The Corporate Governance Lessons of Rutgers Basketball

Note: This is the debut installment of On Board, a regular column about boards of directors and corporate governance issues.

The NCAA Final Four may now be over, but college basketball continues to provide compelling theater—this time more in the boardroom than on the hardwood. The controversy surrounding Rutgers University’s basketball program has an important, if unusual, relevance to corporate governance—one that arises from the trend towards a more active and engaged board.

It’s a trend that suggests there are certain types of challenges—so inherently volatile in nature—that require complete board “ownership.” These are challenges, be they operational, compliance, strategic, or personnel, for which the organizational response can’t be delegated to executive management, as it would be in the ordinary course. For such a “Rutgers Event,” in any company the ball must be in the board’s hands for all four quarters of the game.

The full Rutgers facts won’t be clear for some time, if ever. But for governance purposes, the contours of the story are enough. Start with a prominent corporate executive in a high-profile position, who begins to exhibit eccentric behavior. This behavior comes to the attention of his direct report, who consults with the executive and more closely monitors his behavior. Later, tangible evidence of egregious behavior comes to the direct report’s attention, who shares it within the leadership team. The board is informed, but only certain members see the tangible evidence. The general counsel engages outside counsel to conduct an independent investigation of the circumstances. On the basis of the report, management decides against termination, but rather implements an employment suspension coupled with a significant financial penalty, and counseling. Subsequently, the tangible evidence becomes public, inciting an overwhelmingly negative public reaction against the organization. At this time, senior executive and board leadership review the tangible evidence. The corporate executive is terminated, and both the direct report and the general counsel resign. The outside counsel is publicly criticized by the board chair. A new, separate external review of the entire matter is commissioned.

This isn’t a “one -off” incident or some oddball scandal unique to the slippery world of collegiate sports. Rather, these are circumstances that could conceivably arise in the context of any major corporation at any time, especially one with a major public profile. And for that reason, the Rutgers controversy provides an excellent “teachable moment”; an opportunity for corporate counsel to pull out the whiteboard and design the “governance play” for when a similar controversy may arise.

The discussion might include the following:

1. Information Reporting

There should be clarity on the type of information the board needs from management—promptly—in order to perform its obligations. This should certainly include issues that keep management awake at night, as well as other issues so fundamental to the organization’s risk profile that they require immediate board attention. It is unlikely that any all-inclusive list can be prepared, so it is best to deal with major issue themes: i.e., major litigation, significant compliance developments, a law enforcement proceeding, a significant human resource crisis, and quality of service/care concerns. These are issues that are central to enterprise risk and that have the potential to create significant reputational harm as well (i.e., “shock value”).

2. Always Have the Video