Some of your points are fair, though I think you underestimate just how pervasive the problem is and how strongly the members argue against changing any traditions. It also should be emphasized that while Waters would have known that this type of thing occurred in general, most was of it was done out of the directors' presence during social settings or on buses. This type of behavior is so engrained in the band's culture that it is almost normalized to the point that most people didn't see anything wrong with it. Offensiveness was praised, though I don't think anyone meant any harm. And because it was so normalized, I could understand a director just thinking this was college students being college students and wouldn't take any action unless specific complaints were presented.
It's a normal human tendency to think that when something is accepted for so long, that it must be okay. We don't often step back and really think about whether habitual behavior is right or wrong. This behavior had been "acceptable" (meaning no one tried to change it) for 20+ years under Dr. Woods, so you can see why Waters might not find it as problematic as someone observing it from the outside for the first time. It needs to be changed for sure. I just think Waters is the best person to do this now that the seriousness of the problem is being addressed. He understands the band and could help it through a tough transition.
It just seems like OSU wanted someone to take the fall to prove how serious it is about fixing the problem. And that's unfortunate. He deserves to be reprimanded, I just think this was too far.