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    Re the PA State University Response to Performance Audit Report

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    PA Dept of the Auditor General Ltr Re the PA State University Response to Performance Audit Report

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    Re the PA State University Response to Performance Audit Report

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    © All Rights Reserved
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    54 views24 pages

    PA Dept of The Auditor General LTR Re The PA State University Response To Performance Audit Report

    Uploaded by

    Jasmine Vaughn-Hall
    Re the PA State University Response to Performance Audit Report

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
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    PENNSTATE j == = May 25,2017 VIA FIRST CLASS MAIL. AND EMALL Pennsylvania Department of the Auditor General Bureau of Performance Audits 302 Finance Building Harrisburg, PA 17120 feternee Mos Re: The Pennsyivania State University Response to Performance Audit Report Attached is the University’s response to the Confidential Draft Report, dated May 2017, prepared by the Office of the Auditor General On behalf of the University, I would like to thank the Auditor General and staff for the ‘opportunity to provide the University’s perspective on the important issues identified in the Draft Report. Sincerely, Ce: Erie}. Barron Ira M, Lubert Mark H. Dambly Attachment ‘THE PENNSYLVANIA STATE UNIVERSITY RESPONSE TO THE OFFICE OF THE AUDITOR GENERAL'S DRAFT PERFORMANCE AUDIT REPORT MAY 25,2017 ‘The University appreciates this opportunity to provide a response to the performance audit findings made by Auditor General DePasguae in his May 2017 draft performance aut report (the "2017 Repo”) ‘Asa preamble tothe University’s specific responses tothe governance recommendations made by Aueltor General DePasquale in his May 2017 performance audit report (the “2017 Report), the University submits the following summary ofthe aetions taken by the University and its Board of Trustees (the “Board”) over the past several years with respect to governance reform, The University’s governance has undergone substantial change over the past six years, After the ‘most recent trusee elections, 33 ofthe Board of Trustees’ 36 voting members will have joined the Board after November 2011. The President is beginning his fourth yeae in office, with an ‘overwhelming majority ofthe members of his Senior leadership teams having been appointed after November 2011. And, in addition to these changes in the individuals holding senior leadership positions, the University’s Charter, Bylaws and Standing Orders ~ its principal ‘governing documents ~ have undergone very sigifieant reform. Within a few months afer the events of November 2011, the Board established a new Committee remance and Long-Range Planning (the “Governance Committee"), one of four new standing committees established as part of an ongoing process of reform and revitalization that ‘was voluntarily undertaken by the Board in furtherance ofits efTors to improve oversight and performance of one of America’s great universities. Almost immediatly, steps were undertaken by the Board to begin to respond to the critiques and criticisms of the University’s governance structure thatthe Board ~ through self-examination- and others, including the Office of the Auditor General in its November 2012 Special Report entitled “Recommendations for Governance Reform at The Pennsylvania State University after the Child Sex Abuse Seandat™ (the “Wagner Report”), had identified Ata special meeting held in January 2013, the Committee diseussed a matsix of more than 30 recommendations that it had already adopted or would soon adopt, with notations on how the change was ne would be mae, and the sone of the reeammendation, This document served as the Governance Committee's playbook as it analyzed the many ~ and sometimes conflicting — ‘recommendations from various sources "Asan organization governed by the Pennsyhania nonprofit corporation aw, the Board of Trustees is authorized to adopt changes tots Charter, Bylaws and standing Odes accordance with uch documents and appable law Some of the significant governance reforms that were adopted by the Board between November 2011 and May 2013 in its first phase of post-November 2011 governance reform efforts included the following: ‘+ A reduction ofthe previously existing 15 year term limit to 12 yen for trustees elected for tems beginning July 1, 2013; ‘+ The addition of four new standing committees, for & total of six, providing for greater ‘oversight and engagement by trustees; in adliion, new subcommittees were established ‘+ The expansion of committee membership to include faculty, staff and student representation on all but one committe; and ‘+ Key staff positions, including the Vice President ane! General Counsel and the Chiet Ethies and Compliance Officer, were specifically given a dual reporting line to the President (with respect to General Counsel), or the Senior Vice President for Finance and Business/ Treasurer (with respect tothe Chief Ethies and Compliance Office) for !udministrative purposes and tothe Board of Trustees for reporting purposes. These reporting relationships were modelled after the University's Director of Internal Audit, ‘who reports directly to the Board of Trustees through its Committee on Audit and Risk, ‘and to the Senior Vice President for Finance and Business! Treasurer, for administrative purposes, ‘Then, in May 2013, the Board of Trustes approved sweeping changes to its Charter, Bylaws and, Standing Orders. Among othe significant changes: ‘+ With then Governor Corbett’s suppor, the University's Charter was amended to make the President ofthe University and the Governor ex-officio non-voting members of the Board; ‘© The composition and method of selection ofthe Board's executive committee was chanwed; ‘+ The waiting period for an employee to become eligible to be a trustee was extended ftom thee years to five years, witha similar waiting period with respect to Commonvwealth “row officers” also added; ‘© A process for the removal ofa trustee inthe event ofa breach of his or her fiduciary duty to the University was added to the Bylaws; The quorum requirement was changed from 13 toa majority of the voting members then inoffice; All references that previously existed in the Bylaws with respect to consultation withthe President ofthe University on committee and subcommittee appointments and committee and subcommittee agendas were deleted; c ‘+ Anew provision was added fo impose a five year term limit on committee chairs, ith limited exceptions subject toa super-majority vote of the Board; and ‘+ The provision making the President the ex-officio Secretary of the Board was deleted; ‘withthe Secretary beeoming an elected postion, Alter the Board adopted these changes, it almost immediately commenced a process to review, ‘consider and analyze additional proposals for governance reform with respect to which less consensus existed among members of the Board. fer conducting a comprehensive search process, he Governance Committee engaged a nationally-recognized expert in corporate ‘governance who facilitated a thorough review and analysis ofthe University's governance, focusing primarily on the issues of size, composition, selection methodologies and commitloe structure As part ofthis analysis, over the course of almost a twelve-month period, ‘© The governance consultant interviewed trustees, faculty, students, staff, alumni and others affliated withthe University; ‘© In January 2014, the Board held a retreat, facilitated by the consultant, at which ‘governance issues were identified and discussed; The Governance Committee met to discuss the issues and requested that benchmarking bbe done on a peer group of 20 private and public universities identified by the Committee ‘+ Representatives ofthe Governance Cot legislative caucuses and representatives ofthe Governor; ‘+ The Governance Committee met to review the benchmarking data compiled by the consultant and held breakout sessions to allow for small group discussions on four topics: boar size, board composition, selection methodology and the role ofthe Governance ‘Committee in identifying the qualifications, experience, diversity, and skill sets that ‘would benefit the Board. The Commitie also identified an adaituonal 19 universities to be included inthe benchmarking, ‘© In July 2014, the Governance Committee heard from representatives from the student body, faculty and the Penn State Alumni Association with respect theit requests that the Board add trustees from their respective groups, The Governance Committee invited ‘members of the Committe to bring forward more formalized proposals for consideration ata special meeting tobe held in August ‘© Ataspecial meeting in August 2014, the Governance Committee heard from the chiet ‘counsel for senate appropriations on behalf of Senator John Yudichak regarding ‘governance reform. Governance Committee members put forth for discussion three Separate goverance reform proposals, each incorporating a variety of recommended ‘governance reforms. ‘+ ALits September 2014 meeting, the Governance Committee reviewed the proposals (one ‘of which was modified from the version presented atthe August meeting) and voted, seven to one, in favor of recommending to the Board a proposal for governance reform. ‘© Finally, in November 2014, after discussion and an amendment of the propos, the Board adopted the Governance Committee's proposal Among the significant changes approved by the Board in November 2014 were the following: * The Charterand Bylaws were amended to provide fora total of 38 members ofthe Board, 36 voting members and 2 ex-officio non-voting members, with the new members being a truste representing the student body, tobe elected by the Board of Trustees; a trustee representing the faculty ofthe University, to be elected by the Board of Trustees; an ex-oficto trustee representing the Penn State Alumni Association; and three at-large trustees to be elected by the Board of Trustees; ‘+ A new subcommittee on risk was created; ‘+ Changes were made tothe Board's Standing Orders with respect to the process for clecting “agricultural trustees” and processes for the nomination and election of the student trustee, academic trustee and at-large trustees were added. Subsequent to this second wave of significant changes fo the University’s organizational ‘documents, the Board approved a number of other changes and is inthe process of considering, further changes. A Committee on Compensation, which focuses on executive compensation issues, was created in January 2015 to increase the number of standing committees of the Board to seven, The Board approved the expansion of student and faculty membership on standing ‘committees from four to six and made changes to the Bylaws that redefined and clarified the role ‘of the Committee on Outreach, Development and Community Relations, to bette reflect the intended role and responsibilities of that Committe. As evidenced by the foregoing description the Charter, Bylaws and Standing Orders of the University are not static, nor have they been, and continue to evolve to meet the changing needs ‘of the institution, Additional changes, including proposed changes to “Expectations of ‘Membership” contained inthe Standing Onders, are currently under consideration ‘The University appreciates that the 2017 Report takes note of many ofthese governance reforms and submits the following responses to the Auditor General's recommendations with respect to University governance. 1. Reduce the membership of ts Board to 21 voting members. ‘As the 2017 Report appropriately notes, “[tIhere is no “one size fits all? for public universities Public university boards are elected or appointed ina variety of ways. ranging from having all members appointed by the Governor to having all members lected in a public election, with a number of other vatiations, “Apples to apples” ‘comparisons, taking into account applicable tate laws, the history and mission of different institutions, the size and scope of the institutions and other relevant factors, are difficult to make and not particulary illuminating. Penn State has had more than 30 voting trustees for overa century. Starting with an initial board of thirteen members when the University was established as the Farmers High Schoo! of Pennsylvania in 1855?, the size of the Board increased to 23 members in 1875 and then to 32 members in 1905. While the composition ofthe Board has evolved ‘over this period, the University’s unique board structure has been held up as a model by independent expers in university governance Since the University’s founding, the Board of Trustees has overseen enormous change and growth from a simple schoo for farmers toa $5 billion mult-campus, land-grant, public research university that educates students from around the world, and supports individuals and communities through integrated proprams of teaching, research, and While some may considera different board size to be “ideal, there is ample evidence thatthe size ofthe Board, in and of itself, s not and has not Been an impediment tothe success ofthe University in earying out is land-grant mission. Rather, i isthe University’s view thatthe level ofengagement, not the number, of tastes acting inthe 2500 2017 Report at pat ® Act of Febrory 25,1855 created the Farmers High Sthoo of Pennsylvania. The Act provided fo 13 Wastes, Ineuaing the following ex offic trusteos(Govena, Secretary of the Commoneath, Preset ofthe Ponnsyhanla tate Arctural Solty and te “pinpat” a the institution. The ater nine tees were Inia named in the Act with her successors tobe elected in dasss ofthe by “te votes ofthe executive mittee ofthe Pennsyania State Agricultural Sacey an the votes of three representatives duly chosen by each county apr society ia the Commonwealth which hall have been organised at eae thre months preceding the time of elec.” See; or eample, A Salt to Penn Stote’s Tastes, by Tom Ingram, President Emeritus af the Association of Governing oar of Unters ne Colleges, ubithed inthe Chron of Higher Edveaton, Ap 10,2017 University’s best interests, that is paramount and thatthe current structure provides for an appropriate level of oversight, at an appropriate level of detail, by the Board. As previously communicated tothe Auditor General’ staf, the University believes thatthe ‘enhanced committee and subcommitie structure that was putin place in early 2012 and subsequently amended provides a structure whereby all trustees ate able to engage with the University ata Level that enables them to fulfil their individual fiduciary duties tothe institution? The University notes that the number of voting members of Penn State's Board of ‘Trustees, thirty six, is identical to or fewer than the number of voting members ofthe boards of trustees of the Commonwealth’ other state-elated universities, the University ‘of Pittsburgh (36 voting board members), Temple University (36 voting board members) and Lincoln University (39 voting board members). ‘The University also notes that the ‘number of voting trustees at its fellow state-elated institations was established by the Pennsylvania letislature, adding weight to the conclusion that 36 voting trustees is not an ‘unreasonable or unwieldy number. 2. Permit “Business and industry * constituency groups 10 appoint their trustees. In 1875, the University's Charter was amended to provide for twelve trustees to be elected by a body of electors composed ofthe executive committee of the Peansylvania State Agricultural Society, the managers ofthe Franklin Institue of Pennsylvania, three representatives duly chosen by each county agricultural society in the Commonwealth Which shall have been organized atleast three months preceding the time of election and “three representatives duly chosen by each association, not exeseding one for each ‘county of the Commonwealth, which shall have for its principal object the promotion and ‘encouragement ofthe mining and manufécturing interests of the Commonvvealth and the mechanic and useful arts which, in like manner, shall have been organized at last three ‘months preceding the time of election.” ‘That lection process remained in place until 1951, when the University's Charter was further amended to make clear that two trusees would be elected each year by delegates of organized agricultural interests and two trustees would be elected each year by the delegates representing “organized engineering, mining, manufacturing and mechanical societies and associations.” That change effectively created the “agricultural trustee” nd “industrial trustee” designations ‘As reported tothe Roar of Trstees hy an ad hor commits af the Rod in Oetaber 2002, overtime the election process for “industrial trustees” had become dominated by a single entity, the Pennsylvania Manufacturers’ Association (“PMA”). The ad hoe committee reported to the Board tht in the 2002 eletion, only 75 delegates, representing only 33 of Pennsylvania's 67 couaties, had participated inthe election, It was especially * as note above prior to November 2011, the Board has thee standing committees and on subcommittee. The ‘Soard now has seven standing commitees and ve subcommittees. ‘noteworthy that only five delegates were from organizations other than PMA. By contrast, the agricultural trustee election has been and remains a robust process, ith 175 delegates from 85 different county agricultural societies and associations, representing 60 of Pennsylvania's 67 counties, participating inthe elections that were held earlier this ‘month, ‘The relative lack of interest and participation by “industil societies” other than PMA Jed the Board of Trustes to conclude in 2002 that changes were required and as result, the University’s governing documents were amended to provide for a nomination process of candidates for “business and industry trustees” from a broader base. (The terminology ‘was changed from “industry trustee” to “business and industry trustee in 2002 to reflect the Commonwealth’ evolving economy and to broaden the range ofthe breadth and depth of the eandidate pool.) ‘The changes made in 2002 provided for the ehair ofthe Board of Trustees to appoint a five-member Selection Group on Board Membership for Business and Industry Trustees, That selection group was to be composed of three seated or emerit trustees representing business and industry endeavors excluding those standing for reelection; and two trustees from among those elected by the alumni, or elected by agricultural associations, or appointed by the governor. The seleetion group was charged with the responsibilty to review the poo! of candidates and recommend two candidates each year for membership ‘on the Board of Trustees representing “business and industry” endeavors. THe names and

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