Defective Penn State Governance: What Corporations Can Teach Universities

“As the graduate assistant put the sneakers in the locker, he looked into the shower. He saw a naked boy, Victim 2, whose age he estimated to be ten years old, with his hands up against the wall, being subjected to anal intercourse by a naked Sandusky. … The graduate assistant left immediately, distraught.”

I apologize to all readers for quoting this alleged abhorrently heinous criminal conduct from the Grand Jury report to what is reputed to be several young boys.

Universities are historic institutions, steeped in tradition. Many however have sorely outdated governance practices. Penn State is a good example. What can we learn?

Penn State prides itself on not changing the size or composition of its board since 1951. What this means is that the entire organization is not keeping up with the times.

Thirty-two directors is not a board: it is a theatre. A board this large means management dominates and decisions are made in advance rather than at the table.

The board of trustees should immediately disestablish the Executive Committee chaired by the President. An executive committee means a “real” board where management controls rather than the board and its committees.

The board size should be reduced to half: sixteen directors maximum and preferably fewer. Multi national corporations have fewer directors.

The university president, or any other member of management, should have no influence whatsoever into director selection.

Penn State does not even have an audit or risk committee. What good board does not have an audit committee? The audit/risk committee should oversee conduct and compliance reporting. Where is this obligation overseen by a committee of the Penn State board, I wonder? No committee charters are available, which is another red flag.

A nominating and governance committee should also be established. So should a human resource committee. It is remarkable that audit, nominating or HR committees do not exist and this again suggests undue influence by management who does not want this oversight.

Penn State’s governance statements are verbose, pompous, self serving and ineffective, as are those of many colleges and universities, deliberately so and written by management who write for a living. Key governance documents are missing, such as the competencies and skills of each director linked to their responsibilities; the code of conduct; compliance procedures for the code; whistle-blowing provisions; a position description for the president; and position descriptions for the board and committee chairs.

These are now requirements for publicly listed companies all over the world and leading not-for-profit institutions. Is Penn State or are other universities immune from such best practices?

If these governance and ethics oversight practices exist, they should be documented and accessible on Penn State’s website. That they are not leads me to believe they are ineffective or non-existent. (Note: the Penn State website appears to have changed slightly as of Sunday, November 13, 2011, to include backgrounds of 32 (was 35) directors.)

Next, more to the alleged sexual assaults on campus property by football coach Sandusky.

There needs to be greater rotation and succession planning at many universities and Penn State is no exception. The same director, employee, coach, dean, or otherwise at the helm for 20-30+ years – regardless of performance or money or donations being attracted – is wrong governance. Joseph Paterno was coach for 45 years and is 85 years old.

Inadequate succession planning like this would never fly in public companies, where CEO tenure is 4-5 years and good board tenure is 9. People don’t have time to get comfortable and start capturing people but need to do their job. On boards, retirement age is 72+ and good tenure is 9. In professional service firms, it is even earlier, from late 50s to early 60s to make way for the next generation of leaders.

No one is irreplaceable or larger than an institution. Incumbents create power and fiefdoms, currying favors – such as free sports tickets and equipment to young boys (as was alleged) – or protecting colleagues (also being alleged) – where they become so dominant they cannot be resisted, within pockets of toxic culture and risk – with management and even boards of trustees acquiescing instead of governing.

All allegations have yet to be proven, but if true this is likely what happened here: People become afraid to speak. If they speak, they will suffer enormous reprisals, even loss of their jobs or banishment. The board is at fault if this is the case as a result of a flawed structure (see above) and decisions it took or did not take.

At least half of the Penn State board should be businesspeople with clout. The board should have the same transparent recruitment that companies how have, with directors who are independent, have run businesses and can tell colleges who are behind the times, or who resist reform, that this is what has to happen. Having alumni, the governor, or even agricultural societies (likely a historical artifact) appoint or elect directors does not necessarily result in competent directors being at the table or staffing key committees. There needs to be a greater link – clear and transparent – between directors, their skills, and what is required to govern. The days of ceremonial appointments should be over. Clearly they are not.

Next, all colleges should have whistle-blowing procedures at the same level or above as companies are now obliged to do. This puts the heat under management to have proper procedures, as employees can go directly to an external ombudsperson or the regulator to get protection.

A code of conduct should be developed by all colleges and universities, as is the case for any leading organization. It should be signed off on by each and every trustee, employee and key supplier and be a condition of serving and employment, including for the president. Code compliance should be part of the president’s contract. Everyone has to sign that they do not know of any wrongdoing, directly or indirectly, anywhere on campus, every year. The sign-off statement should include obligations on how to report, protection mechanisms, and assurances of a proper independent investigation.

All code compliance should be reported directly to the audit committee of the Penn State board (note: non-existent at Penn State), and independently assured. The code must include conflicts of interest statements, treatment of assets, fair dealing and harassment. Training and education should also occur, for each employee. The code should be paramount and override defensive union agreements or guises of academic freedom.

Lastly, Penn State’s internal audit charter – if it exits – should be available on its website. The design and effectiveness of internal controls, including approvals, access to restricted rooms, campus security and lighting, keys, locks, areas of vulnerability, and potential for override – most of which were likely deficient in this case – should be reported directly to and overseen by the audit committee.  The audit committee should be able to insist upon independent assurance for any risk, based on the audit report. Good audit committees know and do all this. They direct the president, CFO and finance and risk personnel to comply with best practices.

Why would Penn State management do all this, under this resistance? Simple. The board tells them to. Or they get fired. This is why a strong board is so essential. The tone at the top starts – and stops – with the board. Sandusky is not a rogue any more than a rogue trader is at a bank. He is operating within a defective system, put in place by defective management and overseen by a defective board.

Conclusion: Reform to collegiate governance

Educational institutions are complex organizations, with interdependent stakeholders and many moving parts. They are sometimes more complex to run than a large company. In the vast majority of cases, they are staffed by committed and well-meaning people. They are however, hard to manage and especially difficult to govern, given defensive unions, historic tradition and tenured, specialized academics and staff. They are however taxpayer-funded entities from which leadership and accountability are expected. Indeed, they are supposed to set the example and practice what they teach.

It is very important that governance standards and practices be current and not myopic, and this is why colleges need strong, proper, effective independent boards to counteract resistance, have the clout to direct management and staff, and impose proper governance, risk management and internal controls are is being done for public companies.

Here, Penn State, and perhaps many other universities have much to learn.

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