Let’s say that you are a director of a California corporation and you do not own a
crystal ball. Let’s say that you are thus concerned about being sued someday if, despite your
best efforts, you and your fellow board members make a decision that ends up hurting the
company1
The good news is that the California Legislature will not let anyone hold you liable for
an honest mistake of business judgment.
The bad news? There will not be bad news, as long as you comply with California’s
business judgment rule.2 Compliance with the rule takes more, however, than making honest,
1
Let’s also say you realize that, while
indemnification agreements, liability
insurance, and provisions in the
Articles of Incorporation can reduce
risk of liability, they will not eliminate
it. Indemnification agreements, after
all, are only as good as a company’s
balance sheet. Liability insurance
can be prohibitively expensive, comes
with coverage limits, and inevitably
contains exclusions. The Articles
cannot eliminate liability when a
director should have been aware of
risk of serious injury to company or
shareholders. See California
Corporations Code §317 and
§204(a)(10)(A)(4).
2
careful decisions based on the information in front of you. In some circumstances, you have a
duty to inquire beyond the information in front of you.
How will you recognize those circumstances? The performance of the Pennsylvania
State University’s Board of Trustees, during the 26 days after learning of the cover-up of the
Sandusky child abuse scandal, offers telling instruction.
California Corporations Code §309.
3
“Board of Trustees, Current
Membership,” Pennsylvania State
University, accessed 15 August 2011.
4
“Fall to Fall Enrollment Comparison,
2012 and 2011,” University Budget
Office, Pennsylvania State
University.
5
“Penn State Budget Primer,”
Pennsylvania State University.
The Stakes Are Raised
6
“This Is Penn State, Mission and
Character,” Pennsylvania State
University.
As November 2011 begins, the Penn State Board of Trustees includes seven company
presidents, six CEOs, four attorneys, three State cabinet members, two PhDs, and a venture
3
4
capitalist. University enrollment stands at approximately 96,000 students. The annual
operating budget is approximately $4.3 billion.5
The University’s mission statement declares that Penn State is—
“…a multicampus public research university that educates students from
Pennsylvania, the nation and the world, and improves the well being and health
of individuals and communities through integrated programs of teaching,
research, and service.…”6
The University’s Charter, Bylaws and Standing Orders charge the Board with “complete
responsibility for the government and welfare of the University and all the interests pertaining
thereto including students, faculty, staff and alumni.”7
On 5 November 2011, following a grand jury investigation into reports of sexual
assaults of children, the Pennsylvania Attorney General announces the filing of criminal
charges against three prominent members of the University community.8 The Attorney
General bases the charges on the grand jury’s findings, which are summarized in a
Presentment that is made available to the public and informs the Board of four sets of facts:
7
“Board of Trustees,” Pennsylvania
State University.
8
“Child sex charges filed against
Jerry Sandusky; two top Penn State
University officials charged with
perjury & failure to report suspected
child abuse,” Pennsylvania Attorney
General, 5 November 2011.
9
As defensive coordinator, Sandusky
was architect of the team’s national
championship-winning defensive
squads in 1982 and 1986. He was
once presumed successor to Joseph
Paterno as the team’s head coach.
Sandusky is a large enough man to
have played defensive end at Penn
State in the mid-1960s. The lures that
he used on his victims included
invitations to attend pre-season
football practices, regular season
football practices, regular season
football games, football coaches
meetings, pre-game banquets for the
team, the 1998 Outback Bowl in
Florida, and the 1999 Alamo Bowl in
Texas. He also guaranteed one
victim a roster spot as a walk-on
player on the Penn State football
team. “Partings, October 28,
1999/Emeritus Rank,” Pennsylvania
State University. Mark Viera, “A
Reputation Lies in Tatters,” New York
Times, 7 November 2011. “Jerry
Sandusky: From Rising Star to Most
Hated Man in America,” Athlon
Sports, 10 November 2011. Sara
Ganim, “Jerry Sandusky, former Penn
1.
Gerald Sandusky, Assistant Professor Emeritus of Physical Education
and former football team defensive coordinator, is charged with 21 felonies and 19
misdemeanors involving alleged sexual assaults of eight boys between 1994 and 2008.
According to the findings of the grand jury that recommended the charges, many of
Sandusky’s alleged assaults took place in University football facilities and at
University football events, both before and after his retirement in 1999.9
2.
University Senior Vice President Gary Schultz, whose job included
overseeing the University Police, admitted to the grand jury that he knew about a 1998
alleged assault by Sandusky, but claimed he never read the report about it.10
3.
The grand jury found that in 2000, a janitor witnessed a Sandusky
assault in the University Football Building. The janitor and his co-workers did not
report the incident because they feared they would lose their jobs.11
4.
Michael McQueary, an assistant football coach, testified that in 2001, he
saw Sandusky assaulting one of the victims in the University Football Building.
McQueary testified that he twice reported what he saw, first in a meeting with the
University’s Head Football Coach, Joseph Paterno, and later in a meeting with Senior
State football staffer, subject of grand
jury investigation,” The Patriot News,
31 March 2011. “Sandusky Grand
Jury Presentment,” Pennsylvania
Attorney General, November 2011.
“Police Criminal Complaint, 4
November 2011,” Commonwealth of
Pennsylvania v. Gerald Arthur
Sandusky. “Child sex charges filed
against Jerry Sandusky; two top Penn
State University officials charged with
perjury & failure to report suspected
child abuse,” Pennsylvania Attorney
General, 5 November 2011.
10
The allegation concerned a
mother’s complaint that Sandusky
hugged her 11-year-old son in a
locker room shower on campus. The
County District Attorney declined to
charge Sandusky with a crime in the
matter. As part of the investigation
report, a psychologist who
interviewed the victim wrote to
University Police, “My consultants
agree that the incidents meet all of
our definitions, based on experience
and education, of a likely pedophile’s
pattern of building trust and gradual
introduction of physical touch, within a
context of a ‘loving’, ‘special’
relationship.” “Sandusky Grand Jury
Presentment”, pp.19-20. “Incident
Report, Incident No. 41-98-1609,”
Department of University Safety, 4
May 1998. Alycia A. Chalmers,
Ph.D., Letter to Ronald Schreffler,
Criminal Investigation Unit, The
Pennsylvania State University, 7 May
1998. John Seasock, Renaissance
Vice President Schultz and Athletic Director Tim Curley.12 Pennsylvania law requires
that a person who, in the course of employment, suspects that a child is being abused
must report that suspicion to the person in charge of the institution, or his agent, who
then must report the suspicion to authorities. 13
The Head Football Coach testified that he reported to the Athletic Director that
Psychological Corporation Service
Evaluation for Centre County Children
and Youth Services, 8 May 1998.
Nate Schweber, “Investigation of
Sandusky in 1998 Raises Questions”,
New York Times, 9 November 2011.
Mark Viera, “Sandusky Investigation
Drew Psychologist’s Alert in 1998,
Report Says,” New York Times, 24
March 2012. “Sandusky Grand Jury
Presentment”, pp. 9-10.
11
McQueary had seen Sandusky “doing something of a sexual nature to a young boy.”
14
Yet the day after the grand jury announced its findings, the Head Football Coach
seemed to back off his testimony, issuing a statement that McQueary “…at no time
related to me the very specific actions contained in the grand jury report.” 15
The Athletic Director gave no testimony about what the Head Football Coach
reported to him. The Athletic Director testified that, in meeting with him and the
Senior Vice President, McQueary “[had not] reported …anything of a sexual nature” in
describing Sandusky’s conduct.16 The Athletic Director testified that he advised
President Graham Spanier of what McQueary told him, but he “…was not specific
about the language he used in reporting the … incident to Spanier,” and the grand jury
“Sandusky Grand Jury
Presentment”, pp. 21-23.
12
Sara Ganim, “Judge Changes Date
of Mike McQueary’s Jerry Sandusky
Allegation to 2001,” The Patriot News,
8 May 2012. McQueary is a former
Penn State player who, in 2011, was
the team’s wide receivers coach. He
originally testified that the incident he
witnessed occurred in 2002. He
subsequently amended his testimony
to state that the incident occurred in
2001. There appeared to be no
representative from the University
Counsel’s office at his meetings with
Head Football Coach, Schultz and
Athletic Director. “Sandusky Grand
Jury Presentment”, pp. 6-8.
13
23 Pa.C.S. § 6311 et seq. Federal
law—i.e., 20 U.S. Code § 1092(f) and
34 C.F.R 668.46—also imposes on
higher education institutions reporting
requirements related to abuse
allegations and suspicions. Based on
those requirements, the U. S.
findings contain no testimony indicating that the Athletic Director reported the incident
to the President as being sexual in nature.17
The Senior Vice President testified that he and the Athletic Director met with
McQueary, and met with the Head Football coach. He claimed that neither McQueary
nor the Head Football Coach reported Sandusky’s conduct as sexual in nature. 18
The President testified that Senior Vice President and the Athletic Director met
with him to discuss McQueary’s report. The President “denied that it was reported to
him as an incident that was sexual in nature…”19
Department of Education launched an
investigation of Penn State almost
immediately after the Pennsylvania
Attorney General released the
Sandusky Grand Jury Presentment.
See Nancy Paula Gifford, Area Case
Director, United States Department of
Education, Letter to Dr. Graham B.
Spanier, President, Pennsylvania
State University, 9 November 2011;
“U.S. Department of Education to
Investigate Penn State's Handling of
Sexual Misconduct Allegations,” U.S.
Department of Education Press
Release, 9 November 2011; “The
Handbook for Campus Safety and
Security Reporting,” U.S. Department
of Education, February 2011.
14
None of the five men—President, Senior Vice President, Athletic Director, Head
Football Coach, or McQueary—reported the 2001 matter to the Department of Public
Welfare or to police. Their grand jury testimony indicates that none of their meetings
included a representative of the University Counsel’s office. 20
Prior to the release of the Presentment, the Board knew virtually none of these facts.
The Board had asked the President back in April 2011 what he knew about the grand jury’s
investigation into Sandusky’s conduct. Even though the President had known since December
2010 about the grand jury subpoenas issued to the University, the Senior Vice President, the
“Sandusky Grand Jury
Presentment”, p. 7.
15
Adam Rittenberg and Brian
Bennett, “Joe Head Football Coach
Statement on Sandusky Case,”
ESPN.com, 6 November 2011.
16
According to the Athletic Director,
McQueary, in reporting the incident to
him and Schultz, said that
“‘inappropriate conduct’ or activity that
made [McQueary] ‘uncomfortable’”
had occurred between Sandusky and
a boy in a shower. The Athletic
Director described the reported
conduct as “horsing around.”
“Sandusky Grand Jury Presentment”,
p.8.
Athletic Director, and the Head Football Coach, and about the grand jury investigation of the
alleged Sandusky assaults in 1998 and 2001, he “specifically informed the [Board] that the
investigation had nothing to do with Penn State.”
21
17
“Sandusky Grand Jury
Presentment”, p.8.
18
“Sandusky Grand Jury
Presentment”, pp. 8-9.
19
“Sandusky Grand Jury
On 9 November 2011, four days after the release of the Presentment, (a) the Board fires Presentment”, pp.10-11.
the President and the Head Football Coach, (b) the Athletic Director, facing charges of lying to
20
“Sandusky Grand Jury
Presentment”, pp. 6-13.
the grand jury about the 2001 Sandusky assault and failing to report that suspected child sexual
21
assault, requests and is granted administrative leave, and (c) Senior Vice President, facing the
same charges as the Athletic Director, resigns. The Board fires the Head Football Coach
because, with respect to telling the Athletic Director about McQueary’s 2001 report but not
calling police, “…[H]is decision to do his minimum legal duty and not to do more to follow up
constituted a failure of leadership.” The Board fires the President because, “…[H]e failed to
meet his leadership responsibilities to the Board and took insufficient action after learning of a
2001 incident involving former assistant coach Jerry Sandusky and a young boy in a Penn
State facility. This failure of leadership included insufficiently informing the Board about his
knowledge of the 2001 incident…”
22
“Spanier, Schultz, Curley Grand
Jury Presentment,” Pennsylvania
Attorney General, November 2012,
pp. 27-30.
22
“Report of the Board of Trustees
concerning Nov. 9 Decisions,”
Pennsylvania State University, 12
March 2012. Pete Thamel and Mark
Viera, “Penn State Trustees Recount
Painful Decision to Fire Head Football
Coach,” New York Times, 18 January
2012. “Sandusky Grand Jury
Presentment”, pp. 12-13. Criminal
Docket, Docket Number MJ-12303CR-0000353-2011, Commonwealth of
Pennsylvania v. Timothy M. Curley, 7
November, 2011. Criminal Docket,
Docket Number MJ-12303-CR0000354-2011, Commonwealth of
Pennsylvania v. Gary Charles
Schultz, 7 November, 2011. “Penn
State Athletic Director Tim Curley, VP
Gary Schultz Step Down in Wake of
Jerry Sandusky Scandal,” The
Patriot-News, 7 November 2011. The
Grand Jury did not recommend a
On 9 November 2011, the Department of Education writes to notify the University that
the Department will conduct an extensive review of the University’s compliance with the
Clery Act, the federal law that requires colleges and universities in the United States to
maintain precise records and openly report criminal activity on campus.23
On 17 November 2011, the University receives a letter from the president of the
sporting association to which it belongs.24 Almost everyone knows that one of the
failure-to-report charge against either
Head Football Coach or McQueary
with respect to the 2001 incident,
presumably because each one
fulfilled his legal obligation by
reporting the incident to his
immediate supervisor. The Grand
Jury did not recommend a failure-toreport charge against The President
either, presumably because neither
Curley nor Schultz testified that they
told The President of an alleged
sexual assault.
23
association’s major functions is to impose on its member institutions highly publicized
penalties for violations of its rules.25
On 30 November 2011, the Board learns that a ninth Sandusky victim has filed the first
civil lawsuit for damages against the University.26
Nancy Paula Gifford, Area Case
Director, Department of Education,
Letter to President Graham Spanier,
Pennsylvania State University, 9
November 2011. See Note 13.
24
Mark A. Emmert, President, NCAA,
Letter to President Rodney Erickson,
Pennsylvania State University, 17
November 2011.
25
Questions of Inquiry
Confronted with this sequence of grim developments, did the Board have a duty during
November 2011 to inquire further into the case? The initial analysis is easy to make.
1,066 colleges and universities
belong to the sporting association to
which Penn State belongs. These
colleges and universities join the
association to facilitate the sporting
events that they play with each other.
The schools divide themselves into
different levels of competition based
on the amount of financial aid they
give their players. “About the
NCAA/Membership,” NCAA.org. The
schools define their association as
"an unincorporated not-for-profit
educational organization... through
On the one hand, they cannot be sure that Sandusky is guilty of any crime. In any
criminal case, grand jury findings represent only the prosecution side of the case. Perhaps
Sandusky and his defense attorneys will present evidence at trial that will acquit him of all 40
charges. Or perhaps the jury will decide, for reasons no one can foresee, that the prosecution’s
evidence is not sufficient to warrant convicting him of a crime.
On the other hand, however, in light of the volume of sworn grand jury testimony from
so many victims, plus the McQueary eyewitness account of one assault, plus the testimony
about the janitor’s eyewitness account of another assault, plus the civil plaintiff’s allegations
concerning another 100 assaults, plus the psychologist’s report, the Board can reasonably
conclude that Sandusky, even if somehow never convicted of any of the alleged crimes, had
for almost 20 years used the University as his lure and his lair in orchestrating a sick, dark
existence. That being so, two questions arise:
I.
“How did these assaults happen here?”
II.
“How can we make sure that nothing like these assaults ever happens here
again?”
which the colleges and universities of
the nation speak and act on athletic
matters at the national
level." NCAA and Subsidiaries,
Consolidated Financial Statements,
31 August 2012, p. 6, NCAA.org,
accessed 15 November 2013. See
also “Return of Organization Exempt
from Income Tax, 2010 Form 990,
National Collegiate Athletic
Association,” p.2. During the
previous ten years, the sporting
association has penalized more than
50 institutions. “Bad Apples or
More?” Doug Lederman, Inside
Higher Ed, 7 February 2011.
26
The victim claims that Sandusky
abused him—in the Penn State
football coaches lockers room, on a
trip to a bowl game, and elsewhere—
more than 100 times between 1992
and 1996. Cindy Boren, “Jerry
Sandusky Scandal: First Civil
Lawsuit Is Filed,” Washington Post,
30 November 2011.
27
Freeh, Sporkin & Sullivan was
hired to address the following issues:
“The alleged failure of Pennsylvania
State University personnel to respond
to, and report to the appropriate
authorities, the sexual abuse of
children by former University football
coach Gerald A. Sandusky …[and
the] circumstances under which such
abuse could occur in University
facilities or under the auspices of
University programs for youth. In
The publicity surrounding alleged assaults has damaged the University’s reputation and addition, [Freeh] was asked to
exposed it to liability. Other assaults, in the wake of the Presentment’s revelations, might
increase damage and liability exponentially. The business judgment rule would seem to
require making all inquiry necessary to ensure that the assaults, and the circumstances giving
rise to them, are at an end.
And indeed that inquiry seems to be what the Board has in mind. They hire the law
firm of Freeh Sporkin & Sullivan on 21 November 2011 to answer these two questions.27
Now—that inquiry being underway, do the facts before the Board warrant further
provide recommendations regarding
University governance, oversight, and
administrative policies and
procedures that will better enable the
University to prevent and more
effectively respond to incidents of
sexual abuse of minors in the future.”
Freeh Report, p. 8.
28
“Penn State University Libraries,
Penn State Presidents, Graham
Spanier,” Pennsylvania State
University.
“Board of Trustees, Membership
Selection,” Pennsylvania State
University.
29
inquiry? Consider the following particular nuances of those facts.
First, consider the power and stature of the four employees involved in the cover-up. If
any Board member had at any time between 1995 and 2011 made a list of the 20 most
powerful people at the University, the President, Senior Vice President, Athletic Director and
Head Football Coach would have been on it near the top. The President was also a Trustee.28
The Senior Vice President and the Athletic Director were two of just thirteen people who
reported to the President.29 The Head Football Coach might have been more powerful than
“The Pennsylvania State
University Administration
Organization,” Pennsylvania State
University, accessed 15 August 2011.
The chart shows that both
Intercollegiate Athletics and Finance
and Business/Treasurer report to the
President. Curley was Director of
Athletics and Schultz was Senior Vice
President, Finance and Business.
Sandusky Grand Jury Presentment,
pp. 7, 10.
30
"’If there was one good thing I was
able to do, I was able to say [to the
administrators], “Stay over there.”
Head Football Coach pushed his
hands away from his body -- an
illustrative shooing motion.’” David
Jones, “Former Penn State President
Graham Spanier Recalls Meeting with
anybody—the President and Athletic Director reportedly tried to fire him in 2004 and the
Head Football Coach more or less told them to mind their own business.30
Coach Joe Head Football Coach
Following the 2004 Season,” The
Patriot News, 23 November 2011.
31
Second, consider the disparity between the actions of these employees and the
institution’s purpose. Every day these four employees worked at the University, their job was
to use that power to help the University fulfill its mission as a school that “educates
students.”31
“This Is Penn State, Mission and
Character,” Pennsylvania State
University.
32
Alycia A. Chalmers, Ph.D., Letter to
Ronald Schreffler, p. 3.
33
See Note 22.
34
Yet in lying to the grand jury (either Senior Vice President and Athletic Director
together, or Head Football Coach), lying to the Board about the Penn State focus of the grand
jury investigation (President), equivocating about grand jury testimony (Head Football Coach),
thinking that their judgment about the 2001 Sandusky incident was superior to that of the
authorities (all four), not bothering to read the psychologist’s 1998 report about a “likely
From 1966 and 2011, Head
Football Coach coached 548 games
at Penn State and won 409 of them.
Florida State’s Bobby Bowden is
second on the list of all-time wins with
357. See www.sports-reference.com.
35
“NFF Withdraws Award that Was to
Be Given to Curley,” The Morning
Call, 9 November 2011.
36
32
pedophile” (Senior Vice President), and not consulting with University counsel about the
criminal laws applicable to the 2001 incident (all four), the four employees illustrated their
disregard for the University’s mission.
Perhaps none of the four would ever be convicted of a crime. That is irrelevant. The
University’s mission, to which their conduct must conform, is not, “Do what you like, as long
Jenna Johnson, “Penn State’s
Lesser-known Fallen Icons: Spanier,
Schultz and Curley,” The Washington
Post, 21 November 2011.
37
“President Graham B. Spanier,
Biography,” Pennsylvania State
University, 1 October 2011. The
Associated Press, “Fiesta Bowl Fined,
Remains in BCS,” NCAA.com, 11
May 2011. Dr. Graham Spanier, “The
Engaged University: Our Partnership
as it’s not criminal.” The Board proved this when they fired the Head Football Coach for his
with America,” Texas A&M University,
2000 Academic Convocation.
“decision [in 2001] to do his minimum legal duty and not to do more.”33 By enabling
38
Sandusky’s lure-and-lair use of the University, these four employees increased the odds that
39
the University would be enveloped in scandal and scrutiny that would suck tangible and
intangible resources from its efforts to educate students every day. These employees did not
use their power to deal with Sandusky in a way that was direct and legal, so the University
could stay focused on developing the talents of students, so those students could in turn
enhance the lives of others. In covering for Sandusky, these employees used their power for a
different aim.
Third, consider the magnitude of the liability this cover-up generated. By giving
Sandusky in 2001 the freedom to prey on a second decade’s worth of victims, these employees
probably pushed the University’s liability for Sandusky’s conduct into the nine-figure range.
Given that these employees exerted so much collective power over the University’s
course for so many years, given that their actions were so inconsistent with education, given
then they exposed the University to enormous liability, given that their actions enabled
Sandusky to act in ways that were, to say the least, inconsistent with education, and given that
See Note 36.
According to both Sports
Illustrated and ESPN, Head Football
Coach and The President each
reportedly earned more than $1
million in salary and benefits in 2011.
“Penn State Reveals Head Football
Coach’s Salary,” CNNSI.com, 27 May
2012.
Associated Press, “Penn State
Discloses Compensation,”
ESPN.com, 29 May 2012. Athletic
Director’s 2011 salary is not a matter
of public record, but Penn State
agreed to pay $396,000 per year to
his replacement, David M. Joyner.
“Memorandum of Understanding,”
The Pennsylvania State University
and David M. Joyner, Pennsylvania
State University, 17 November 2011.
Despite Head Football Coach’s
termination, his contract, amended in
August 2011, resulted in his estate
(Head Football Coach died 22
January 2012) being paid additional
sums for 2011, including a $3 million
career bonus, a $900,000 share of
2011 television and radio revenue,
forgiveness of $350,000 in loans, and
$476,000 in other payments. “Facts
About the University’s Payments to
the Estate and the Head Football
Coach Family and Coach Head
Football Coach’s Contract with the
University,” Pennsylvania State
the Board had no clue about the treacherous course on which these employees had set the
University, the prudent, reasonable Board member would ask more questions:
III.
“Why did these employees act in a way so inconsistent with educating
students?”
IV.
“Is there anything else going on at this University, as a result of their fifteen
University. Despite The President’s
termination, his contract also resulted
in him being paid additional sums for
2011, including more than $2.4 million
in severance payments and deferred
compensation. “Penn State
Announces Compensation for Former
President Spanier,” Pennsylvania
State University, 28 November 2012,
accessed 15 November 2013.
40
years of off-mission leadership, that we don’t realize and that, while perhaps not as evil as
Sandusky’s conduct, is inconsistent with education?”
One obvious point a prudent, reasonable Board member would recognize in response to
these questions is the extent to which the fortunes of the Head Football Coach, Athletic
Director and President—in terms of both money and fame—depended on Penn State football.
The Head Football Coach enjoyed an iconic reputation at the University and around the
country, thanks to having won more games as the University’s coach than any coach in the
history of football in college. He was head coach there for 45 years.34 The Athletic Director, a
former Penn State player, and a former assistant football coach, won the 2011 John L. Toner
Award, given to the athletic director who shows “outstanding dedication to college athletics
and particularly … football.”35 He was Athletic Director for 18 years.36 The President was
“Penn State Faculty Offer
Teachable Moments from Difficult
Events,” Pennsylvania State
University.
41
Also note that, according to the
Association of Governing Boards of
Universities and Colleges, of which
Penn State is a member, board
members are fiduciaries of a
university, and thus obligated to
“…advance the mission of the …
university… [and] act in a manner that
is consistent with the mission and
goals of the institution.” See
“Fiduciary Duties,” Association of
Governing Boards of Universities and
Colleges. Given even a moderate
amount of the quality admissions
officers across the country say they
want to see in all college applicants—
i.e., intellectual curiosity—one would
think that the football/mission
consistency questions would be on
the mind of the prudent, reasonable
Board member. Given the Board’s
fiduciary duty to the University, one
would think that the prudent,
past chairman of the Big Ten Conference Council of Presidents and Chancellors; past
chairman of the sporting association’s Division 1 Board of Directors; chaired the committee of
reasonable Board member realizes
that the Board is obligated to answer
these questions.
42
college presidents that oversee the Rose Bowl, Sugar Bowl, Orange Bowl and Fiesta Bowl, as
Transcript 396, “#1 Party School,”
www.thisamericanlife.org, 18
December 2009.
well as the National Championship Game; chairman of a task force that investigated financial
43
improprieties connected with the Fiesta Bowl; anchor of a television show on the Big Ten
Network about intercollegiate athletics entitled, “Expert Opinion with Graham Spanier”; and
firm in the belief that “football Saturdays” were “central to life in higher education.”37 He was
President for 16 years.38 Together, the three earned millions in compensation in 2011.39
Maybe these three panicked at the prospect of losing that money and fame, and
sacrificed education to preserve those rewards. Maybe they felt entitled to that money and
fame, and sacrificed education to preserve those rewards. Maybe concern for education had
died in these three, and they would preserve their pipeline to the fame and money of Penn
State football at any cost. These thoughts should not have been thoughts that a prudent,
reasonable Board member would have difficulty arriving at in November 2011. Under the
heading “Penn State faculty offer teachable moments from difficult events,” Penn State’s web
site had on 28 November 2011 profiled Professor Scott Kretchmar’s class, “Sport Science:
Sara Ganim, “Alleged Jerry
Sandusky Victim Leaves School
Because of Bullying, Counselor
Says,” The Patriot News, 20
November 2011.
44
Nate Schweber, “Penn State
Students Clash with Police in Unrest
after Announcement,” New York
Times, 10 November 2011.
45
Kurt Badenhausen, “The NFL’s
Most Valuable Teams,” Forbes, 7
September 2011. “The U. S.
Professional Sports Market &
Franchise Value Report 2012,” W. R.
Hambrecht + Co., p. 22.
46
Chris Isidore, “College Football’s
$1.1 Billion Profit,” Money, 29
December 2010. Cynthia A. Baldwin,
Vice President & General Counsel,
Pennsylvania State University, Letter
to Albert G. Horvath, Senior Vice
President for Finance &
Business/Treasurer, Pennsylvania
State University, 19 January 2011.
Stephen S. Dunham, Vice President
and General Counsel, Pennsylvania
State University, Letter to Rodney A.
Ethics in college athletics.” The profile offers the following quote from the Professor: “The
problem with college sports is the big business behind it. [The class discusses] the power
Erickson, Ph.D., President,
Pennsylvania State University, 9
January 2013.
47
behind sports, powerful coaches and the necessity to win, make money and get on TV, at any
cost.” 40
The other obvious point the prudent, reasonable Board member would recognize in
asking why they acted as they did is that the money and fame available to men through Penn
State football does not fall out of the sky.
If that University community did not buy the tickets, fill the stadium, and otherwise
demand, adulate and identify with Penn State football to the extent that they do, then Penn
State football would not enjoy the fame and generate the money that it does, the three might
not have become so attached to the fame and money of Penn State football, and their power
might not have been used to set the University on its current treacherous course.
“Penn State Football’s direct
economic impact stems from the
spending by Penn State Football for
capital improvements and goods and
services; the spending of Penn State
Football staff; and the spending of
out-of-area visitors who attend all
football related events and programs
and those who visit staff. In addition,
these direct, first-round expenditures,
received as income by businesses
and individuals in the state, recirculate through the economy in
successive rounds of re-spending.
The end result is the total impact of
Penn State Football’s presence and
its spending patterns.” “The
Economic Impact and Community
Benefit of Penn State Football on
Pennsylvania and Centre County
2009, Executive Report,”
Pennsylvania State University, pp. 56.
48
So the President, Athletic Director and Head Football Coach may have been
overwhelmed by football, so much so that they abandoned education, but if that is the case,
that would be so in part because the University community is overwhelmed by football.
Chris Isidore, “College Football’s
$1.1 Billion Profit,” Money, 29
December 2010. Cynthia A. Baldwin,
Vice President & General Counsel,
Pennsylvania State University, Letter
to Albert G. Horvath, Senior Vice
President for Finance &
Business/Treasurer, Pennsylvania
State University, 19 January
2011. Stephen S. Dunham, Vice
President and General Counsel,
In light of this connection between Penn State football, the cover-up, and the
community, and in light of the magnitude of the problems already uncovered in this case, and
in light of the Board’s lack of awareness of these problems, the prudent, reasonable Trustee
would recognize that the why-did-they-act-this-way question is composed of a set of more
nuanced questions:
V.
Did Penn State football foster the cover-up conduct of these men?
VI.
Is Penn State football fostering other conduct inconsistent with educating
students?
VII.
Is Penn State football likely to foster other conduct inconsistent with educating
students?
VIII.
Did we value football to an extent that it fostered this conduct?
IX.
Do we value football to an extent that it is fostering other conduct inconsistent
with educating students?
Pennsylvania State University, Letter
to Rodney A. Erickson, Ph.D.,
President, Pennsylvania State
University, 9 January 2013. “Fall to
Fall Enrollment Comparison, 2012
and 2011,” University Budget Office,
Pennsylvania State
University. “Roster, Penn State
Football,” Pennsylvania State
University. “Penn State President
Erickson Signs Employment
Contract,” Pennsylvania State
University, 10 January 2012.
49
The University’s football team
plays its games in Beaver Stadium
which, with a seating capacity of
106,572, ranks behind only Strahov
Stadium (Czech Republic, 220,000),
Rungnado May Day Stadium (North
Korea, 150,000), Salt Lake Stadium
(India, 120,000), and Michigan
Stadium (University of Michigan,
109,901) on the list of the largest
athletic stadiums in the world. See
“100,000+ Stadiums,”
Worldstadiums.com; “List of Stadiums
by Capacity,” Wikipedia.com, last
modified 15 November 2013.
50
X.
Do we value football to an extent that it is likely to foster other conduct
inconsistent with educating students?
Rodney A. Erickson was Penn
State’s Provost in 1999 when the
decision was made to grant Sandusky
emeritus status. Report of the Special
Investigative Counsel Regarding the
Actions of The Pennsylvania State
University Related to the Child Sexual
Abuse Committed by Gerald A.
Sandusky (“Freeh Report”), Freeh
The Board would not seem to have the luxury of taking the risk that the answer to any
of these questions might be “yes.” Public confidence that this Board possesses the acumen to
run an institution with 96,000 students and $4.3 billion budget would seem to be at stake. The
business judgment rule would seem to require the Board to make all inquiry necessary to
answer these questions, so as to eliminate the risk of further damage arising from the coverup.41
Sporkin & Sullivan, LLP, 12 July
2012, p. 60-61. See also, “The Freeh
Report,” New York Times, 12 July
2012.
51
“Penn State Dedicates Paterno
Library,” Pennsylvania State
University, 8 September 2000.
52
“Source: Dan Mullen tops wish
list,” ESPN.com, 29 November 2011.
53
The Road Not Travelled
Even a modest inquiry into football’s impact on the University community would have
revealed to the Board the following ten facts, all of which were available, as matters of public
or University record in November 2011.
“Minutes of Meeting, Board of
Trustees,” Pennsylvania State
University, 20 January 2012. “Penn
State President Erickson Signs
Employment Contract,” Pennsylvania
State University, 10 January 2012.
“Employment Agreement,” by and
between the Pennsylvania State
University and Rodney A. Erickson,
Ph.D., as of 10 November 2011.
“Employment Contract,” by and
between the Pennsylvania State
University and William O’Brien, 6
January 2012.
54
1.
When the University’s football team wins a game, citations and arrests related
to drinking and fighting in the University community go up.42
“Sandusky Guilty of Sexual Abuse
of 10 Young Boys,” New York Times,
23 June 2012. “Jerry Sandusky
Verdict: Complete Breakdown of
Charges,” The Patriot News, 22 June
2012.
55
See Report of the Special
Investigative Counsel Regarding the
Actions of The Pennsylvania State
University Related to the Child Sexual
2.
Reacting to the firing of the University’s football coach, students at a local high
school bullied one of Sandusky’s alleged victims with name-calling and threats that forced him
to leave the school in the middle of his senior year.43
Abuse Committed by Gerald A.
Sandusky (“Freeh Report”), Freeh
Sporkin & Sullivan, LLP, 12 July
2012. See also, “The Freeh Report,”
New York Times, 12 July 2012.
56
3.
Reacting to the firing of the Head Football Coach, thousands of University
students stormed the community’s downtown area, overturned a television news van, knocked
down lampposts, climbed on cars, shattered car windows, tipped trash cans and newspaper
vending machines, and threw rocks, cans of soda, fireworks and flares at police while
shouting, “We are Penn State.”44
4.
In 2010 the average profit per professional football franchise in the National
Football League was $30.6 million. Before tax.
45
By contrast, for the 2009-2010 school year,
the Penn State football team earned a profit of $50.4 million. After tax.46
5.
A report commissioned by the University estimates the football team’s
economic impact on the Commonwealth in 2009 exceeded $160 million.47
6.
In contrast to the University’s $50.4 million of annual untaxed football profits,
and the Commonwealth’s $160 million of annual economic impact, the players on the football
team earn no annual compensation.
“Freeh Report,” p.14-15, 16-17, 18.
57
Pete Thamel and Zach Schonbrun,
“NCAA Plans ‘Punitive Measures’
Against Penn State,” New York
Times, 22 July 2012. See, e.g., Sean
Gregory, “’Death Penalty’ Would Be
an Act of Mercy for Penn State
Football,” Time Magazine, 17 July
2012. Tim Rohan, “Scandal at Penn
State Poses Tough Choices for
NCAA,” New York Times, 14 July
2012.
58
“Press Conference Remarks,”
Executive Committee Chair, Oregon
State President Ed Ray, NCAA
President Mark Emmert, NCAA.org,
23 July 2012. “Binding Consent
Decree Imposed by the National
Collegiate Athletic Association and
Accepted by the Pennsylvania State
University,” NCAA.com, 23 July 2012.
59
“Binding Consent Decree Imposed
by the National Collegiate Athletic
Association and Accepted by the
Pennsylvania State University,”
NCAA.com, 23 July 2012.
60
See, e.g., Pete Thamel, “Sanctions
Decimate the Nittany Lions Now and
7.
In round numbers, there are 95,895 University students who are not on the
football team, and 105 who are. The budget for the University is about $4.3 billion, which
works out to about $44,000 for every student. The budget for the football operation is about
$20 million, which means that the University spends an extra $200,000 per player. All told,
then, the University spends $44,000 for non-football students and $244,000 for football
61
Don Van Natta Jr., “Penn State
Faced 4-year Death Penalty,”
ESPN.com, 26 July 2012.
62
Zach Helfand, “Penn State Coach
Says ‘It’s Time to Punch Back’,” New
York Times, 26 July 2012.
63
players. 48
8.
for Years to Come,” New York Times,
24 July 2012.
To house the football team’s home games, the Board built the fifth-largest
Don Van Natta Jr., “Penn State
Trustees File Appeal,” ESPN.com,
updated 7 August 2012.
64
stadium in the world.
9.
49
Like many universities, Penn State reserves emeritus status for full professors
and other faculty and administrators of note. The group eligible for the distinction does not
typically include football coaches or assistant professors. Yet in 1999, when Sandusky
proposed, as part of his retirement negotiation, that he be accorded emeritus status, the
President agreed to the proposal, and the University’s provost, now its new President, granted
Sandusky emeritus status.50
“Statement by a Group of Past
Chairs of the Pennsylvania State
University Faculty Senate Regarding
the Freeh Report, the NCAA Consent
Decree, and Their Academic
Implications,” 28 August 2012,
accessed 15 September 2012 and 15
November 2013.
65
“State of Pennsylvania to file
lawsuit against NCAA,” Pete Thamel,
CNNSI.com, 1 January 2013.
“Governor Sues Over Penalties to
Penn State,” New York Times, 2
January 2013.
66
“University issues statement
regarding state’s lawsuit against
NCAA,” Pennsylvania State
University, 2 January 2013.
67
“Governor’s Lawsuit Against
N.C.A.A. Over Penn State Penalties
10.
In 2000, with an institutional history that extended back 140 years, in the state
where the Second Continental Congress produced the Declaration of Independence, the
University named its new main library after the Head Football Coach.
51
In sum, a modest November 2011 inquiry into the connection between football and the
University community would have illustrated to the Board a connection characterized by
overzealous devotion, colossal amounts of cash, special treatment, and questionable decisions by
the Board.
One would think that a prudent, reasonable Board member would recognize in this mix
the potential for further damage to reputation and further exposure to liability. Couple these
dysfunctions with the grand jury’s findings, which had just presented the Board with a vivid
lesson in how much about their own University they do not know or control. Add the
Sandusky allegations, the apparent cover-up, the reputational damage, and the looming
liability. In the firestorm of these forces, one would think a prudent, reasonable Board would
recognize, “There is too much here that we do not know and cannot predict.”
The Board could have then re-declared the University’s educational mission and
announced an inquiry that added the football/mission consistency questions to the Freeh
Dismissed,” New York Times, 6 June
2013.
68
Constitution Article 4.1.2(d) & (e)
are the provisions where the
association says the 1,066 member
schools find their authority to act in
this case. Those provisions give the
association’s Executive Committee,
which includes a president or
chancellor from each of 16 different
universities, authority to “identify core
issues that affect the association as a
whole,” and “act on behalf of the
association by adopting and
implementing policies to resolve core
issues.” See “NCAA Authority to Act,”
NCAA.org, 23 July 2012.
Mounting an argument that
these provisions give the sporting
association’s 1,066 schools no
authority whatsoever over this case
would be easy:
A.
Sandusky’s crimes
and their cover-up by Spanier,
Schultz, Curley and Head Football
Coach do not—unlike, say,
concussions suffered playing
football—present a core issue that
affects the sporting association as a
whole. They are more properly
characterized as a once-in-a-lifetime
tragedy that (1) affects the victims,
their families and friends, Sandusky,
Spanier, Schultz, Head Football
Coach and Curley, and the University
community, but (2) does not affect
anyone at the University of Georgia,
Texas A&M, or USC. Because the
crimes and cover-up present no core
Report questions. It could have suspended football until the completion of the inquiry, on the
eminently reasonable theory that, while determining whether football negatively impacts the
community, it would be irresponsible to let football negatively impact the community.
These steps might have helped stem the flow of the negative narrative about the
University, and started to lead the school out of the firestorm. One would think that a prudent,
reasonable Board member would see the need for these steps, and the intelligence of taking
them, in the wake of even a modest inquiry into football’s impact on the University
community.
The Costs of Confusion
The Board does not, in November 2011 or at anytime thereafter, initiate any inquiry
beyond the investigation commissioned from Freeh Sporkin and Sullivan. Football
continues.52 A number of events ensue.
On 20 January 2012, the University’s new President, Rodney Erickson, addresses the
Board. At the outset of his remarks the President announces to the Board that he and his staff
issue, they are not a core issue to
“resolve,” and are thus not grounds
under Constitution Article 4.1.2(d)&(e)
for the sporting association to punish
Penn State.
B.
If the sporting
association’s Executive Committee,
acting on behalf of the 1,066 member
schools, arranges a punishment for
Penn State, it is not “adopting and
implementing policies” to resolve a
core issue. A punishment impacts a
single school, whereas a policy
impacts a range of schools. Since
Constitution Article 4.1.2(d)&(e)
authorizes only policies, and not
punishment that affects only a single
school, the sporting association’s
Executive Committee can take no
action under this provision to punish
Penn State.
C.
The association’s
Constitution and Bylaws address only
conduct that takes place within the
bounds of activities in sporting events
between universities. In this case,
the conduct of Sandusky, Spanier,
Schultz, Curley and Head Football
Coach was outside the scope of their
activities in sporting events between
universities. Accordingly, none of the
provisions of the sporting
association’s Constitution and Bylaws
are relevant to this case.
If the University had to
challenge the sporting association’s
authority in court, would it have
prevailed? The arguments set forth
above would not guarantee a win, but
they would guarantee a fight. And if
have hired a new head football coach. The Board is paying the new leader of their
institution—with its 96,000 students, $4.3 billion budget, almost-20-year-long football-based
child sexual abuse scandal, and 10-year long football-based child sexual abuse cover-up—an
annual salary of $515,000. This is half of what the Board was paying the man they just fired
from that job. By contrast, the contract for the new head football coach calls for an annual
salary of $2.3 million.53 This is more than twice what they were paying the man they just fired
trustees from each of the sporting
association’s other 1,065 member
schools were made to understand
that, if Penn State prevailed in its
lawsuit, it would seek damages from
all 1,065 endowments, many of those
trustees might have lost their appetite
for that fight.
69
“A look at Big Ten coaches’
salaries,” Brian Bennett, ESPN.com,
17 November 2011.
70
“A look at Big Ten coaches’
salaries,” Brian Bennett, ESPN.com,
17 November 2011.
from that job.
On 22 June 2012, Sandusky is convicted on 45 of 48 charges of abuse.54
On 12 July 2012, Freeh, Sporkin & Sullivan issue their 267-page Report.55 The
Report’s executive summary states, “Some coaches, administrators and football program staff
members ignored the red flags of Sandusky’s behaviors and no one warned the public about
him.” The executive summary also states that the investigation revealed “…a culture of
reverence for the football program that is ingrained at all levels of the campus community,”
and concludes one page later with this paragraph:
“One of the most challenging tasks confronting the Penn State community is
transforming the culture that permitted Sandusky’s behavior, as illustrated
throughout this report, and which directly contributed to the failure of Penn
State’s most powerful leaders to adequately report and respond to the actions of
a serial sexual predator. It is up to the entire University community—students,
faculty, staff, alumni, the Board, and the administration—to undertake a through
and honest review of its culture. [emphasis added] The current administration
and Board of Trustees should task the University community, including
students, faculty, staff, alumni, and peers from similar institutions and outside
experts in ethics and communication, to conduct such a review. The findings
from such a review may well demand further changes.” [emphasis added] 56
By calling for this “thorough and honest” review of University culture, the executive
summary seems to drive the trustees toward examining the “culture of reverence for the
football program that is ingrained at all levels of the campus community,” and considering
ways to end that reverence. The executive summary thus seems to drive the Board straight
toward addressing the football/mission consistency questions that could have been recognized
by any inquisitive Board member back in November 2011. The Board takes no steps toward
addressing the questions.
On 22 July 2012, after weeks of high-visibility speculation in the news media, the
sporting association announces that it will impose punishments on the University.57
On 23 July 2012, the sporting association announces that one of the punishments it has
assessed, and the University has accepted, is a $60 million fine. 58
On 23 July 2012, the sporting association also announces additional punishments that
the University has accepted: a reduction in football scholarships for four years; a four-year
ban from all bowl games; a five-year period of probation and monitoring by the
association. In addition, all 111 University football victories from 1998 to 2011 are vacated—
i.e., they are erased from the record books, as if the games never took place.59 Reporting on
the punishments brims with hyperbole and dominates the news media.60
On 25 July 2012, one Board member, reacting to the association’s punishments, tells
an ESPN reporter, “They’ve destroyed the school, as far as I’m concerned.” 61
On 26 July 2012, the new Head Football Coach, commenting to reporters, says, “Penn
State has taken a lot of punches over the last six months and it’s time to punch back.”62
On 7 August 2012, another Board member, acting apart from the Board, hires a law
firm to notify the sporting association that he plans to appeal the agreement on the
punishments between the association and the University. Three fellow Board members
reportedly agree to join his appeal.63
On 28 August 2012, a group of 30 past Chairs of Penn State’s Faculty Senate, issue a
statement rejecting the “sweeping and unsupported generalizations” with which the Freeh
Report portrays University culture, the sporting association’s “deeply unjust” penalties, and
the “precipitous and heavy-handed fiat” by which the association imposes policy.64
On 1 January 2013, the Governor, who is also an ex officio University Board
member, announces that he is directing the Commonwealth of Pennsylvania to sue the
association in federal court over the $60 million fine and other punishments it imposed on the
University because of the Sandusky assault cover-up. Apparently bitter about the University
being banned from the Rose Bowl for four years as part of the punishments, the Governors
leaks news of the lawsuit in the middle of the Rose Bowl.65 The University posts a statement
on its web site noting that it has nothing to do with the lawsuit.66 The court needs little time to
assess the Governor’s case: it dismisses the lawsuit as nothing but a “Hail Mary pass.”67
In sum: the Board’s failure to expand its inquiry to include the football/mission
consistency questions, suspend football, and re-declare the University’s commitment to its
educational mission reverberates through 2012. The failure unwittingly keeps events spinning
out of control and keeps the University in the spotlight. It results in further financial damage
to the University. It also costs the University in less measurable ways. The very inquiry that
the business judgment rule calls for Board to make in November 2011 is the inquiry that the
Board’s independent investigator calls for them to make in July 2012. The Board does not
commence the inquiry at either point.
The Board’s message through 2012 is not, “We run an educational institution here.”
The ever-deepening impression is that football makes the community—Board members
included—come a bit unglued.
Stumbling into Liability
Are Board members liable for the damage that their lack of further inquiry brought
onto the University’s finances and reputation in 2012? While a complete analysis of this
question is beyond the scope of this article, three points merit mention.
First, one could argue that the Freeh Report shows that need for further inquiry was
obvious to everyone but the Board, and that, had the Board suspended football and inquired
further into the football/mission consistency questions on its own, the association would have
had no need to impose the $60 million fine. This argument would not guarantee a judgment
against the Board for the fine, but Board members would not want to see it pointed at them.
At a minimum, their lack of further inquiry would diminish the chance that their defense could
include any reliance on the business judgment rule.
Second, one could argue that the Board’s lack of inquiry in into the football/mission
consistency questions included a lack of inquiry into the appropriateness of the association’s
17 November 2011 letter to the new President. The Board could have argued quite
persuasively that the association lacked authority to ask questions about the cover-up and to
impose punishments. The Board apparently never looked into making that argument,
however, either when the letter arrived in November 2011 or when the fine was imposed in
July 2012.68
Finally, while the Board’s liability for the fine can be debated, its responsibility for the
damage to the University’s reputation is more clear-cut. Rather than deciding in November
2011 to protect that reputation—or what was left of it—at all costs, the Board unwittingly set
the stage for that reputation to sustain further damage throughout 2012. For each member of
the Board, erasing the stigma of association with such poor Board performance will take more
than just revising a resume.
A Simple Story
The story of the Penn State Board in November 2011 is the story of a failure of
intellectual curiosity. Having arrived at a pivotal moment in an institution’s life, the Board
neglects its duty to inquire into material facts. The Board instead aims the institution down a
future-crashing road, thanks principally to long-standing biases that distort the reality of the
institution’s problems.
The Board had before it during that month the opportunity to retake control of an
exceedingly negative narrative concerning the institution. Raptured by a key employee (the
Head Football Coach) and a popular program (football), the Board could not muster the
business judgment to seize that opportunity.
How can you make sure that biases do not warp your ability to recognize when your
company’s future is on the line and when facts need further investigation? How can you avoid
the close encounters with liability and the reputation-crushing stewardship that now mark the
University’s Board members? Two options.
One is to write, in the simplest terms, the story of your company, its problem or
opportunity, and your proposed action.
In Penn State’s case, the story might have gone something like this:
1.
We run an educational institution.
2.
Allegedly criminal conduct and major liability have arisen with connections to
one of the institution’s non-educational programs.
3.
Some of the allegedly criminal conduct has lasted almost 20 years, a cover-up
of that conduct has been in place for at least 10 years, and the Board had no
inkling of either.
4.
Public outcry against the institution, and damage to the institution’s reputation,
have been enormous.
5.
Outsized rewards—both tangible and intangible—may have created incentives
for program officers to cover up the allegedly criminal conduct and risk further
liability.
6.
Further problems would cause even more outcry and damage.
7.
We do not know what other problems may be uncovered in the program.
8.
We propose to continue the program.
Is further inquiry warranted? In light of the magnitude and duration of the alleged
crimes, the Board’s years-long ignorance of the matter, the Board’s uncertainty about this
program’s possible other problems, and the disparity between the institution’s educational
purpose and the non-educational, problematic program, declining to inquire further into the
program’s operation seems unreasonable and irresponsible. So, one could argue, does
deciding not to suspend its operation during that inquiry.
The other option is to create a simple, Harper’s Index-type spreadsheet for the
institution, its problem or opportunity, and your proposed action. In Penn State’s case the
spreadsheet might have looked like this:
Institution’s annual operating budget:
Program annual budget:
Revenue:
Expenses:
Income:
Liability connected to Program (estimated)
Liability (9 victims x $3-7 million)
US Department of Education matter
Sporting association matter
Fees (attorney, investigator, PR)
Unknown
Total (estimated)
$4.3 billion
$70 million
$20 million
$50 million
$27-63 million
$5-10 million
$5-10 million
$10-30 million
$0-50 million
$47-163 million
Former President Salary
$1 million +
New President Salary
$515,000
Former Program Administrator Salary
$1 million +
New Program Administrator Salary (est.) i
$1.9 million
Average Salary, Key Program Contractors
$0
The numbers illustrate that the President’s salary is being halved, while the program
administrator’s salary will likely double. The numbers illustrate that the program
administrator’s salary will be four times that of the President and consume 20% of the
program’s expenses. The disparity between the program’s income and the salary of its key
contractors is unnatural.
Is further inquiry warranted? In light of the oversized incentives set up by these
disparities, the magnitude of the liability that the institution already confronts, and the relative
insignificance of the program compared to the operation of the institution, declining to inquire
further into the program’s operation seems unreasonable and irresponsible. So, one could
argue, does deciding not to suspend its operation during that inquiry.
At any moment when your company’s future is on the line, the practice of committing
your story and your spreadsheet to paper is more valuable than just talking about what to do.
Writing forces deeper reflection and finer expression. It helps you work past bias and move
into the realm of intellectual curiosity. It helps you form inconvenient questions. Forming and
answering those questions is the sort of activity that will gain you the protection you seek from
California’s business judgment rule.