Friday, April 20, 2012

The Risks of Poor Governance: Governance and Transparency Problems in The Case of Penn State/Second Mile Scandals

In my last two blog posts I reviewed the essential findings of the Penn State/Second Mile (PSU/SM) scandal and the role that conflicts of interest played in fostering and prolonging the scandal. This week’s post addresses the ways that poor governance and the lack of transparency may have contributed to the scandal.
Governance refers to the strategies organizations use to maintain oversight and accountability with laws, regulations and funding source requirements. In addition to administrators, Boards of Directors and Boards of Trustees bear the responsibility for sound governance. In the recent scandal, the Second Mile’s governance structures exacerbated its difficulty in monitoring and responding to risk. As Michael Wyland notes, it appears that Second Mile had four boards in addition to the governing board. A particular source of confusion involves the Honorary Board, populated with sports celebrities. In the wake of the scandal many people listed on that board denied knowing that they were on the board. At least one governing board member believed he was only on the honorary board.
Further, the governing board was also unusually large. According to its 2010 Form 990, the Second Mile board had 36 members-- two to three times as many as recommended for an effective, involved board. This number fosters the risk of collective irresponsibility, and may explain the confusion on the part of at least one member about whether he was, in fact, on the board.
It also appears that most governing board members were drawn from the corporate or philanthropic interests. These connections can be essential for the fund-raising and friend-raising aspects of nonprofit survival, but may not be sufficiently diverse, concerned, or informed to delve into the oversight needed for enterprise risk management (ERM). The board also lacked limits in the number of terms members could serve. Good governance encourages rotating membership and caps on terms, to encourage fresh perspectives and discourage cronyism and groupthink.  
Jerry Sandusky, founder and board member of Second Mile, was reportedly paid $57,000 annually by the charity, from 2001-2007. The rationale for these payments is unclear, but it raises serious questions about excessive insider compensation and the board’s awareness of these arrangements. 
            Beyond the structural problems, it is difficult to diagnose reasons for failures in governance by the board. Second Mile and its leaders have not been forthcoming about their processes or the allegations against them, However, the board’s failure to address the blatant conflict of interest created by a the Executive Director’s marriage to his direct report, the Executive Vice President would suggest that there were not firm hands on the tiller of governance.
            Similar complaints have been lodged about Penn State. Both Trustees and faculty members have expressed dismay at the administration’s failure to notify them at significant points in the scandal, notably, the 1998 police investigation, the 2002 observation of abuse in the Penn State facilities, the years of the grand jury investigation.

Lack of Transparency
            In the wake of Enron and other corporate scandals, legislators, regulators, and the public at large demanded greater transparency about organizational relationships, decisions and financial dealings. Yet in 2007, Penn State successfully lobbied to be exempt from the state’s open records law arguing that providing donor, salary, and other information would be costly and divisive. This carve-out from right-to-know legislation is rare: only two other states offer such exemptions. Because of the exception, Penn State was not obligated to publicly disclose information such as emails, contracts, meeting minutes and other data pertaining to Jerry Sandusky and the others affiliated with the scandal. Even if personnel protections might have limited the scope of information available, the immunity itself feeds a culture of secrecy and unaccountability. 
            Second Mile, ironically, has received the Guide Star Exchange Seal for its commitment to transparency. The designation certifies the provision of documents and policies aligned with good governance. Skepticism rests, however, in the organization’s execution of its policies. Second Mile has not been forthcoming in the aftermath of the scandal. What efforts were made to protect children or restrain Jerry Sandusky when reports were received about inappropriate conduct with youth in the organization’s care? How did administrators and board members view their roles and responsibilities in leading the organization? What response do they have to the troubling allegations of conflicts of interest, excessive compensation, and other governance issues? The agency has hired former Philadelphia DA Lynne Abraham to conduct an internal investigation, but makes no promises to release the report or its findings, casting future transparency into question.

Friday, April 13, 2012

The Risks of Poor Governance: Conflicts of Interest in The Case of Penn State/Second Mile Scandals

In my last blog post I reviewed the essential findings of the Penn State/Second Mile (PSU/SM) scandal. While ostensibly about the sexual abuse of children who were clients of the Second Mile charity, the case also contains significant lessons for organizations about the risks of poor governance. Some of the issues are particular to nonprofits, but most apply to public as well as private entities. As I see them, the risks fall predominantly in three categories: conflicts of interest, inappropriate governance structures, and lack of transparency. Certainly other conclusions can be drawn about ethical failings in the case, but this post focuses on the organizational errors as they apply to both PSU and Second Mile. Michael Wyland has written a thoughtful commentary focusing specifically on the Second Mile, and it is likely future insights will evolve as records are opened and reports written by task forces looking at both organizations. Today’s blog will address conflicts of interest and next week’s will conclude the series by addressing governance and transparency.
Conflicts of interest
            Conflicts of interest arise anytime an individual has loyalties to two or more parties, such that upholding the interests of one may work to the disadvantage of the other. Typically such conflicts arise from blurred boundaries, where it is unclear what role or responsibility one is exercising at a given time. They can also arise from dual relationships where individual associate with each other in multiple roles or settings. In small towns or rural areas, dual relationships cannot be avoided: in fact, the interdependence in such communities is prized and necessary for successfully meeting life’s needs. For example, an individual may be the financial advisor for a doctor, for whom the financial advisor is a patient. Perhaps the two also serve on community boards and socialize together. The conflict of interest arises when information from one role or setting contaminates or jeopardizes another role or relationship. For example, perhaps in socializing, the doctor learns that the financial advisor likes to gamble and drinks excessively. How will this information be used in the doctor patient relationship? In trusting the financial advisor? In supporting him for treasurer of a nonprofit board? The PSU/SM case offers numerous examples of problematic conflicts of interest.
·         Jerry Sandusky was the founder of Second Mile and an executive officer of the board. He was also a major fundraiser and he interacted with and donated gifts directly to clients. Irrespective of the accusations of pedophila against him, was Sandusky able to act in the interests of the Second Mile as an officer, given his history in founding the organization and his multiple other roles? Were administrators and other trustees able to carry out their responsibilities in the presence of the founder, donor, service provider and fellow board member? Or, did Sandusky’s multiple roles quell inquiry and dissent, particularly when explicit reports of inappropriate contact with youth were conveyed to Second Mile?   
·         Wendell Courtney was the legal counsel for Penn State and, according to the grand jury report, also served as legal advisor for Second Mile. In which capacity was he acting when he reviewed the substantial investigative report in 1998 in which Sandusky reported inappropriate physical contact with young boys? To which organization did he report? If he offered advice to one why did he not do so to the other?
·         Two Second Mile board members worked in the same organization in which they had a hierarchical reporting relationship? Did this influence their capacity to govern independently as board members? The 2010 form 990 acknowledges that officers, directors, trustees or key employees had relationship or business interests with one another, though the nature of these beyond the cases noted here is unclear.
·         Did board members have affiliations with PSU that might have blurred or compromised their fiduciary responsibilities to Second Mile? PSU employees were clearly involved in Second Mile in other capacities, for example, participating in fundraisers, as well as football trips and events to which Sandusky brought Second Mile clients. Mike McQueary played in a Sandusky fundraiser/ golf tournament three months after he witnessed a sexual assault by the former coach.
·         The Executive Director and the Executive Vice President of Second Mile were married to each other.  As Michael Wyland notes, “This represents both a management and a board-level conflict of interest, as Dr. Raykovitz would normally be expected to review Ms. Genovese’s job performance, set her compensation, and otherwise act as her supervisor at The Second Mile.
Ms. Genovese, by virtue of being married to the CEO of The Second Mile, is by IRS definition a "disqualified person" under IRC Section 4958. The board has a legal responsibility to monitor the transactions involving disqualified persons. The board must insist that documented procedures are followed to assure that the marriage relationship does not adversely affect The Second Mile and its interests as it enters into agreements (such as employment) with Ms. Genovese.”
While the relationship between two senior staff was noted on the Form 990, it is not clear what steps, if any, the board took to segregate their duties or avoid the risk of collusion or exploitation.
·        Insularity was also problem at Penn State. While not a statutory or ethical violation, the propensity to hire administrators and other staff from within, and the tendency for those hired to stay for extended terms can create a stale, self-referential environment with an inclination toward groupthink.

Conflicts of interest are not uncommon in small communities, or among people in large communities who have shared concerns, for example the professionals and families who care about autism. While conflicts of interest can’t always be avoided, they should be anticipated and addressed, In the case of Penn State and the Second Mile, efforts should have been made to diversify the board, identifying people without significant PSU ties as prospective members. Individual members should have been alert to their various roles and responsibilities and declined service, resigned, or recused themselves in instances where they could not objectively uphold their board responsibilities. The same would hold true in instances where information gained in one setting might create a conflict of interest for the other.
The potential for financial, social, or professional conflicts of interest should be addressed in board recruitment and orientation. Boards should have a clear conflict of interest policy and require annual disclosure statements by board members. Board chairs should preface the discussion of significant or controversial agenda items by asking if any members have conflicts of interest with the matter at hand (Boardsource, 2007). The same strategies might hold true for Penn State trustees and administrators, given the multiple, overlapping, long-term relationships between the university and community entities. The leaders of organizations and the individual volunteers and employees are all responsible for the identification and careful resolution of conflicts of interest. While the Second Mile’s 2010 Form 990 indicates that it has a conflict of interest policy, that key trustees and employees are required to disclose interests that could give rise to conflicts, and that the organization monitors and enforces compliance with the policies and disclosures, it is clear that lapses in scope and application of these requirements failed for many years.  

BoardSource. (2007). The nonprofit board answer book (2nd ed.). San Francisco, CA: Jossey-Bass.

Friday, April 6, 2012

The Risks of Poor Governance: The Case of Penn State/Second Mile Scandals

           Last November, the worlds of sports, nonprofits, and higher education were rocked by an abuse scandal involving Jerry Sandusky, a former assistant football coach for Penn State and founder of The Second Mile, a charity serving at-risk children. According to the grand jury report, Sandusky founded Second Mile in 1977 and was its primary fundraiser. He solicited his victims from young men served by the agency, inviting them to professional and collegiate football games, giving them gifts, coaching them in sports and weight lifting, and having them sleep at his home. He is accused of routinely fondling boys, demanding they shower with him, and seeking physical contact through back rubs and wrestling, all of which are considered strategies by which pedophiles “groom their victims”. (Link to read Dr. Strom-Gottfried's article on Grooming the Victim.)
            In 1998 Sandusky was investigated after a mother questioned why her son had wet hair upon returning from an outing with him. In a surveillance phone call, Sandusky admitted showering with her son, expressed remorse, and promised never to do so again. No charges were filed against Sandusky and it is not clear whether Second Mile was notified of the incident. However, Wendell Courtney, who served as Counsel for both Penn State and Second Mile, reviewed the investigation report at the time.
            In the fall of 2000, a janitor named Jim Calhoun observed Sandusky in the showers of the football facility performing oral sex on a boy. Calhoun, upset and crying, reported it to his colleagues and supervisor. The supervisor advised him of where to report the incident, should he choose to do so. It appears no report was made. 
            In 2002, Mike McQueary, a 28-year-old Penn State graduate assistant heard a shower running late at night in the football building and saw a naked boy being subjected to anal intercourse by Sandusky. McQueary reported it to his father, and the next day to the Head Football Coach, Joe Paterno, who in turn reported it to the Athletic Director and a Penn State Senior Vice President. Approximately 10 days later, the graduate assistant gave his account directly to the administrators, and two weeks after that, he was told that Sandusky’s keys had been taken away and that the incident had been reported to Dr. Jack Raykovitz, the Executive Director of Second Mile.
            In November, 2011, Jerry Sandusky was charged with the sexual abuse of eight boys, The Penn State Athletic Director and Senior VP were arraigned on making false statements to a grand jury and failure to report child abuse. They lost their jobs, as did the Head Football Coach and the University President. Raykovitz, who had served as Executive Director of the Second Mile for 28 years, resigned. Since then, at least two task forces have been empaneled to examine the institutional responses to this case, more victims have been identified, more staff have been suspended, fired or have resigned. 
Like other scandals, this has far-reaching effects for the nonprofit sector. It erodes philanthropic support for charitable causes. It creates suspicion on the part of those who entrust nonprofits with care of vulnerable individuals. It diminishes public trust and casts a pall on the positive impulses that draw many to social service work. It also raises questions that can be instructive to others who wish to avoid and mitigate future scandals. For example: 
  • Why was Jerry Sandusky allowed ongoing access to Second Mile clients?
  • In whose interests was Wendell Courtney acting when he reviewed the 1998 abuse report? Did he take any further action with either organization?
  • Why did Penn State and Second Mile fail to act on explicit reports of child abuse?
  • How could the harms to children, organizations and careers have been avoided?
Next week’s blog will address these questions and identify the lessons nonprofits and their boards can take away from the PSU/Second Mile case.