New York State
Ethics Commission


Advisory Opinion No. 96-29: Application of Public Officers Law §74 to compensation received by a campus president of the State University of New York serving as a Director of a for-profit corporation.

INTRODUCTION

The following advisory opinion is issued in response to a request for a formal opinion submitted on behalf of [ ], President of the State University of New York at [a campus]. [The requesting individual] asks whether she may accept a new form of compensation which is due to her for serving as a member of the board of directors of [a for-profit corporation].

Pursuant to the authority vested in the State Ethics Commission ("Commission") by Executive Law §94(15), the Commission hereby renders its opinion that [the requesting individual] may accept such compensation, as there would not be a violation of Public Officers Law §74, as interpreted by Advisory Opinion No. 95-21, if she were to participate in the deferred stock plan for non-employee directors of [the for-profit corporation]. The plan would not give [the requesting individual] an equity interest in the corporation of the type that would create the appearance of impropriety.

BACKGROUND

There is substantial history to this matter. When [the requesting individual] first became President of SUNY-[campus], she asked whether she could serve as a Director of [the for-profit corporation], a publicly traded, profit making corporation. In Advisory Opinion No. 95-21, issued on May 31, 1995, the Commission approved [the requesting individual's] service on the board of [the for-profit corporation], but required that she recuse herself in certain situations. In that opinion, the Commission held that [the requesting individual] may accept the fixed annual rate of compensation then paid to those serving on the board, but that she may not accept the stock option plan offered by [the for-profit corporation] to its non-employee directors.

The Commission, in that opinion, carefully examined [the requesting individual's] duties as a campus president and the potential for conflict if she were to assume a position on the [for-profit corporation] board. It noted that the financial and contractual relationship between SUNY and [the for-profit corporation] could not be said to be significant in terms of the total volume of SUNY's computer business or the total business volume of [the for-profit corporation].(1) The Commission, therefore, determined that there would not be an apparent or potential conflict of interest between [the requesting individual's] role as a SUNY campus president and her role as a member of the board of [the for-profit corporation]. She was permitted to serve on the board, but was required to make full disclosure and recuse herself, either in her [the for-profit corporation] or SUNY capacity, from discussions or decisions in any matter with respect to the other. In addition, she was permitted to accept fixed annual compensation -- then $30,000 -- for her service.

Non-employee directors of [the for-profit corporation] were, at that time, entitled to receive, in addition to fixed annual compensation, a stock option plan limited to 2,000 shares per Director per year. The Commission determined that [the requesting individual's] having a personal, financial interest in [the for-profit corporation] could create the appearance of impropriety in violation of Public Officers Law §74, even after her recusal. Thus, she was prohibited from participating in the stock option plan offered to [the for-profit corporation] board members.(2)

Since May, 1995, the method of compensation for non-employee directors of [the for-profit corporation] has been changed. The sole method of compensation is now a deferred stock plan. Under this plan, the Board of Directors establishes an annual directors' fee. Each outside director is compensated through a Deferred Stock Compensation Account, which is credited annually with a number of shares, calculated by dividing the annual directors' fees for the year, as determined by the Board of Directors, by the fair market value of one share of [the for-profit corporation] common stock as of the day the fees are payable. The shares maintained in a director's account, as well as any dividends on them, accumulate, subject to adjustment and substitution for splits, dividends or consolidations of common stock. They continue to accumulate until termination of the director's term of office, or the director's resignation or death.

Under the terms of the plan, the shares credited to a director are not available while he or she continues to serve. For example, Section seven of the Plan provides:

Neither the Director nor any beneficiary designated by the Director shall have the right to, directly of indirectly, alienate, assign, transfer, pledge, anticipate or encumber (except by reason of death) any amount that is or may be payable hereunder, nor shall any such amount be subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors of the Director or the Director's designated beneficiary or the debts, contracts, liabilities, engagements, or torts of any Director or designated beneficiary, or transfer by operation of law in the event of bankruptcy or insolvency of the Director or any beneficiary, or any legal process.

Furthermore, a director, while serving, has no assurance as to the ultimate value of his or her account. Section eight of the Plan states that it "constitutes a mere promise by the Company to make payments in the future." It then explains that:

The Directors and their designated beneficiaries shall have the status of, and their rights to receive a payment in shares of Common Stock under the Plan shall be no greater than the rights of, general unsecured creditors of the Company. No person shall be entitled to any voting rights with respect to shares credited to a Deferred Stock Compensation Account, and not yet payable to a Director or the Director's, designated beneficiary. The Company shall not be obligated under any circumstance to fund its financial obligations under the Plan, and the Plan is intended to constitute an unfunded plan for tax purposes.

[The requesting individual] asks whether, in light of Advisory Opinion No. 95-21, she may accept compensation under the new plan.

APPLICABLE LAW

Public Officers Law §74 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's 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.

DISCUSSION

In Advisory Opinion No. 95-21, the Commission permitted [the requesting individual] to accept a fixed annual rate of compensation from [the for-profit corporation] for her service but not a stock option offered to the corporation's non-employee directors. It determined that a personal, equity interest in [the for-profit corporation] would create the appearance of impropriety under Public Officers Law §74 even after [the requesting individual's] recusal. The question here is whether there would be a similar appearance of impropriety if she accepted compensation under the deferred stock plan.

The Commission's prohibition on [the requesting individual's] maintaining an equity interest in [the for-profit corporation]was based upon its finding that she would have been in a position to financially benefit from SUNY contracts even after her recusal from the decision-making process. The Commission said that "this financial relationship would constitute the type of inappropriate appearance that high level executives in State government should avoid."

The deferred stock plan is quite different. Fundamentally, it gives [the requesting individual] no present equity interest in [the for-profit corporation]. Her account would be credited as she earned fees, but it would represent "a mere promise" to make payments in the future. [The requesting individual] would not enjoy the customary rights of a holder of equity in a publicly traded company, as she would have neither the right to vote the shares credited to her account nor to alienate or trade the shares. Furthermore, while a director, she would have rights no greater than those of a general unsecured creditor. Thus, she, unlike a shareholder, would have no ability to protect against the risks of a downturn.

Since the Commission has previously approved, with certain conditions, [the requesting individual's] service as a director of [the for-profit corporation] and her acceptance of a fixed annual cash compensation, the narrow issue presented at this time is whether she can accept fees under the deferred stock program. Under the terms of this program, she would hold only a limited and tenuous interest in the securities credited to her account. Therefore, there would be no appearance of impropriety in her accepting this form of compensation. As she will not truly hold an equity interest in [the for-profit corporation] until after she completes her service as a director, there is no conflict or appearance of a conflict in her accepting the directors' fees as described while holding the position of President of SUNY-[campus].

CONCLUSION

The Commission concludes that [the requesting individual] may accept directors' fees pursuant to [the for-profit corporation's] deferred stock plan, as there would not be a violation Public Officers Law §74, as interpreted by Advisory Opinion No. 95-21, if she were to participate in this plan, created for non-employee directors. The plan would not give [the requesting individual], during her service as a director, an equity interest in [the for-profit corporation] of the type that would create the appearance of impropriety.

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:

Evans V. Brewster
Angelo A. Costanza
Donald A. Odell, Members

Dissent:

Robert E. Eggenschiller, Member

Dated: December 17, 1996


Endnotes

1. In addition, the Commission noted that two of three contracts between SUNY and [the for-profit corporation] are University-wide and not with the [ ] campus, and all contracts are of long duration (1979, 1985, 1986).

2. For a full discussion of the issues outlined herein, see Advisory Opinion No. 95-21.



URL: http://www.nysl.nysed.gov/edocs/ethics/96-29.htm