The Penn State board of trustees did not escape blame in Louis Freeh’s 162-page report released yesterday (July 12). See the PDF summary here and pages 97-103 of the full report for findings about the board.
According to the report, the board had inadequate reporting procedures and committee structure. Some trustees claimed that board meetings felt “scripted” and that it was “rubber stamping” decisions already made by others, including former Penn State President Graham Spanier. The board also failed to create a “tone at the top” to which senior university officials felt accountable. Further, once the Sandusky investigation became publicly known in March 2011, the board failed to assess this information or lead an independent inquiry.
So what can university boards learn from this failure? A few things.
1. Reduce your board to a maximum of 15 people. Penn State’s board was 32 members. Even the largest company boards have an average of 12 directors. Research shows that larger boards tend to provide the worst oversight when company size is held constant. If you have a board this large, debate cannot occur, and the board can fall victim to “rubber stamping” decisions.
2. Dis-establish the executive committee. Executive committees dominated by university executives and a few directors create a board within a board, which obviates the very need for the board and creates two classes of directors. It is a red flag for management control over the board. Executive committees have been disbanded in the corporate sector for this very reason.
3. Have a rigorous code of conduct and compliance oversight. Reporting should be direct to a board committee. Have every university employee and key supplier sign the code and receive training on it. Have an independent and anonymous whistle-blowing procedure. All good companies now have these and universities need to follow suit. Press on despite faculty associations’ allegations of breach of academic freedom.
4. Have authority within board and committee charters to compel independent assurance and investigations when the board or committee deems it appropriate. All good companies have this, but universities don’t.
5. Test the board’s tone in the middle and watch for pockets of undue influence. Tenure of 20 to 30 years in any position (coach, dean, director, etc.) should be a red flag for improper succession planning. Insist on vacations, sabbaticals, term limits and regular leadership rotation and development for all positions.
6. Select trustees on the basis of competencies and skills, not donations or favouritism. Restrict busy directors (three or more directorships) as research shows companies with busy boards tend to have worse long-term performance and oversight.
7. Ask yourself whether all material risks (including compliance and reputation) of the university are reported and assured by the board and committee structure. Meet in executive session—without management—to discuss. Retain independent advisors to assist you if necessary. Insist that management implement full enterprise risk management.
8. Lastly, insist on executive sessions in which management leaves the room at every board and committee meeting. Pay particular attention to internal audits. This person should have adequate staff, resources and report directly to the board and audit committee, not management.
There are many shoes left to drop in the Penn State tragedy, including ensuing civil litigation. In my experience the vast majority of universities have not adopted the above recommendations for best practice. However, many or most corporations have implemented these practices. Universities and all educational institutions should not be immune from proper governance practices.