Board Oversight Lesson from the Penn State Imbroglio

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Board Oversight Lessons from the Penn State Imbroglio

by James U. Jensen and Leah Bennion

© ClearWater Law & Governance

18July 2012

“Success has a thousand fathers/ and failure is a bastard.”  If you think everyone knows this phrase you will be surprised to learn that Former FBI director Louis Freeh turned it on its head with his 267-page report about failures of governance at Penn State.  Contrariwise, the Freeh Report suggests it was failure that was birthed by a crowd.  The Report gives no quarter, finding fault with the President—now gone; the general counsel—now gone; the vice president of finance—now gone; and the board—now restructured.  Of course the whole athletic department is scathed from the institutional failure to protect young people on the Penn State Campus.

At ClearWater we are committed to advocacy of good governance, and to us, the Report suggests these key governance lessons for non-profit and for-profit corporations alike:

  1. –The Board MUST require, fund and utilize a system of disclosure and accountability from its senior executives.  This “compliance” function has been the subject of numerous governance articles and is compelled for large public companies by the Sarbanes-Oxley Act.  Other corporations should take note.
  2. –A management environment that discouraged discussion and dissent can take root and endure in large charitable organizations to deleterious effect.  But a compliance mentality can take hold in corporations of all sizes where its effect may be even more debilitating.  In another context the author has read of a Board Chairman who said, “It seems we are unanimous; so I suggest we table this matter until someone makes a cogent argument opposing the position.”
  3. –Board oversight fails where management fails to instill a system of assessment and reporting of institutional risk.
  4. –If the General Counsel favors representation of management over representation of the institution (and its board), severe adverse consequences may follow.
  5. –Criminal exposure [or any governmental investigation] of corporate officers should gain attention of the Board who, with the assistance of expert “outside” counsel, should consider whether to conduct an internal investigation.
  6. –A fully functioning Board should not allow a system where key decisions are made in advance of Board consideration and a system of “select-director involvement” creates a system of two classes of directors thus denying the institution of the full benefit of a well functioning Board of Directors.

If you sit on a board or if you provide counsel to a board, take this report as a wake-up call.  Commit to help your board do a self-assessment that addresses these key issues and other issues of current importance.  Literature and organizations are readily available to assist you toward your quest for a fully-functioning board and a system of governance that can minimize the potential for un-forced errors of the magnitude of those found at Penn State.