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.

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