Penn State Freeh reportMr. Lamm is Assistant General Counsel and Assistant Secretary at Pfizer Inc. and a Gunster alumnus.  The views expressed in this posting are Mr. Lamm’s personal views and should not be attributed to Pfizer Inc. or to Gunster.

While nothing good has come out of the Jerry Sandusky sexual abuse scandal at Penn State, I am not aware of anyone who has focused on the lessons learned, particularly the link between corporate governance and the scandal.  However, in my view, anyone who professes to be interested in corporate governance (or compliance) should read the report prepared by former FBI Director Louis Freeh and give it some thought.  It is comprehensive, well organized, well written and thoughtful; in short, it is an important document, notwithstanding the sordid subject matter and the massive human tragedy involved.

Of course, Penn State is an educational institution rather than a publicly traded company, and the facts of the Sandusky scandal are arguably not likely to be replicated in a public company setting.  However, many of the issues outlined in the Freeh Report apply equally to public companies – or to almost any form of organization – as much as to educational institutions, including the following (just to cover a few):

  • Boards of directors (or trustees, governors, etc.) tend to be blamed when bad things happen, even if they are not given the information they should be given and have no way of knowing that information.  Penn State’s trustees were excoriated in the press and other media for not dealing with the matter early on, despite the fact that they hadn’t been informed about the matter, didn’t even know of its existence and had no reason to know of its existence.  It’s really no different in the corporate world; the media tend to ask “where was the board?” even when the board could not possibly have known what was going on.  For example, was it really the board’s responsibility to review specific derivative trades that resulted in losses to financial institutions – particularly when the managements of the institutions provided information about the trades and assured their boards that the risks were minimal? If – as most corporate practitioners agree – the proper function of the board is to oversee management (rather than to supplant it), why should the board be blamed?
  • Of course, good directors understand that they have an obligation to ask questions, including tough questions, to test what they are being told and to ferret out more than what they’re being told.  Reading the Freeh Report, one gets the impression that the trustees of Penn State may not have asked the tough questions – or, indeed, any questions – even after they became aware of the matter.
  • At the same time, good management teams understand that it’s important to bring bad news to the Board’s attention, and to do so promptly.  According to the Freeh Report, this did not happen at Penn State.  It is difficult to understand how the Penn State administration and staff could possibly have thought that the Board should not be informed of the accusations about Coach Sandusky – particularly as new accusations seemed to keep coming over the years.
  • Similarly, good management teams (including the communications and investor relations functions) also understand that the best way to deal with problems is to deal with them in a timely and straightforward manner, rather than to circle the wagons and pretend that they don’t exist or that they’re someone else’s fault.  Based on the Freeh Report, this did not happen at Penn State, where much time was spent blaming the media for all the negative attention being given to the institution and giving the appearance of valuing the institution (or, more specifically, its football franchise) more than doing the right thing.

From a governance perspective, one of the most interesting and important parts of the Freeh Report is a lengthy and very thoughtful set of recommendations – many of them specific and detailed – concerning the actions Penn State should take to improve its governance and compliance processes and to assure that this sort of thing does not happen again.  Simply stated, the recommendations are very, very good; they are similar to (and undoubtedly based on) corporate governance and compliance processes that many companies and other institutions have developed and implemented over the years.  As noted above, anyone interested in governance and/or compliance should read them along with the rest of the Report.