Filed Under:Agent Broker, Commercial Business

The Second Mile Foundation: 4 Possible Scenarios, 5 Risk Management Lessons

During press coverage of the ongoing and unfolding Penn State scandal, reporters have also written extensively about The Second Mile Foundation.

The Second Mile, a nonprofit organization serving the youth of Pennsylvania, has been pulled into the scandal because Jerry Sandusky, the former Penn State defensive coordinator, set up the organization. As of Dec. 8, all 10 of Sandusky’s accusers reported meeting him at The Second Mile.

Even as The Second Mile prepares to cease operations, a teaching moment should not be allowed to pass.

Although it’s unclear how this tragedy will end, we can speculate on a few of the potential outcomes:

  1. The damage control work done by the foundation through the professional advice received limits the damage and the impact of the events, avoiding all lawsuits and allowing the foundation to discontinue operations in an orderly manner.
  2. The trustees and the foundation are sued by a number of plaintiffs and their families for the damage and harm inflicted. The foundation’s risk management program has adequate insurance limits and appropriate terms and conditions to trigger coverage and fund the potential future settlement of all claims.
  3. The more than 65 trustees and executives who support the foundation as board members are sued as a group and individually for their service to the foundation. Either the terms and conditions exclude coverage or the limit available in the D&O liability policy is inadequate to protect the directors, requiring the foundation to sell assets to satisfy claims. With a little less than $9 million in assets (according to the foundation’s 2010 annual report), this asset sale may limit the foundation’s ability to satisfy all claims.
  4. The potential worst-case scenario from a director’s standpoint is the insurance policy excludes coverage for the claim allegations. After not being satisfied with the proceeds from the sale of assets, the plaintiffs then sue the directors for their personal financial assets to satisfy the claim. This is not  unprecedented: Ask the Enron directors.

This is a chilling reminder to well-meaning and well-intentioned members of our business community and the non-profit sector in particular to review their coverage before an event. Boards should exercise a healthy “what if” mindset, developing scenarios to deepen awareness of vulnerabilities and support structures within the organization. 

Whatever the outcome, social service organizations will be able to learn on The Second Mile’s dime. The greatest lesson from this crisis is that it should have been stopped long before it spun out of control.

Following are risk management principles to help make this a reality for social services organizations:

  1. Since the actions of one individual can bring down a social services organization, no one should be placed above the interests of the organization.  Checks and balances must be put into place, even (especially!) for a charismatic leader.
  2. Individuals under the care or guidance of social service organizations must be encouraged to report any violations. Clear guidelines must be published and disseminated. An easy-to-follow communications mechanism must be established.
  3. When it comes to putting a stop to a potentially ruinous situation, now is always better than later. And the later it gets, the worse it gets.
  4. Whenever a situation does not look right, all roads should lead to counsel. In the case of Penn State, the attorney has said it would have been his sworn duty to go to law enforcement had he been alerted to any wrongdoing.
  5. Moral authority helps to clarify all situations. Doing what is right is always the right decision. Upon reflection, it is also often the easiest decision.

Executives and senior staff at social services organizations must select insurance support to maximize coverage and knowledge against a gamut of exposures. And they must do so even when controls have been set in place. As this event has again proven, humans are flawed creatures and their actions and inaction can lead to terrible consequences.

The greatest risk may be to not recognize this sobering fact.

 

 

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