The Smithsonian Board Game (Jun 07)

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 As the summer issue of the Nonprofit Quarterly on the topic of governance goes to press, there are two interrelated situations unfolding at the federal level that beg to be addressed. The first is the appalling scene at the Smithsonian Institution [PDF] where Lawrence Small, the chief executive, or secretary as he is there called, was overcompensated and underperforming for years while the board, which includes the Vice President of the United States as an ex-officio member, as well as the Chief Justice of the Supreme Court, three senators and three representatives, and a few foundation CEOs as active members, was apparently whistling Dixie. The second is the IRS’s draft of a new Form 990 in which questions about governance are included for the first time and where the IRS attempts to gather additional information about executive compensation.

Our suggestion is that those leading the Form 990 and nonprofit regulatory reform efforts see the situation at the Smithsonian for what it is — an indicator of their willingness to apply the standards they demand of the broad base of the nonprofit sector on those at the highest levels.

It is an interesting juxtaposition of events, coming right on the heels of high-profile problems in governance at the Red Cross. Both the Smithsonian and the Red Cross are congressionally chartered — an odd hybrid of nonprofit with high federal investment that includes members that are politically appointed. This carries its own set of rich opportunities for cronyism, for instance the extraordinarily well-paid Sheila Burke, second-in-command at the Smithsonian, was the chief of staff for former Senate Majority leader Bob Dole, whose wife was the former president of the Red Cross. 

To make matters worse, both Secretary Small and Ms. Burke spent a portion of their valuable time sitting on the boards of private corporations even while private dollars raised by the Smithsonian were declining. Both actually held compensated positions on the board of the Chubb Corporation, which insured the Smithsonian, a clear conflict of interest. Small was reported to have spent 64 days over a 7-year period in that capacity for two corporations, bringing home more than $5 million in various types of compensation for his efforts. Ten weeks of vacation annually left plenty of time for such commitments.

Meanwhile, at the Smithsonian, Small earned a base pay of $671,000 in his last year. But the story doesn’t end there. In addition he received payment of $105,000 in lieu of pension and a $193,000 housing allowance that everyone conceded was simply a boost to his salary since he already owned his own house free and clear. His total compensation therefore amounted to $915,000, which was two and a half times that of his predecessor who, apparently performed much better in the job. The board as a whole was unaware of his level of compensation and how it had been increased (by the executive committee) throughout much of his tenure — they were also misguided about his performance. Private donations, which spiked immediately before Small took over declined during Small’s tenure even while other similar institutions were experiencing an increase in such donations. Business income also declined. Small was, by the way, hired with the expectation that he would increase private donations as a proportion of the budget and decrease the Institution’s dependence on federal dollars.

This high flying irresponsibility at the crux of government and nonprofits is not unusual. Rick Cohen, NPQ’s national correspondent, has covered that intersection energetically over the past few years and there is much still to be explored. But the larger concern we have right now is about the steps that are required to reform this critically important institution and set an appropriate pace for the rest of the sector.

The Smithsonian board of regents, as far as we can see, has largely given themselves a free pass. Apologizing for their regrettable inattention, they have said their mea culpas and expect to be allowed to move on as an intact body. This is not the way to go. The board has proven the quality of its oversight capacity as low to nonexistent and the current members should resign. The problems in the governance of congressionally chartered organizations seem more systemic than unique to individual institutions. We need to plug the holes where the all-too-common lapses in fiduciary care leak through. In other words, these are bodies that need major reform. That reform process, in our opinion, should include a questioning of the practice around appointing board members. Apparently, Chief Justice Roberts is resisting the idea that his role as Chancellor may need to change. The fact that he believes he should get to decide demonstrates gall and a surprisingly weak ethical compass. It flies in the face of reasonable expectations of nonprofit accountability and clear consequences for outright negligence — a failure of care.

Standards need to be demonstrated in this situation and quickly because as the IRS invites comments on its new and expanded Form 990, the government’s credibility as a regulator is in question. Are we to have new standards that are not equally applied? Nonprofits do not want the kind of careless behavior exhibited by the Smithsonian board countenanced, and neither should the government. We need and want a sector that holds itself to the highest levels of integrity. If Senators Grassley and Baucus at the Senate Finance Committee want small and mid-sized politically unconnected nonprofits to take their reform efforts and those of the IRS seriously, they must stay with this situation and aggressively push for radical reforms in the Smithsonian in particular and congressionally chartered organizations in general.