Port Ethics Memo
MEM QRANQQM CALFO HARRIGAN LEYH & EAKES LLP TO: Craig Watson, General Counsel, Port of Seattle FROM: Timothy G. Leyh and Katherine Kennedy'w /M__ DATE: September 10, 2012 RE: Port CEO's Participation on Expeditors' Board 1. Issue and Short Answer This memo addresses the issue of whether the Port of Seattle's Code of Conduct: Workplace Responsibility Employee Handbook ("Employee Code of Conduct"), Code of Ethics for Port Commissioners ("Commissioners' Code"), or RCW 42.23, Washington's Code ofEthics for Municipal Ofcers ("Statutory Ethics Code"), preclude Port CEO Tay Yoshitani from sitting Inc. ("Expeditors"), a for- on the Board of Directors of Expeditors International of Washington, profit corporation. We conclude that there is no ethical prohibition under the circumstances presented here, as described below. I]. Assumed Facts of $367,000. Mr. Tay Yoshitani is CEO of the Port of Seattle, receiving an annual salary Yoshitani's employment contract with the Port permits him to participate in an outside corporation's Board of Directors. The contract states, in pertinent part: of During the term of this Agreement, CEO may on his own time (e.g. after close business or while on Paid Time-0ft), participate as a member of a Board of Directors for a private entity; provided, that prior to accepting such appointment, the Port's General Counsel determines that CEO's participation would not create is contrary to any other provision of or appear to create a conict of interest, or the Port's Code of Ethics for Employees. We understand that the term allowing Mr. Yoshitani to serve on a private company board was specically negotiated as part of his current employment agreement, which was approved by the Port Commission in 2011. We understand that Mr. Yoshitani regarded this term as material to his decision to remain with the Port. We think a reviewing court would nd these facts signicant, because they suggest a particular focus on this right as a part of Mr. Yoshitani's employment agreement. In August 2012, the Expeditors Board of Directors announced that it had elected Mr. Yoshitani to its nine-member Board of Directors, effective August 6. Mr. Yoshitani was simultaneously appointed to Expeditors' Audit Committee, Compensation Committee, and the Nominating and Corporate Governance Committee. We understand that Mr. Yoshitani did not solicit the invitation to the Board; it was advanced by Expeditors in light of Mr. Yoshitani's extensive experience and unique perspectives on international trade. Board membership requires attendance at four meetings a year. The Board provides overall management of the "affairs, property and interest of the corporation" and is not involved in day-to-day operations. The Committees are vested with such powers as the Board designates, but may not usurp the functions of the Board. Expeditors pays its directors, including Mr. Yoshitani, a $30,000 a year retainer, plus $1,000 for each day they attend board meetings or do other company work, and gives them restricted stock each year, potentially worth $200,000. Mr. Yoshitani, on May 21, 2012, provided a Conflict of Interest Disclosure Form to the Port, stating: I have joined the board of directors of Expeditors International. Expeditors is a It has no contracting company specializing in seabom [sic] cargo logistics. relationship with the Port of Seattle and as a member of the board I do not anticipate any circumstance that would lead to a conict or perceived conict with my rol[e] as Port of Seattle CEO. I[t] any such circumstance does arise I understand that I would recuse myself from participation in that matter on behalf of Expeditors lntl. The Port's General Counsel conducted an analysis of the Port's Code of Ethics for Employees ("Employee Code of Conduct") and RCW 42.23, and concluded that "CEO Yoshitani has fullled his obligations under contract, statute and policy."I Expeditors is an international company offering air and ocean freight consolidation and forwarding, vendor consolidation, customs clearance, cargo insurance, distribution, and other logistics services. It is a Fortune 500 company with more than 13,000 employees worldwide. We understand that in 201 1, about 37% of Expeditors' consolidated net revenues were from airfreight services, either as a freight consolidator or an agent for the airline that carries any given shipment. When acting as a freight consolidator, Expediters purchases cargo space from airlines and resells that space to its customers. About 23% of Expeditors' consolidated net revenues were attributable to ocean freight services. Among other ocean freight functions, Expeditors operates an entity that contracts with number of containers between various ocean shipping lines to obtain transportation for a xed points at an agreed rate. The company also may prepare documentation, procure insurance, consultation. arrange for packing and crating services, and provide The remaining 40% was attributable to customs brokerage and other services. The documentation, company assists importers to clear their shipments through customs by preparing calculating and providing for payment of duties and other taxes on behalf of the importer, arranging for the required government inspections, and arranging for delivery (as well as other valueadded services at destination). I In that analysis, General Counsel Craig Watson notes that Mr. Yoshitano was "ofcially invited to join the board" of Expediters in August 2012. Mr. Yoshitani's Conict of Interest Disclosure Form in May 20l2 stated that he We understand already had joined the board, while in fact he was not formally elected to the board until August. that Mr. Watson, in the Spring of 2012, provided Mr. Yoshitani with an oral opinion stating that there would be no ethical violations, and that Mr. Watson's written opinion was provided when Mr. Yoshitani was, in fact, elected to the board. 3 The Port of Seattle is a public agency whose primary mission is to invest public resources to advance trade and commerce, promote industrial growth, stimulate economic development, and createjobs. The Port owns and operates cargo and airport facilities, marinas, parking four thousand acres of industrial garages, conference facilities, and grain terminals, as well as and commercial property. Expeditors has no contracts or other direct relationship with the Port of Seattle, although Expeditors has contracts with shippers who use Port of Seattle facilities. [11. Legal Authorities and Analysis A. General Standards. According to Eugene McQuillian, The Law ofMunicipal Corporations 122173.22 (3d ed. 2012), [p]ublic condence requires that municipal ofcials avoid conicting interests that convey the perception that a personal rather than the public interest might affect decision-making on matters ofconcem. Ofcials must be free of even the potential for entangling interests that will erode public trust in government actions. Thus, it is the potential for conict, rather than proof of an actual conict or of actual dishonesty, that commands a public ofcial to disqualify himself from acting on a matter of public interest. The general rule is that there should be strict enforcement of conict of interest statutes so as to provide a strong disincentive for officers who might be tempted to take personal advantage of their public ofces. The test for disqualication is fact-sensitive and depends on whether, under the circumstances, a particular interest had the likely capacity to tempt the official to depart from his sworn public duty. Mr. Yoshitani's relationship with the Port is governed by his employment contract, which was approved by the Port Commission, including the provision that Mr. Yoshitani could, on his own time, participate as a board member for a private entity as long as the Port's General Counsel determined that such participation would not create or appear to create a conict of interest or otherwise violate the Port's Code of Ethics for Employees (in the Code of Conduct). Mr. Yoshitani has complied with the requirements of his employment contract, obtaining an opinion from General Counsel that the CEO's participation on Expediters' Board of Directors violates no relevant ethical rule. If the Port Commission sought to force Mr. Yoshitani from Expediters' Board of Directors after it specically approved the contract permitting Mr. Yoshitani to so serve, the Port could be faced with a breach-of-contract lawsuit. B. Employee Code of Conduct: Workplace Responsibility Handbook The Port's Employee Code of Conduct (referred to in Mr. Yoshitani's employment contract as "the Port's Code of Ethics for Employees") applies to all employees, including the CEO, requiring that they "serve the Port with the highest standards of ethical conduct and . . . avoid situations that create a real or perceived 'conict of interest." The Code states that "the Port's interests [must] come rst," and requires employees to disclose all potential conicts of interest as well as to report any potential violations. In particular, the provisions of the Code of Conduct addressing "Employee Ethics and Conict of Interest" state: A "conict of interest" exists when an employee's duty to give undivided loyalty to the Port is inuenced, or could be inuenced, by personal interest. The fact of a conict of interest is not in itself a violation of the policy. Instead, it is something that should be reported (see Section IV) so the Port may ensure that decisions are not made that could be inuenced by the conict of interest, or perceived to have been inuenced by it. Port employees must avoid real, or perceived, conicts of interest between their private activities and their duties and responsibilities as employees. At a minimum, potential conicts should be reported so that the Port may consider what, if any, actions should be taken to ensure that decisions are not inuenced (or perceived to be inuenced) by personal interests. While the Code of Conduct addresses "perceived" conicts as well as "real" ones, the perception of a conict must meet an objective, "reasonable person" standard. A conict must be either actually apparent or reasonably apparent based on the actual facts, not supposition. See 5 Code at III ("Employees must avoid circumstances in which it appears, or to a reasonable person might appear, that the employee is requesting or otherwise seeking special consideration, treatment or advantage because of the employee's position with the Port"); see also, Tatham v. Rogers, 2012 Wash. App. LEXIS 1939 (Aug. I4, 2012) (under the appearance of fairness doctrine, the test to determine whether "impartiality might reasonably be questioned is an objective test that assumes that 'a reasonable person knows and understands all the relevant facts."'). The Employee Code of Conduct gives examples of di'erent types of actual and potential conicts. "Conicts from business relationships" may arise when an employee "has a Financial with or Benecial Interest in . . . an organization that competes with the Port, is doing business the Port; or plans to do business with the Port." No employee may have a nancial or benecial interest, direct or indirect, in any contract by "or for the benet of the Port." The Code of Conduct also precludes an employee from "participat[ing] in any decision-making, review, approval, selection, authorization or supervisory activity concerning any contract or Port transaction in which he/she "Financial or Benecial . . . has a Financial or Benecial Interest." Interest" is dened to include an "ownership interest in an amount or value in excess of $1,500," althoughunlike the Commissioners' Codethe denition does not expressly mention ownership of stock. The Code of Conduct does state that employees should "avoid owning interests in or operating companies that compete with the Port, or that sell (or plan to sell) products or services to the Port, other than minimal amounts of stock in publicly-traded companies)" Mr. Yoshitani stated in his Conict of Interest Disclosure Form that neither he nor any relative has any nancial or business interests in Expeditors, and that Expeditors "has no contracting relationship with the Port of Seattle." Even if the CEO's stock ownership in Expeditors (after he began service on the Board) is considered a nancial or business interest, we 6 understand that Expeditors does not compete with the Port, do business with the Port, or plan to do so. The "direct or indirect" language of this Policy modies "nancial or benecial interest" in a contract, and because there apparently are no contracts or other direct dealings between Expediters and the Port, the language would not apply here. The Code of Conduct also states that "conflicts from outside employment" may arise from "[w]orking with any organization that has a business relationship with the Port, or seeks to have one, [where] that business receives, or may receive, more favorable treatment as a result of the employee's relationship with the business." As a result, working for those with whom the Port has a business relationship is prohibited unless expressly approved in writing by the Workplace Responsibility Ofcer. Even if outside employment is with an organization that does that does not have a business relationship with the Port, conicts of time and energy may arise. Accordingly, salaried, exempt employees must obtain prior written approval from his or her Department Head before holding ajob with another organization. If such approval is granted, the employee acknowledges that satisfactory job performance with the Port must be maintained and that no conict of interest can exist. (Emphasis added.) All employees with other jobs will continue to be judged by the same performance standards and will be subject to the Port's scheduling demands, regardless of any existing outside work requirements. If the Port determines that the an employee's outside work interferes with performance or the ability to meet Port's changing requirements, employees may be asked to terminate outside employment in order to continue employment with the Port. The "time and energy" considerations of this provision could be implicated in Mr. Yoshitani's case even if Expeditors has no business relationship with the Port. Under his employment contract, however, Mr. Yoshitani may participate in Expeditors' matters on his own time (e.g., after close of business or on his time off). The fact that Mr. Yoshitani's contract with the Port specically allows him to participate on a private entity's Board, provided that General Counsel determines that such a role will not "create or appear to create a conict of interest, or is the contrary to any other provision of the Port's Code of Ethics for Employees," corroborates conclusion that Mr. Yoshitani has complied with the Employees' Code of Conduct regarding "conicts with outside employment." Another provision of the Code, "Use of Position for Personal Benefit," addresses the type of conict that may arise "when an employee is in a position to exploit his or her role with the Port to advance his or her personal interest." Employees must avoid circumstances in which it appears, or to a reasonable otherwise seeking special person might appear, that the employee is requesting or consideration, treatment or advantage because of the employee's position with the Port. It could possibly be argued that Mr. Yoshitani used his position as Port CEO to obtain the "special privilege" of serving on Expeditors' Board. However, I have found no authority for the notion that membership on a board (particularly when expressly permitted by an employment contract) is a "special privilege" within the contemplation of the ethics rule; the term appears intended, instead, to refer to such things as "abuse of ofce" by doling out "favors" contrary to law and the public interest. See. e.g., Hubbard v. Spokane County, 146 Wn.2d 699, 50 P.3d 692 (2002) (County planning director waiving compliance with zoning laws for a hotel development could constitute giving a "special privilege" to another, contrary to RCW 42.23.070(1)). Furthermore, the Expeditors' Press Release announcing Mr. Yoshitani's election to the Board cited his "wealth of experience and a distinctive set of talents" that qualified him for the position, as well as his "unique" perspective on international trade. These were the motivating factors for Expeditors' action with regard to Mr. Yoshitani, not his current position at the Port. The Employee Code ofConduct, in "Duty to Report Conicts of Interest," reiterates that "the fact of a conict of interest is not, in and of itself, a policy violation. Rather, it is the failure to disclose a real or potential conict of interest, and/or taking action on behalf of the Port when there is a real or perceived conflict of interest that is of concern to the Port." No "real" conict 8 of interest has been identied here, and Mr. Yoshitani provided the Port with a "Conict of Interest Disclosure Form" agreeing to recuse himself in the event of an actual or perceived conict. The Code states that after disclosure, the "Workplace Responsibility Ofcer" should "document the disclosure and determine any steps that should be taken to avoid the employee's participation in any decision." Mr. Yoshitani's contract effectively gave that role to the Port's General Counsel. The General Counsel documented the disclosure and conducted an analysis. He concluded that that there was "no direct conict," and indeed that "a thriving Port of Seattle is directly aligned" with Expeditors' business strategies. He stated: "It can even be argued that CEO Yoshitani's participation on the Expediters Board will give him a unique insight into the needs of businesses engaged in the shipment of goods that will benet the Port." Any potential for a perceived conict was cured by Mr. Yoshitani's "express commitment to recuse himself from participation in any Expeditor's matter." These conclusions appear reasonable under the circumstances. C. Commissioners' Code The Code of Ethics for Port Commissioners was enacted by Resolution 3583 on September 11, 2007. While it does not by its terms apply to the Port's CEO, its standards likely are applicable to him at least by analogy.2 The Preamble states, in pertinent part: The Code is intended to provide guidance in the event of conicts between a Commissioner's personal or professional interests and the interests of the Port. It is not intended to be comprehensive in scope addressing every perceived conict or issue; rather, it should be viewed as a framework which Commissioners and the public can apply to particular circumstances. Commissioners are elected ofcials entrusted with public condence. 2 It is not referenced in Mr. Yoshitani's employment contract, which requires that the Port's General Counsel determine that "CEO's participation [in a private entity] would not create or appear to create a conict of interest, or is contrary to any other provision of the Port's Code of Ethics for Employees (i.e.. the ethics provisions in the Code of Conduct: Workplace Responsibility Employee Handbook). 9 It is assumed and expected that a Commissioner will act in accordance with applicable law and with integrity, and will strive to avoid any appearance of impropriety in the conduct of his/her ofce. Ultimately, ethics for Port Commissioners are a matter of personal honesty, common sense and good judgment. Neither this, nor any other code, can be an adequate substitute for those attributes.3 The Code's "Standard of Conduct," Section 2, adds: A Commissioner shall perform his/her ofcial duties consistent with the highest standards of ethical conduct and in accordance with the Port of Seattle By-laws, in of King a manner that reects the duciary duty to the Port and the residents County that is required and expected of elected ofcials. In its "Conict of Interest" provisions, Section 4, the Code prohibits Port Commissioners from knowingly engaging in activities "which are in conict, or which have the potential to create a conict, with the performance of ofcial duties." Such a conict, for example, may exist where a Commissioner "inuences . . . the conduct of business between the Port and any entity when the Port Commissioner . . . ." The Code. . . has a Financial Interest in that entity denes "Financial or Benecial Interest" to include an "ownership interest (including without limitation, ownership evidenced by stock purchase) in an amount or value in excess of $1500 In addition, Section 3, "Use of Ofce," parallels the prohibition in the Employee Code of Conduct and RCW 42.23.0700) against using a Port ofce to obtain special treatment for another entity (among other prohibitions). The relevant language is as follows: A Port Cormnissioner shall not use his or her position to secure special privileges or exemptions for himself, herself, members of his/her Family or others. The circumstances here, however, do not appear to implicate these prohibitions. Because Expeditors has no direct relationship or any contracts with the Port, and Mr. Yoshitani has 3 The Commissioners' Ethics Code creates a Board of Ethics comprised of ve members, none ofwhom is a Port Commissioner or employee, empowered to receive and investigate any suspected or alleged violation of the Code and render written opinions. including advisory opinions regarding questions of ethics and conicts of interest. 10 pledged to recuse himself from any situations that pose actual or perceived conflicts of interest, Mr. Yoshitani presumably will not be in a position to "influence the conduct of business" between the Port and Expediters, or use his Port position to secure "special privileges or exemptions" for Expeditors, despite his ownership of stock in the corporation. Furthermore, as discussed above, it is unlikely that Mr. Yoshitani could be found to have violated this provision by using his position as Port CEO to obtain the "special privilege" of serving on Expediters' Board. Mr. Yoshitani did not solicit the Board position, but (as stated in an Expeditors Press Release) was elected in view of his wide experience and unique perspective on international trade. D. Statutory Ethics Code (RCW 42.23) The provision in Mr. Yoshitani's employment contract permitting him to sit on the board of a private corporation under certain circumstances is not dispositive of the ethics issue, nor is compliance with the Port's Employee Code of Conduct or Commissioners' Code, unless those provisions incorporate and/or are consistent with state ethics law. In fact, the Port Codes are very similar to RCW 42.23. RCW 42.23.030, "Interest in contracts prohibitedExceptions," states, in relevant part: No municipal ofcer shall be benecially interested, directly or indirectly, in any contract which may be made by, through or under the supervision of such ofcer, in whole or in part, or which may be made for the benet of his or her ofce, or accept, directly or indirectly, any compensation, gratuity or reward in connection with such contract from any other person benecially interested therein. In addition, RCW 42.23.070, "Prohibited Acts," states: (1) No municipal ofcer may use his or her position to secure special privileges for himself, herself, or others; (2) No municipal ofcer may, directly or indirectly, give or receive or agree to receive any compensation, gift, reward, or gratuity from a source except the employing municipality, for a matter concerned with or related to the ofcer's services as such an officer unless otherwise provided for by law. ll (3) No municipal ofcer may accept employment or engage in business or professional activity that the ofcer might reasonably expect would require or induce him or her by reason of his or her ofcial position to disclose condential information acquired by reason of his or her ofcial position. (4) No municipal officer may disclose condential information gained by such reason of the ofcer's position, nor may the ofcer otherwise use information for his or her personal gain or benet. A provision that potentially could apply in the current circumstances is RCW 42.23.0700), whichlike similar provisions in the Employee Code of Conduct and the Commissioners' Codeprecludes use of an ofcer's position to secure "special privileges or exemptions for . . . others," i.e., for the private corporation on whose board a municipal ofcer sits. In Hubbard v. Spokane County, 146 Wn.2d 699, 50 P.3d 692 (2002), the Washington Supreme Court applied that provision to nd genuine issues of material fact regarding whether a County planning director violated RCW 42.23.0700) by allegedly ignoring zoning requirements for the benet of "others," i.e.. a hotel developer. even though there was no evidence that the planning director had any interest in the hotel development. Hubbard involved a claim for wrongful termination in violation of public policy, where plaintiff claimed the public policy was stated in the Ethics in Public Service Act. The Court of Appeals held there could be no such claim because of the absence of any interest by defendant in the hotel development. The Supreme Court reversed, holding: RCW 42.23.0700) creates a valid public policy in favor of prohibiting municipal ofcers from granting special privileges or exemption to others. In so holding, we recognize the burden this may place on public ofcials. However, because public ofcials serve the interests of the citizens of Washington, consistent with the Ethics in Public Service Act, we nd it appropriate to hold them to a high standard. 12 1d. at 713. The Court noted that RCW 42.23.070, as original enacted, addressed only conict-of- interest situations, but in 1994, it was amended to include the prohibition on use of an ofcial position to obtain special privileges for others. Under RCW 42.23.070( 1) and the case law applying it, the analysis of Mr. Yoshitani's potential ethical violations cannot be limited to contractual conict-of-interest situations. Mr. Yoshitani also may not use his position as Port CEO to "secure special privileges or exemptions" for Expeditors or himself. Again, the fact that the Port does not deal with Expeditors is relevant to the remote likelihood that Mr. Yoshitani would be in a position to seek special treatment for the corporation. And his commitment to recuse himself from any "conict or perceived conict" situation would obligate him in any situationif any were to arisewhere Expeditors could potentially receive special treatment. This conclusion is buttressed by Citizensfor Des Moines, Inc. v. Petersen, 125 Wn. App. 760, 106 P.3d 290 (2005), where Division 1 of the Court of Appeals held that a City Council member did not violate the "benecial interest in a contract" provision of RCW 42.23.030 when there was no contract between the City and the towing company owned by the councilmember. In that case, the City's police had historically called on "Pete's Towing" for towingjobs, but there was no contract between the City and Pete's. There is no evidence in this record that Councilman Petersen self-dealt with respect to any individual towing transaction or with respect to towing transactions generally. Instead, after Peterson took ofce, towing transactions were handled as they had been for decades previouslypolice ofcers and other authorized city staff decided which towing company to call, and not because Petersen took office but because they had always done it that way, they almost always caused Pete's towing. Thus, the trial court's ruling (nding a violation of RCW 42.23.030) is tantamount to a ruling that, given the preference among city police and other authorized officials to use Pete's Towing due to the superior service it provided, Petersen was simply disqualied 'om serving as a city council person for so long as he held any interest in Pete's Towing. 13 The City of Des Moines has not made any such contract, express or implied, with Pete's Towing. . . . Not only has Councilman Petersen engaged in no self- dealing, but even if inclined to do so, his ability, and that of the city council as a whole to affect the exercise of discretion by police is limited, both by statute and the Fourth Amendment. Id. at 766, 768-69. Similarly, in In re. Petition to Recall Cynthia Olsen, 154 Wn.2d 606, 116 P.3d 378 (2005), the Washington Supreme Court held that the "benecial interest" provision ofRCW 42.23.030 did not apply to noncontractual acts or decisions by a Port commissioner who had voted on a motion for the Port District to defend and indemnify the commissioner in an action alleging violations of the Open Meetings Act. The Court held that the decision to indemnify did not involve a contract; "we cannot see how Olsen has a benecial interest in a contract between the port and counsel." 1d. at 612-13. Mr. Yoshitani cannot be prohibited, under his employment contract and the various ethics rules discussed herein, from serving on the Expeditors Board and committees when Bxpeditors has no contractual or other relationship with the Port. The CEO has committed to recuse himself from participating in any situations that would involve a conflict or perceived conict between the Port and Expeditors. He cannot reasonably be foreclosed from sitting on Expeditors' Board of Directors on his own time. 14
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