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What Companies & Commissioners Can Learn from the Penn State Sanctions

    Compliance, as it turns out, isn’t just for insurance and other financial services entities. So pay attention ... there’s something to be learned from the penalties the NCAA imposed on Penn State July 23.
 
    It is a cautionary tale of what can happen at any college – or any insurance company, for that matter:
    • when an organization abandons its culture of compliance;
    • when one area of the organization thinks it is more important than the institution itself;
    • when people put their own interests ahead of the greater good; and
    • when little thought is given to the impact actions may have on the reputational risk.
 
    That cautionary tale could easily have been played out anywhere at any one of a number of good organizations. Before all this, after all, Penn State was a recognized leader and one of a handful of educational institutions that had never had a major write-up of any kind.
 
    As former football player Paul Posluszny once told the Florida Times Union, “I stand in awe of what he was able to accomplish at Penn State.... Coach Paterno was not only one of the greatest coaches in any sport but he was a great man who did things the right way.”
 
    And yet, just a few bad decisions brought us to where we are today, and to this more recent observation from the same player: “The mistake he made, it goes against everything we were taught, and everything that he preached to us.”
 
    So yes ... mistakes like those made at Penn State can happen anywhere.
 
    Even, possibly, where you work.
 
 
The NCAA’s Unprecedented Sanctions
    The penalties are for the school’s transgressions related to Jerry Sandusky and his child abuse crimes. They’ll have a familiar ring to them, if you’ve ever read a market conduct exam settlement. There is, for example:
   • a monetary penalty – to the tune of $60 million, the equivalent of the average gross annual revenue of the football program, to be paid over five years;
    • an additional monetary penalty – $13 million – imposed by the Big 10 conference;
    • a probationary period – for five years;
    • a penalty-in-waiting – not specifically spelled out, but mentioned as being “more severe” – if the school doesn’t adhere to the settlement agreement, or if it violates NCAA rules in any sport during the next five years;
    • a cut in scholarships for the next four years; and
    • no post-season games for the next four years.
 
    The settlement agreement contains significant new compliance requirements for the college as well (we’ll discuss those later).
 
    Further, the NCAA will have the power to continue investigating and to impose further sanctions on former school officials at the conclusion of their pending criminal proceedings, and on the school, if there are further violations.
 
    Simply put, rather than penalize just the football program, the NCAA is holding the entire school community accountable for what happened.
 
    There isn’t a culture of compliance there now, but there will be soon, officials vowed.
 
    “Our sanctions address the cultural change necessary at Penn State,” NCAA president Mark Emmert said at a July 23 press conference announcing the penalties.     “Football will never again be placed ahead of educating, nurturing and protecting young people.”
 
    And therein lies the lesson for insurance compliance professionals – and others at their companies. Doing the right thing now officially trumps looking the other way.
 
    That should be the case whether addressing the egregious goings-on that occurred at Penn State, or reviewing any transgressions that might occur at an insurance company – be they unsuitable sales, the Death Master File mess (ICI, Feb. 6, 2012 and ICI, April 23, 2012), institutional decisions to put profits ahead of agent oversight, claims and complaints (ICI, Jan. 7, 2008), or other compliance failures.
 
   
Take-Aways for Insurance Regulators
    Interestingly, there are elements in the settlement that insurance commissioners have used for years when determining appropriate punishments.
 
    The NCAA could have imposed the so-called “death penalty” on Penn State, effectively shutting down its football program for a year or longer. That would be the equivalent of a state yanking the license of an insurance company or producer. But Emmert said that would have penalized student-athletes who aren’t even Penn State students.
 
    Besides, Emmert said, “Imposing the death penalty doesn’t address the cultural, systemic and leadership failures at Penn State.”
 
    Instead, the NCAA focused on the bigger goal. “Our approach demands that they become an exemplary NCAA member by eradicating the mindset that led to this tragedy.”
 
    The NCAA clearly wants the school to regain control of the institution, and have academics, rather than football, call the shots.
 
    In the world of insurance, that’s what regulators try to get companies to do when they catch one of them misbehaving – have a climate of compliance replace a climate of getting ahead at the expense of injury to consumers or the company’s reputation.
 
 
New Compliance Requirements
    To regain that institutional control, and maintain it, Penn State will have to meet a number of compliance requirements in the agreement. Collectively, they are intended to integrate athletics into the greater university community, rather than the other way around.
 
    The message here – and everyone should get this loud and clear – is that no single element of the enterprise should be bigger than the enterprise itself.
 
    (Are you listening, sales department?)
 
    For Penn State, there will be:
    • a new compliance officer for athletics;
    • a new compliance council composed of faculty, senior university administrators and the compliance officer for athletics;
    • new disclosure requirements;
    • a new hotline anyone can use to anonymously report violations;
    • annual certification by a named coach that his or her team complies with all relevant ethical, legal, compliance and university standards and obligations;
    • the same certification made for the athletics department as a whole; and
    • required annual ethics training for all student-athletes, and university employees associated with the athletics department.
 
    All of which should sound familiar to most regulatory and insurance compliance officials.
 
 
Paterno: Ignored Reputational Risk
    Finally, insurers and regulators should consider the lessons to be learned from former football head coach Joe Paterno who, as it turns out, made a number of decisions dating to 1998 without fully considering his reputational risk.
 
    An investigation the school commissioned, the Freeh Report, determined that Paterno and several other top school officials buried accusations, and what they knew, about Sandusky. When the details came to light – as they almost always do – JoPa’s reputation took a massive hit.
 
    As part of the sanctions, the NCAA vacated 14 years of Penn State football victories, making Joe Paterno no longer the most successful head football coach in NCAA history. That’s something he worked decades to achieve and it was a title he coveted. But with his legacy in tatters, he now is just 12th on the all-time list, a mere footnote in the history of coaching.
 
    His legacy, of course, was supposed to be about more than wins. Paterno had intended it to be about doing the right thing – winning with integrity, insisting on academic achievement and, as one commentator pointed out, “sending men into the world ready to succeed in life, not just in football.” And while Paterno did a lot of good in his life, the Freeh Report determined he didn’t come anywhere close to meeting his own high standards when it came to dealing with Sandusky.
 
    Taking away coaching wins is just the tip of things, of course.
 
    Penn State also unceremoniously removed his statue from in front of the football stadium, carrying it away with a tarp covering his head – one wag compared it to a criminal being led away with a coat over his head to hide his shame.
 
    Nike removed the Paterno name from the child development center on its Oregon headquarters campus.
 
    And State Farm has ended its sponsorship of Penn State football – no donations and no more ads during broadcasts or in the stadium.
 
    That’s quite a fall from grace ... and something to consider when considering what’s the right thing to do.
 
 
Copyright 2012 ProBusiness Publishing LLC All Rights Reserved
 
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Insurance Compliance Insight is a general circulation weekly publication focused on insurance compliance and regulatory issues. Nothing within it should be interpreted as offering investment advice, legal counsel or other professional services.
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