Board Governance Failures Abet Organizational Scandals
The scandal at Pennsylvania State University which recently erupted in the public arena will continue to unfold over months and years. As the investigation progresses, it is highly likely that reputations will be tarnished, careers damaged or destroyed, the credibility of the institution diminished and the once unblemished image of the athletics program shattered. Worst of all, the victims, the abused children and their families, will have their day in court but whatever justice they secure will never make things right.
This pattern has played itself out many times recently in both the non-profit and for-profit arenas – shocking revelations, prosecutorial or government action, denials by the accused coupled with the initial public relations defense of key participants, internal and external investigations followed by judicial or regulatory procedures, the accumulation of evidence, a finding of guilt (or, in rare instances, innocence), and punishments and penalties meted out.
What is often lost in the screaming headlines and newscasts is the relative insulation of nameless and faceless people that constitute a Board of Trustees, as at Penn State, or the Board of Directors, as at Hewlett-Packard. Rarely does the public fully understand how the governance model failed. But a careful analysis of Penn State and Hewlett Packard more recently or Tyco, Enron, Parmalat, Adelphia, United Way, Ahold, and Worldcom in the last decade, along with similar less visible scandals, help illuminate a pattern of behaviors the lead to this type of governance failure at the Board level. Experts have identified the following problems as being prominently associated with such failures:
Failure to deal with a culture of greed within the top management ranks (this is rarely a factor in the non-profit world but often a key factor in corporate scandals; however, in the case of Penn State, the large financial and reputational contribution of the football program to the university strongly suggests this may well have been a key factor).
Management dominance of key committees coupled with minimal exercise of board member diligence (this seemed to be the case at Penn State where Joe Paterno could be classified as “management” with immunity from board member diligence, again because of the financial and reputational success of the football program).
The Board creating a culture of accommodation, ceding significant governance, policy, and strategy authority to Management (this was clearly a major factor in the Worldcom, Adelphia, and Tyco scandals).
Officers of the company having misgivings regarding decisions or actions by other senior executives and making little or no attempt to curb, stop, or challenge conduct that they deemed questionable or inappropriate (while the facts are still emerging, this would seem to characterize the behavior of Assistant Coach Mike McQueary, Joe Paterno, and Graham Spanier and the Board of Trustees itself).
Senior executives having unfettered discretion to commit an organization to significant actions or obligations with little or no Board discussion or oversight (Enron, Adelphia, and Parmalat were rife with this type of Board abdication).
A Board committee takes an action without informing the full Board of the action (this has happened at Hewlett-Packard with some Board members actually electronically monitoring the conversations of other Board members without the full Board knowing).
The full Board adopts the recommendations of a Board committee without meaningful consideration and discussion (this is a common thread among all of these scandals).
A lack of transparency between Senior Management and the Board coupled with a culture and internal processes that discourage or implicitly forbid scrutiny and detailed questioning (as recently revealed in the Wall Street Journal, Joe Paterno’s reported resistance to recommended disciplinary actions made by Penn State’s Office of Judicial Affairs in connection with football player misconduct, if true, is a prime example of resisting scrutiny and questioning, and creating a high risk environment and a double standard, in this case football players versus other students).
Outside professional service providers that didn’t exercise the professional skepticism inherent in their responsibilities (this was rampant at Enron and Worldcom, especially as practiced by their outside auditors).
Inside and outside counsel not believing it was their responsibility to remind Board members of their fiduciary obligations to become adequate informed concerning the organization’s business and operations (at Tyco inside counsel was an enabler of the fraud and clearly not reminding an all too compliant board of its fiduciary responsibilities, a topic to which I return to below).
Professional Advisor malpractice where an advisor, such as an investment bank, participates in actions that come perilously close to commercial bribery whereby an insider garners significant favors or sizable financial kickbacks and the investment bank secures more M&A and/or underwriting business (this behavior appears to have been rampant at Tyco given its dizzying number of acquisitions under former CEO Dennis Kozlowski).
The Board permitting Senior Management to push to extremes in conjuring up highly unconventional and flawed concepts in areas that directly affect financial results or compensation (this was clearly indentified at Enron and Worldcom).
The absence of regular, robust assessment process of committee structure, the CEO, and Peer Review by the Board (unfortunately this is quite common among most Boards, whether their organizations are tainted by scandal or not. It’s the rare organization that does all of this, and does it well, on a regular basis).
Board members typically have a fiduciary obligation to their organizations which can be defined as being legally, morally, and ethically bound to protect the interests of others. The “interests” are normally but not exclusively financial (e.g., “maximizing the value of shareholders”) and property right interests. I would suggest, given what has recently started to unfold at Penn State, and what we’ve seen play out countless times in corporations, that a broadened definition of fiduciary obligation include a moral system that holds people accountable for managerial misconduct or, said another way, requiring Boards to officially move to a wider plane than narrow economic interests, is essential for strong and effective organizational governance.
Beyond that, clearly identifying members of the Board of Trustees of non-profits and publicizing in easily accessible ways, on what committees they serve, the duration of their terms, how and why they were selected, and what direct interests they may have in the organizations they are serving should shed light on responsibility and accountability that for many organizations now seem to be hidden in the shadows of organizational governance.