What public companies can learn from the Penn State debacle

July 16, 2012

This post was written by Joe Hassett, Senior Vice President

“We protect our reputations by doing the right thing, not by hiding our failings. Indeed, even amid discovery of error and wrongdoing, reputations are enhanced by acknowledging, dealing with them immediately and directly, and working to minimize their recurrence.”

— Edward Queen, Director of the D. Abbott Turner Program in Ethics and Servant Leadership at Emory University’s Center for Ethics in Atlanta

Wiser words have never been written in light of the Penn State disaster uncovered this week with the conclusion of former FBI Director Louis Freeh’s investigation. Eight months ago, the President of our agency, Greg Matusky, blogged about his admiration of Penn State. Not as an alumnus defending his alma mater (both Greg and I are University of Pennsylvania graduates), but because of how Penn State transformed his entire family by admitting his father, originally a coal miner, into the university after World War II, where he earned his diploma under the GI Bill.

At the time, Greg typed the most difficult phrase he ever penned when he said, “I am glad my father is not alive to see the Penn State mess.” He continued, “It’s all much more than public relations or damage control. It pains me to even mention those terms in this regard. No. The problems here are much, much deeper. Systemic.”

And now come the Louis Freeh’s findings, simply written, masterfully researched, and searing in their criticism and condemnation. At the heart, Freeh finds what I suspected. This has nothing to do with perception and everything to do with reality and governance — the responsibility leaders carry with them in the administration of their domains.

Point by point, the Freeh report reads like a game plan for institutional meltdown, and I believe it will stand as a seminal work on corporate governance to which organizations of all stripes will turn when grappling with issues that threaten their organizations.

As an agency that works closely with public companies, the Freeh report is particularly instructive for CEOs and other leaders who are the stewards of not only the goodwill of their customers, employees, and neighbors, but of shareholders as well. Here are five key takeaways from the report that are the most crucial to protecting the value of your franchise, brand, and image:

1. A weak, ineffectual board that rubber stamps decisions, and can be easily controlled and manipulated is a prescription for disaster. The Freeh report finds that board meetings with trustees were frequently scripted and that PSU President Graham Spanier quashed dissention and/or conflict. The board itself in a statement suggests that it exchanged its extreme confidence in Spanier for exercising due diligence regarding the true nature of the risk facing the institution. Corollary for public companies: Boards are the boss, not management. Boards need to identify risks and manage them according to established standards.

2. Governance is breached when short-term financial concerns trump the long-term sustainability of an organization. PSU sacrificed its long-term reputation in order to keep its big-time college football revenue spigot open. Graham Spanier himself recognized the long-term risk in an email that affirmed PSU Athletic Director Tim Curley’s decision to not report Jerry Sandusky’s alleged actions to the authorities. Clearly, the leadership at PSU was willing to risk the problem escalating into a much bigger issue over the long term in order to not disrupt gains that were certain in the short term from the football program.

3. Culture counts in value formation. The relentless focus on numbers over ethics, morals, and transparency can create a culture where leadership finds it acceptable to turn its back on suffering, young victims. The Freeh report refers liberally to a culture where winning and exceptional football performance were the only yardsticks, and they had to be protected at all costs. This culture was well-understood and institutionalized, leading to its own demise. Culture isn’t just touchy-feely. Rather, it is part and parcel to real valuation creation.

4. No one, regardless of their mystique, should be beyond scrutiny. We saw this recently with former JPMorgan employee, Bruno Iksil. Known as the “London whale,” he held so much allure that even CEO Jamie Diamon could not reign him in. Same with Joe Paterno. No one should be beyond the reach of effective governance.

5. The Queen’s Formula. The quote from Edward Queen above makes it clear. “We protect our reputations by doing the right thing, not by hiding our failings.” One of the most important and difficult lessons we as communicators teach our publicly traded clients is that credibility earned over many years can be destroyed in a matter of minutes. To bastardize a Jessie Jackson quote, “God is not done with any of us.” We all make mistakes and so too do the institutions we manage and oversee as a society. But as Edward Queen points out, we enhance our reputation by “acknowledging, dealing with them [our mistakes] immediately and directly, and working to minimize their recurrence.”

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