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.

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