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Freeh Report on Penn State Provides Little Guidance on Nonprofit Governance

NOTE:  A version of this article appears in The Nonprofit Quarterly and may be accessed here:

http://www.nonprofitquarterly.org/governancevoice/20779-freeh-report-on-penn-state-provides-little-guidance-on-nonprofit-governance.html

The recently released Freeh Report on Penn State found, in part, that the Penn State Board of Trustees did not exercise sufficient oversight of the University and its senior executives.  The report blames the Board for being too deferential to the University President and for not demanding more and better information on issues of risk management and oversight.  The report’s recommendations include governance recommendations which would make many nonprofit executives blush or roll their eyes.  Unfortunately, the governance recommendations are either vague and tentative or too narrowly focused to have significant organizational impact.

The 162-page report (plus 105 pages of appendices and exhibits) makes 120 recommendations in eight areas.  Overwhelmingly, these recommendations relate to managerial, administrative, and communications-related policy and procedure.  There are 21 recommendations and sub-recommendations in the section devoted to the Board of Trustees. 

The first recommendation is to review the Board’s size and composition.  The recommendation is short on specifics, and does not include targets for total board size, how to modify the composition of the board, etc. 

Penn State’s current 32-member Board of Trustees is comprised of: 1) ex officio members including state officials; 2) governor’s appointees; 3) Trustees elected by alumni; 4) Trustees elected by the state’s agricultural societies; and 5) six Trustees from business & industry selected by the Board of Trustees itself.  As if that weren’t complex enough, there are 16 “Trustees Emeritus” who have all rights of trustees except making motions, voting, and being an officer of the nonprofit.

Nonprofit board size and composition is an easy target, since many large, well-established nonprofits have boards too large for effective governance.  However, a billion-dollar land-grant university will likely encounter much opposition from state government and other vested constituencies should it attempt to streamline its board in accordance with nonprofit best practice. 

The report praises the Board for redesigning its committee structure to include a new “Committee on Audit, Risk, Legal and Compliance.”   It also recommends that the Board “…develop a critical incident plan, including training and exercises, for the Board and University administrators.”

Other recommendations are commonplace in nonprofit board assessments: 1) adopt a conflict of interest policy for the Board; 2) assure that Board members review Penn State’s Form 990, leadership compensation and performance reports, and Clery Act (reporting of crimes on campus or involving University personnel); 3) conduct periodic Board self-assessments; and 4) get training on ethics, oversight, and regulatory responsibilities. 

The report is also significant for what it does not recommend.  It does not state the need for a change of Board structure, composition, terms, etc., though it recommends “an examination.”  It tacitly approves a Board structure which includes an Executive Committee of 11 members while simultaneously criticizing Penn State for allowing the University President, Board of Trustees Chair, and selected Trustees to bypass the Board as a whole in information exchange and decision-making.  Executive Committees of larger nonprofit boards are notorious for serving as a place where the “real” decisions are made since it’s easier to coordinate a smaller group.  In addition, the report recommends that no committee chair serve longer than five years, but does not address how this would affect the Executive Committee, chaired by the Trustees Board Chair. 

The recommendations on communication with and from Trustees are relevant, but limited in their practicality.  We can encourage Trustees to ask hard questions and demand good answers, but how does a Trustee know which questions to ask to assure that they have enough information to fulfill their responsibilities without getting mired in minutiae?  How does one prescribe how hard Trustees push the administration before the board/staff partnership becomes adversarial? 

The recommendation that Trustees have individual, publicly-available University e-mail addresses is an invitation to include Trustees in micromanaging the University by being exposed to all sorts of issues and personalities without the moderating influence of having to mail a letter or make a telephone call.  Since Trustee names and contact information are publicly available on the Form 990 and elsewhere, there must be a way to channel communications from the public to Board members without also exposing them to the worst aspects of the Internet. 

The goal of the report’s communications recommendations is laudable, of course.  Open and complete communication is important to organizational function.  Unfortunately, it’s much easier said than done, and that leaves boards and staffs open to continued criticism.

Freeh Sporkin & Sullivan are to be commended for an exhaustive study conducted in a short time frame without subpoena power or the authority to take testimony under oath.   They conducted over 430 interviews and reviewed more than 3.5 million documents and e-mails.  One wishes that nonprofit governance were treated in the comprehensive and systemic way that other issues were addressed.  Those looking for nonprofit governance leadership lessons will not find their template for improvement in the Freeh report.

Read the full report here.