, although a campus president may award such a computer contract without the benefit of competitive bidding, SUNY Procedures indicate that "a campus should take steps necessary to ensure that prices are, in fact, reasonable."(9) In addition, the value of such a contract is de minimis when compared to the volume of computer sales and business undertaken by most computer companies in a single year. To illustrate this point, the Division of the Budget estimates that in fiscal year 1992-93, SUNY and its senior colleges spent approximately $20 million for computers and computer-related services. Contracts with [the for-profit corporation] accounted for approximately $244,000, or about one percent of SUNY's computer-related expenditures.(10) [The for-profit corporation]'s annual revenues for the same period was approximately $1.8 billion. Annual revenues for fiscal year 1993-94 were approximately $2.1 billion. It is unlikely, therefore, that a computer contract award of $5,000 or less would be perceived as favorable treatment on the part of the State agency or constitute an appearance of impropriety on the part of the individual or entity making the vendor selection.

    The current financial and contractual relationship between SUNY and [the for-profit corporation] cannot be said to be "significant" to the total volume of computer business conducted by SUNY or undertaken by [the for-profit corporation]. Accordingly, the Commission has determined that, in this instance, there is not an apparent or potential conflict of interest between the policymaking role of a SUNY campus president and her role as a member of the board of a for-profit corporation doing business with the campus and SUNY. [The requesting individual] may therefore serve on the board of directors of [the for-profit corporation] and accept fixed annual compensation (currently $30,000) for such service.

    A remaining issue concerns any restrictions to be imposed on [the requesting individual] as she exercises her duties as the President of [SUNY - A] and as [a for-profit corporation] board member. The Commission affirms its previous decision that she must make full disclosure and recuse herself, either in her [for-profit corporation] or SUNY capacity, from discussions or decisions in any matter with respect to the other.

    II. [THE REQUESTING INDIVIDUAL]'S RECEIPT OF AN EQUITY INTEREST IN [THE FOR-PROFIT CORPORATION]

    Finally, there is the issue of her compensation as a member of the Board of [the for-profit corporation]. In its initial ruling, the Commission permitted [the requesting individual] to accept fixed annual compensation but said that she could not accept the stock option plan offered to non-employee board members. The Commission concluded that any equity interest she held in the [for-profit corporation] would be inappropriate, since she would be in a position to financially benefit from SUNY contracts even after her recusal from the decision-making process. This financial relationship would constitute the type of inappropriate appearance that high level executives in State government should avoid.

    As noted in the "Background" section of this opinion, counsel for [the for-profit corporation] has argued that as long as [the for-profit corporation]'s revenues from its contracts with SUNY are relatively insignificant in comparison to its overall revenues, there should not be an appearance problem. He suggests a test of .005 percent; that is, [the requesting individual]'s equity interest would be barred only if [the for-profit corporation]'s revenue from SUNY contracts exceeds this percent of its total revenues.

    While this "gross revenue test" might appear to [the for-profit corporation] to be an appropriate guideline in the instant case to allow [the requesting individual] to accept the stock option, the Commission is not prepared to adopt a "formula-generated" solution to determine the propriety of a State officer accepting such an interest. Any type of quantitative test would require the Commission, in this and future cases, to make significant ongoing judgments concerning the financial operations of for-profit corporations and monitor the extent to which they do business with State agencies. Such analysis and monitoring of private businesses is beyond the scope and capacity of the Commission. Furthermore, the propriety of accepting a stock option could rest on non-financial factors. Thus, the Commission continues its position that any equity interest in [the for-profit corporation] on the part of [the requesting individual] which she would receive as a Director would result in the appearance of a conflict of interest.

    CONCLUSION

    The Commission concludes that there would not be a violation of Public Officers Law §74 or its rules governing outside activities if [the requesting individual], as President of [SUNY - A], were to serve on the board of directors of [], a for-profit computer company doing business with SUNY and [SUNY -A], provided she recuses herself in both capacities from discussions or decisions concerning the other. [The requesting individual] may accept a fixed annual rate of compensation for serving on the board. She may not, however, accept the stock option plan offered by [the for-profit corporation] to its non-employee directors since a personal, equity interest in [the for-profit corporation] would create the appearance of impropriety. In the judgment of the Commission, because [the for-profit corporation] does business with SUNY, this appearance, would not be cured by her recusal from SUNY-related matters.

    This opinion, until and unless amended or revoked, is binding on the Commission in any subsequent proceeding concerning the requesting individual who acted in good faith, unless material facts were omitted or misstated by the persons in the request for opinion.

    Concur on Points I and II:

    Joseph M. Bress, Chair

    Concur on Point I:

    Barbara A. Black,
    Angelo A. Costanza,
    Donald A. Odell, Members

    Concur on Point II:

    Angelo A. Costanza,
    Robert E. Eggenschiller, Members

    Dissent on Point I:

    Robert E. Eggenschiller, Member

    Dissent on Point II:

    Barbara A. Black,
    Donald A. Odell, Members

    Black, B. and Odell, D. dissenting on Point II. The average person possessing all the facts presented to the Commission would not conclude that [the requesting individual]'s receipt of a stock option as a Board member of [the for-profit corporation] constitutes a conflict of interest or even the appearance of a conflict. Several factors lead us to that conclusion.

    First, we are in agreement with the majority that [the requesting individual]'s service on [the for-profit corporation]'s Board is appropriate. We disagree, however, that [the requesting individual]'s receipt of [the for-profit corporation] stock option would somehow taint her role on the Board or her actions as President of [SUNY - A]. The nature of her remuneration -- whether in the form of a fee or a stock option -- does not determine whether her outside activity presents a conflict of interest. [The requesting individual] should be allowed to serve on the Board and accept whatever remuneration is received by the other directors. We note that SUNY's policy on presidential compensation would allow [the requesting individual]'s service and her receipt of both forms of compensation.

    Second, as noted above, the level of business activity between [the for-profit corporation] and SUNY is relatively low. If it were higher, the Commission might not have permitted [the requesting individual] to serve on the Board. This minimal level of business, coupled with appropriate recusals by [the requesting individual], both in her capacities as [a for-profit corporation] Board member and SUNY campus president, precludes any appearance of impropriety that could otherwise result from her receipt of [the for-profit corporation] stock option.

    Finally, as the majority indicates, this case differs from the Commission's previous opinion involving a SUNY campus president who was prohibited from serving as director of a bank in which the college deposits funds or has an "on-going and significant business relationship." There, a duty of loyalty to the corporate interests of the bank coupled with the significant interests of the SUNY institution placed the SUNY campus president in a potentially compromising situation. Here the relationship between SUNY and [the for-profit corporation] involves "arms-length" transactions which are, in fact, trivial in terms of the overall operations of [the for-profit corporation] and the campus of which [the requesting individual] is president. Hence, it is extremely unlikely that [the requesting individual] would ever have to choose loyalties. Since the nature of this relationship has remained relatively constant, it is unlikely [the requesting individual] would be placed in a position where, as either [a for-profit corporation] Board member or campus president, her independence of judgment would be challenged, impaired or compromised. This independence is not affected by the nature or form of her compensation.

    Dated: May 31, 1995


    Endnotes

    1. [footnote omitted]

    2. [footnote omitted]

    3. The regulations generally apply only to State officers and employees who have been designated as serving in policy-making positions by their appointing authority. SUNY presidents have been designated as policymakers.

    4. Advisory Opinion No. 91-7, p. 10.

    5. Advisory Opinion No. 91-7, p. 12.

    6. Advisory Opinion No. 90-6, pp. 10-11.

    7. A campus may also make a "sole source" purchase or an emergency purchase, in accordance with SUNY Procedures.

    8. A campus may also purchase goods, printing or contract services directly from a "responsible New York State certified minority- or women-owned business without the need to solicit competition." SUNY Procedures, Item 300, IV. B. October 13, 1993.

    9. The Commission has been informed by SUNY and the Division of the Budget that it is not uncommon for State agencies or SUNY campuses to obtain price quotes from several vendors, regardless of the contract amount, before making a final vendor selection. With regard to the purchase of computer goods and services, the vendor selection process will often include input from several employees with expertise in information management systems, prior to awarding the final contract.

    10. SUNY's total annual operating budget for this same period was approximately $4 billion.



    URL: http://www.nysl.nysed.gov/edocs/ethics/95-21.htm