December 07, 2011

Stop Asking 'Where Was the Board’ in Sex-Abuse Scandals

Second guessing is a favorite American pastime. But it might be going into overdrive as experts and others question the role of governing boards in the sex-abuse scandals that have riveted the nation’s attention in the past few weeks. And the sad result may be that board members, regulators, and others may get the wrong idea about just what good governance standards require.

As the controversies have unfolded about Penn State, Syracuse University, and the Second Mile charity founded by the former assistant Penn State football coach Jerry Sandusky, the critical call has been the same: “Where was the board?” 

Indeed, a thoughtful and articulate op-ed in The Wall Street Journal last week argued that the Penn State trustees were accountable for a university culture in which a sex-abuse scandal could arise. Critics wonder how trustees could have let this situation happen. How could they not have known? Given the horror of the allegations and the suffering of the victims, such reactions are understandable. But that doesn’t mean the criticisms are fair.

To hold the boards responsible for the activities of the institutions’ employees, or their lack of oversight, is wildly premature until we know all the facts. What’s more, critics seem not to understand the board’s basic fiduciary obligations. Such an overheated environment threatens to inflate expectations of board-member conduct to unsustainable levels. These boards are conducting their own internal investigations, conducted by highly qualified and impartial advisers. Fairness and fiduciary principles require that these efforts be completed before critics say anything more.

And while we wait, nonprofits should take advantage of the teaching moment this scandal provides to pursue a boardroom discussion about just what a board’s job is when it comes to oversight.

The key lesson that will surprise many of the critics of Penn State and other institutions is that when it comes to defining fiduciary accountability, what emotions may demand might be very different from what the law requires.

Nonprofit boards must take reasonable steps to be sure that a nonprofit’s executives carry out their management duties and comply with the law and institutional policies.

In other words, board members need to keep their fingers on the pulse of the organization but not micromanage. Their goal is to keep in mind the best interests and welfare of the institution and to act in good faith.

The limits of this obligation have been well established by the courts. These rulings provide that trustees must adopt a system of oversight and then make sure they are alerted to key reports.

This system should assure that board members get information in time for them to do something about it. No “one size fits all” system works; the law defers to the business judgment of the board in setting the level of detail that is appropriate for the size, scope, and mission of an institution.

Courts recognize that no matter how well designed a nonprofit’s reporting system, people will find a way to get around the system and commit wrongdoing. But the law does expect the trustees to help preserve a culture in which everyone is expected to follow the law.

In this context, trustees are expected to supervise a nonprofit’s executives. But the law does not require them to search out illegal or improper activity unless board members see specific warning signs of trouble. Rather, they are expected to insist on a proper flow of information about possible misconduct and to act when they see reason to suspect things are going wrong.

When they detect trouble, they must shift into higher gear and make sure their concerns are resolved. If that is impossible, they should seek out independent advisers who can help sort things out. But absent credible evidence of suspicious developments, trustees are entitled to rely on a nonprofit’s executives to perform their duties, including making sure that the organization’s system for reporting wrongdoing is working well.

Some boards might do all that and still be found by regulators or the courts to have neglected their duties. But that is also why words like responsibility, accountability, and liability shouldn’t be thrown around lightly. 

So far, it seems that the governing boards under attack in the sex-abuse scandal have responded swiftly. They made a prompt and serious response to a tragic development by firing longstanding and prominent executives and other leaders and starting independent internal investigations.

The sensational nature of the sex-abuse scandals has allowed the emotions of moral outrage to bleed into established standards of fiduciary conduct. People are more than angry—they are repulsed. They are personalizing the victims’ pain and casting retribution and blame far beyond the alleged perpetrators. That’s not helpful, especially as a way to evaluate whether trustees took the right actions.

The “hang the board’ crowd would seemingly hold the board accountable simply on the basis of its elevated position in the institutional hierarchy. They were the senior institutional leaders in charge as the scandal developed, and on that basis alone (and without regard to the actual record) must be held responsible for any harm anyone suffered at their organizations. That’s an approach more typically found in criminal enforcement of laws to protect the public welfare, like those that prohibit misbranding of pharmaceuticals. It has no place in the law of fiduciary duty. Nobody would serve on a nonprofit board using that standard.

So let’s withhold judgment, at least until Louis Freeh, the former FBI director hired by Penn State to investigate the abuse scandal, and the investigators elsewhere complete their work. We must hear from them before countenancing any more “Where was the board?” talk.  Because right now we need to throw a penalty flag for unnecessary roughness when it comes to the way trustees have been treated.

Michael W. Peregrine is a partner in the Chicago office of McDermott Will & Emery, where he advises many nonprofits.