Boards of directors help set a tone that seeps throughout an organization’s culture, and confirm that an organization actually behaves in the way it promises to behave. When the board doesn’t do its job, things can go very wrong.
A recent Grant Thornton webcast, “Reputational risk: Protecting the good name and reputation of the not-for-profit organization and its board,” explored ways to keep a non-profit on track, with the recent Penn State scandal emerging as the prime example of inadequate governance. Penn State wasn’t on the prepared webcast slides, but clearly on presenter Larry Ladd’s mind as he fleshed out how things can explode when a board fails.
Ladd currently is Grant Thornton’s director of national higher education practice, and a past administrator at both Harvard and Tufts universities.
A BOARD “NOT DELVING DEEPLY ENOUGH”
“Think of how culture and governance of the university allowed bad behavior to remain unreported for approximately 2 decades,” Ladd said in reference to the Jerry Sandusky sexual abuse scandal.
Sandusky was convicted on 45 of 48 counts in a sexual abuse trial, taking down with him a number of Penn State administrators who apparently failed to act appropriately upon the allegations of sexual misconduct.
“The board failed to create an environment that held senior people accountable,” Ladd said.
Although the Penn State example is particularly dramatic, he said the case is “quite typical” of scandals seen in the not-for-profit and for-profit sectors, another case where trustees were not delving deeply enough.
NO ROOM FOR HERO WORSHIP
He compared the hero worship of Joe Paterno, Penn State’s long-time head football coach, to a similar pattern that can emerge around a successful CEO. “When a particular leader begins to be revered too much, it’s a board members responsibility to continue to ask hard questions (and) to continue to be skeptical,” Ladd said.
As soon as a board becomes so respectful that they stop asking difficult questions, the door is opened to risk. Ladd pointed out that the NCAA sanctions ultimately concluded that the culture of reverence for the football program “subverted institutional processes.”
Further, far more damage was done because the organization tried to overlook or avoid reporting suspected activities, he said.
SYSTEMS IN PLACE MUST BE ENFORCED
Ladd recommended having a solid risk-avoidance system in place–and board members willing to enforce it–to keep trouble at bay. He recommended that not-for-profits employ a formal enterprise risk management system addressing four broad categories of risk: strategic, operations, reporting, and compliance. Ladd presented a model incorporating those standards:
“This is how detailed you need to be when looking at risk. It shows how risk permeates the whole organization,” Ladd said. He said Grant Thornton uses the table to “think as comprehensively as possible” about the risk universe an organization faces.
While larger institutions like Penn State are likely to have formalized programs, those plans mean nothing if they are not being implemented across the board. Every board must have at least one person who focuses on those risk and asks the tough questions, Ladd said.
The key drivers to reducing ethics risk are well-implemented program and strong ethical cultural, he said. “Pay attention to the culture of your organization. Seek the highest standards.”
Exceptions to the standards, noted one presentation slide, are toxic.