Fiesta Bowl’s Board Fumbled Oversight

May 1, 2011       Mark Hrywna      

A $1,200 visit to a strip club. More than $33,000 for a 50th birthday party at Pebble Beach, Calif., and some $13,000 to send six employees to an assistant’s wedding. Those were just some of the reimbursed expenditures that apparently were enough to put the word “former” in front of the title Fiesta Bowl President and CEO for the now deposed John Junker.

Then there were the allegations that almost a dozen employees were reimbursed for political campaign contributions. Now it seems like everyone’s looking into it, creating a task force or convening a panel.¬† Members of the board of directors of the Fiesta Bowl, which is made up of four nonprofit entities, voted unanimously to fire Junker for his role in allegedly improper and inappropriate activities documented in a report released in late March.

Junker was placed on administrative leave Feb. 14 after failing to comply with two written directives by the Fiesta Bowl board to cooperate with the Counsel to the Special Committee’s five-month investigation. The 276-page report from the committee uncovered an alleged scheme to reimburse at least $46,539 in improper campaign contributions, and also examined the previous investigation by former Arizona Attorney General Grant Woods, excessive executive compensation and inappropriate gifts and expenditures.

The Fiesta Bowl was established in 1971 and has become one of the most important games during the college football bowl season. The four Scottsdale, Ariz.-based nonprofits that make up the Fiesta Bowl are: The Arizona Sports Foundation (ASF); Fiesta Events, Inc. (FEI); Valley of the Sun Bowl Foundation (VSF), and the Arizona College Football Championship Foundation (ACFCF). Bowl games are supported by 44 employees and thousands of volunteers.

The Fiesta Bowl’s board of directors initiated an investigation this past fall, hiring the Minneapolis, Minn., law firm of Robins, Kaplan, Miller & Ciresi. An initial review following 2009 reports by the Arizona Republic about the bonuses allegedly being tied to campaign contributions, was done by Woods, who found “no credible evidence” of anything illegal or unethical. The new investigation, however, questions his review because of potential conflicts of interest and attorney-client privilege.

The Tostitos Fiesta Bowl, played annually in Glendale, Ariz., is part of a five-game Bowl Championship Series (BCS) to help determine college football’s national champion. In the wake of the report, the BCS appointed its own task force to evaluate the Fiesta Bowl’s findings and recommendations and asked that the bowl “demonstrate why it should remain a BCS bowl,” something the task force will evaluate, “along with the full slate of reforms instituted by the bowl.” The BCS promised to closely monitor the situation going forward, should the Fiesta Bowl remain part of the BCS.

Arizona Gov. Jan Brewer released a statement indicating her plans to convene “a panel of some of the state’s leading figures in business and athletics” to offer “counsel and a roadmap” so the bowl can restore its reputation and emerge “a stronger, more accountable institution.”

While many of the infractions fall under state statutes, Citizens for Responsibility and Ethics in Washington (CREW) filed a complaint with The Federal Election Commission (FEC) to launch an investigation into the Fiesta Bowl and the campaign contribution allegations.

“Clearly, the board placed too much trust in a single executive without proper oversight, and has already acted to put in place new bylaws, policies, and controls that will ensure such activities do not happen again,” Duane Woods, board chairman, said via a statement. “We also plan to share the lessons learned from this experience with other bowls around the country and the BCS and seek further input on our reforms. We are committed to being a model nonprofit organization,” according to the statement.

“The Fiesta Bowl is legally bound and highly motivated to recover money that was misappropriated and will be examining all of our options to do so√Čand will continue its full cooperation with the Arizona Attorney General’s investigation,” said Woods, who is not related to Grant Woods.

Judging by the report, members of the Fiesta Bowl board appeared to be merely attending meetings and not providing much in the way oversight, according to Deborah Davidson, vice president, governance research and publications, for BoardSource, a Washington, D.C.-based nonprofit that promotes good governance. “The whole thing is just so shocking and just gross. It’s hard to know here to begin,” she said. “No question, there were gigantic governance issues. The oversight was ridiculous,” said Davidson, adding that its previous auditing firm dropped the ball as well.

Board members appear to have a “complete lack of knowledge of their responsibilities,” said Davidson, with some claiming they weren’t told or didn’t get enough information from staff. As board members, “You don’t accept that, you’re supposed to be the CEO’s boss,” she said, describing the situation as “truly an astronomical lack of oversight and an acceptance of the status quo.”

Overall, a board should be looking at how it functions and interacts with its chief executive officer, said Willard “Bill” Boyd of Nyemaster Goode, P.C., in Des Moines, Iowa, and chair of the American Bar Association’s (ABA) Nonprofit Organizations Committee. “The board should be supervising the chief executive officer in a way to avoid issues like this that have come up. They don’t need to micromanage but they should have systems in place that help allow the organization to comply with various laws,” said Boyd. “When something like this happens, it makes you mindful of the need to have those systems in place,” he said.

The revised federal Form 990 now asks whether policies are in place and deals with other governance issues. From a governance standpoint, policies make sense and help charities comply with the law but more important than having the policies is making sure they’re being followed. “The only thing worse than not having a policy is having a policy and not following it,” said Boyd, adding that it’s good for a board to be monitoring an organization’s compliance with the policies.

As with most scandals, sweeping reforms have been approved by the board in the aftermath, including:

* The general counsel/chief compliance officer will report directly to the Audit & Compliance Committee, Executive Committee and the Board.
* The Audit Committee was renamed and restructured to consist of board members who are financial experts or have other substantial nonprofit financial expertise.
* The board will review and approve all compensation payable to Fiesta Bowl senior-level and other key staff members. Any expense reimbursements paid to a director now must be approved by the executive committee.
* The board adopted a comprehensive whistleblower policy, including a hotline to be monitored by an independent company.

The board’s actions to reform look good on paper but the proof will be whether they follow through, said Davidson. She noted that the report indicates it was suggested in Junker’s 2003 performance review that he focus on improving internal controls. “While there may have been certain improvements in internal controls over the years,” few of the suggestions were rigorously followed, according to the report. “Just making the statement doesn’t help if you don’t follow up, if you don’t have systems in your board,” Davidson said.

BoardSource often warns of an overreliance by boards on the Executive Committee because they can devolve into making all decisions for the board, Davidson said. “Over time, maybe that’s what was going on here,” she said. Organizations should think about whether they need an Executive Committee, and whether a plenary board would be more transparent.

Executive Committees sometimes do the work for some organizations where by-laws require exceptionally large boards, such as The Smithsonian, according to Davidson. BoardSource has found that the “sweet spot” for board size is about 16 to 22 members, which would not warrant an executive committee. The Fiesta Bowl has 29 board members.

“Was the board asleep at the switch? We weren’t there, we won’t know all the facts,” said Michael Peregrine, a partner with the Chicago law firm of McDermott, Will & Emery, adding that the report itself doesn’t look to address the board’s culpability. “This is a free lesson for nonprofits in what we would do in similar situations; would we be in same situation if it came up?” The bigger lesson boards can take from the Fiesta Bowl fiasco is to review their own organization’s processes. “Boards should figure out, in my organization, is bad news getting to the board, the audit committee, so the board can take action?”

With respect to excess compensation and improper reimbursement issues, Peregrine said board members should take a look at whether they have control at the board level and whether they would be aware of problems. “Yellow flags require a pause, red flags require action,” Peregrine said. “It’s something so out of the ordinary — on its own, or in connection with others — to cause a reasonable person to say,”This doesn’t look right, it’s troubling this bothers me,'” he said.

It’s a “strong reminder of the prudence of why the board should really get into the 990 and other state filings,” he said. “For whatever reason the Fiesta Bowl board wasn’t made aware of this,” Peregrine said.

The Form 990 is one of a number of ways that a board can exercise oversight of what’s going on, said Peregrine. “It’s not going to catch everything but at a certain level, it’s a good education piece for the board,” he said.

The Fiesta Bowl’s most recent 990s indicate the board had a written policy regarding payment or reimbursement and that it required substantiation prior to reimbursing or allowing expenses incurred by officers and directors. Junker, who earned almost $600,000 annually as president and CEO, often would put expenses on his personal credit card, be reimbursed for the full amount, and then reimburse the organization after identifying personal expenses on the statement, according to the report.

How often a board reviews policy might depend on the particular policy. A conflict of interest policy should be reviewed annually since board members now are asked to disclose information on the 990 for the organization to manage any conflict of interest issues, Boyd said.

There might be other policies that don’t need to be reviewed on an annual basis, in terms of what they require, whereas some activities impacted by policies might be reviewed on a more frequent basis. NPT