Governance Lessons from Penn State
When Jerry Sandusky retired in 1999 after 30 successful years at Pennsylvania State University he was revered 'like a god'. The successful football coach had earned a national reputation in the sport. He was also well known in the community, and highly thought of, for his work with disadvantaged youth.
In June this year, Jerry Sandusky was convicted for a series of sexual assaults on boys. It was undeniable that the University was highly complicit in Sandusky's offending.
The University Boards response to Sandusky's arrest late last year was to commission an independent investigation by former FBI Director Louis Freeh. Freehs report concluded that top Penn State officials, including former President (CEO) Graham Spanier and legendary football coach, the late Joe Paterno, had 'failed to protect against a child sexual predator harming children for over a decade'.(1)
The Freeh report also highlighted significant shortcomings in the performance of the Penn State Board and the Universitys governance systems and processes.
The Penn State experience carries lessons for all governing bodies but it is a particular wake up call for the boards of educational institutions. Universities and other institutions of higher learning are particularly vulnerable to such disasters. Their cultures have traditionally lacked and even been antagonistic to the disciplines of corporate governance.
The Penn State experience reinforces a number of governance principles and realities.
1. Board size is a significant variable in board effectiveness
The larger the board, the greater is the likelihood of under-performance. The Penn State Board had 32 members. A board this size cannot conduct an effective dialogue about things that matter. This means it is likely to abrogate effective control and direction of the institution to its executives. It is hard for a large board to be more than a rubber stamp for management initiatives.
It is also more likely that there will be a 'board within a board' and therefore two classes of directors. A small sub-set of the board is likely to form an overly influential 'inner circle'. It is common for this to be reinforced structurally in the form of a board 'executive committee'. Excessive influence is also likely to accumulate in the hands of the board chair.
A large boards oversight of organisational performance is likely to be superficial and probably ineffectual. Larger boards are often the consequence of a desire to accommodate a wide range of interest group representatives. Such boards are often fragmented, its members displaying little interest in matters beyond those relating to their particular constituency. Such boards often struggle to develop a 'collective consciousness' of potential risks. They also tend to take far too long to commit to decisive action when it is necessary.
2. Organisational values are central to organisational performance and the board must set the tone at the top
A board must have an explicit sense of the corporate culture that is desirable for its organisation. Some cultures have elements (in the Penn State case, the importance of football) that make governors and top management blind to (or accommodating of) things that do not seem right. Because of this blindness one media report suggested Penn State had a demonstrated a propensity for magical thinking. They tricked themselves into thinking there wasnt a problem.(2) Penn State was an institution in which a former football coach could testify at Sanduskys trial that he often saw Sandusky in the showers with children but he did not believe the practice was improper!
This situation also illustrates that certain people, because of their status, reputation or the general sentiment towards them, become 'untouchable'. Sandusky was one of these people. Not only emersed in the Universitys football focused culture he had drawn the University into association with his good works in the youth field. Sandusky founded a non-profit organisation (the 'Second Mile') that provided services and activities for disadvantaged children. The University gave visible support to the Second Mile. Many Penn State officials and some members of the board supported the organisation through volunteer service and donations. This provided Sandusky with opportunities to bring young boys onto the Penn State campus long after his retirement. He was allowed to use University facilities to run 'Jerry Sandusky' summer football camps. He was exempted from the normal formalities applied to others seeking similar privileges.
The Sandusky situation highlighted another cultural vulnerability. Contrary to what is taught at many universities, the organisational culture at Penn State apparently discouraged 'speaking truth to power'. There were elements of fear that suppressed important information reaching those with the authority to act. A university janitor observed Sandusky sexually assault a young boy and advised co-workers of what he saw. Another janitor observed further suspicious behaviours the same day. Neither janitor reported the incidents. They were afraid of being fired for disclosing what they saw. Their belief was that 'football runs this university' and that the University would have closed ranks to protect its football program at all costs.(3)
3. Boards must construct and adopt good policy but without effective implementation that policy is irrelevant
A board must be able to confirm that there is legal and policy compliance. Legislation (the 'Clery Act)' requires US universities to collect crime statistics relating to designated crimes (including sexual offences) occurring on university premises. In 2011, more than 20 years after its enactment, Penn States Clery Act policy was still in draft form and had not been implemented.
The Universitys administrative controls included over 350 policies and related procedures but oversight of those was decentralised and uneven. The University had a central Human Resources (HR) department headed by a senior executive but each school and other large departments had their own HR staff. Those individual departments were allowed to relax or opt out of the standard rules and procedures in implementing University policies and rules. The University had no centralised office, officer or committee to oversee institutional compliance with laws, regulations, policies and procedures. It was left to individual departments to monitor their own compliance issues. They had very limited resources and even less incentive to comply.
4. The boards membership must be capable but it must also be on the ball
The charter, by-laws and standing orders of the Penn State Board state that the Board 'Shall receive and consider thorough and forthright reports on the affairs of the University by the President or those designated by the President. It has a continuing obligation to require information or answers on any University matter with which it is concerned.'
It was weeks after an initial media report about the Grand Jury investigation of Sandusky before management reported this to the Board. Even then it was only at the insistence of a trustee who had read the original article. When in May 2011 the President and the Universitys General Counsel finally briefed the Board they failed to fully disclose the nature of the allegations and the possible negative impact on the University. They focused instead on issues of alleged bias in the Governments investigation, the President calling the charges 'erroneous, unfair and unfortunate'.
Apparently satisfied with this smokescreen, the Board did not independently assess this information and it was a further six months before the Board would inquire further. It was at the Boards November meeting that members of the Board began to press the President for more information about the criminal charges. By now these charges also seemed likely to extend beyond Sandusky to other members of staff.
By his actions the President deliberately downplayed the serious harm that could result to Penn States reputation. He kept the Board at arms length from the issue. It was apparent to Freeh and his investigators that this problem was partly attributable to the Board. It had not ensured that it created a relationship with the President and other senior executives such that they understood they were accountable to the Board. Some trustees reported that Board meetings felt 'scripted' or that they were 'rubber stamping' major decisions made by the President and a smaller group of Trustees. The Freeh Report observed that the Board had allowed itself to be marginalised.
Notwithstanding the absence of disclosure by management and its lack of respect for the Boards ultimate responsibility, Freeh concluded that the Board failed to exercise its oversight and reasonable inquiry responsibilities.(4) During the period when people within the University hierarchy were aware of Sandusky's activities the Board did not have regular reporting procedures or committee structures in place to ensure disclosure to the Board of major risks to the University. Because the Board did not demand regular reporting of such risks, the President and senior University officials did not feel they needed to bring major risks facing the University to the Board.
Boards are often hit hard by things they didnt know they didnt know. When the proverbial 'hits the fan' it is often revealed that what they didnt know they didnt know, they should have known. So it was with the Board of Pennsylvania State University. Penn State was not being governed in any active sense of that term. As a consequence, serious harm was done to the children who were exploited by Sandusky, to others who were drawn into complicity and, not least, to the once proud university itself and its reputation.
(2) See http://www.huffingtonpost.com/2012/07/12/freeh-report-penn-state-coverup-joe-paterno-jerry-sandusky_n_1667727.html
(3) Freeh report, p.65
(4) Freeh Report, p.97