The Halo Effect: Lessons from Penn State

A loosely supervised operation becomes increasingly central to the mission of a storied institution. Its star performer receives millions in compensation. The risks are not well understood—and primarily off the books. Cross out American International Group and write in Penn State, and you’ve got pretty much the same script, right?

AIG’s derivatives trading unit in London was a money spinner, which is one reason the bosses in New York were willing to look the other way. But the athletics program at Penn State, which is dominated by football, isn’t a profit machine. Sports contributed $106.6 million in revenues in the school’s 2010 fiscal year, according to a report from the National Collegiate Athletic Assn. Yet that only came to 2.5 percent of the university’s roughly $4 billion in operating revenue. Subtract expenses for marketing, recruiting, and salaries—including former football coach Joe Paterno’s $1 million-a-year compensation—and Penn State is left with about $18.6 million.