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.
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