Illustrating the latest example of eyebrow-raising foundation behavior, the Boston Globe recently reported that the H.N. and Frances C. Berger Foundation invested $100 million of Foundation resources in distressed Texas real estate. The payoff? $4.2 million in “profit sharing bonuses” for the foundation’s seven trustees.1 Stories like this–and there are many of them–are hardly the publicity philanthropy needs.
These sorry stories revolve around four dimensions of foundation board governance:
- Trustee fees
- Trustee self-dealing
- Trustee self-granting
- Trustees’ discretionary grants
Without a doubt, foundation scandals involve only a small fraction of grantmakers. But good foundations don’t deserve to be dragged down by the unscrupulous actors in their midst. It’s time to notice the red flags and wake up foundation trustees to the highest possible standards of foundation probity. Foundation boards have to do what’s right, not just what’s within the boundaries of the law. After all, that’s what they expect of the nonprofits they fund.
Numerous foundations pay trustees quite hefty sums for doing as little as showing up at a couple of board meetings each year, according to a recent study from Georgetown University’s Center for Public and Nonprofit Leadership.
This wasn’t a tiny group of funders, but 64 percent of the larger foundations and 79 percent of the smaller foundations in the study sample. The 238 foundations in the study paid more than $31 million to trustees in 1998.2 Although the researchers found exceptions, particularly among smaller foundations, they observed that foundation trustees “in general spent little time on foundation business.”3
The worst examples publicized in the press recently include: The Paul and Virginia Cabot Charitable Trust in Massachusetts paid trustee Paul C. Cabot $1.4 million in 2001 (including an extra $200,000 he needed for his daughter’s wedding in Boca Grande, Florida);4 the five trustees of the $800 million Horace W. Goldsmith Foundation in New York City were paid $175,000 apiece;5 and in western New York State, the Statler Foundation paid each of its trustees $20,429 in 2001 for selecting 32 grant applicants, and the Margaret L. Wendt Foundation paid $129,391 to each of its three trustees.6 Then there’s the George W. McManus Foundation in Maryland, which paid its board president and trustees more than it granted to charities, the Goldseker Foundation, which paid its board chair and vice chair $130,000 each in 2001,7 and the M.J. Murdock Charitable Trust in Washington State, which paid $123,000 to two trustees.8
In defense of the practice, former Kellogg Foundation executive Joel Orosz suggests, “Foundations that pay trustee fees generally get what they pay for.”9 In other words, if the foundation doesn’t pay for quality on the board, it won’t get it. That’s a troubling, backhanded slap at al l the foundation trustees who donate their board service because they truly believe that foundation boards should be voluntary.
In some foundations, trustees are compensated to carry out functions that would otherwise have to be done by staff. Setting aside for a moment the rather generous valuation of the time of some foundation trustees, the action is fundamentally a conflict of interest. If a foundation trustee is working as the equivalent of staff, who is going to tell the trustee-staff person that he or she is doing the job poorly, needs to be retrained, or ought to be terminated?
Fees might be justifiable if they were intended to diversify the racial, ethnic and social class composition of foundation boards. But most recipients of trustee fees are hardly working stiffs and rarely people of color.
According to a 2001 study from the Joint Affinity Groups, minorities comprised only 10 percent of foundation board members.10 Minorities were 11.6 percent of independent foundation board members and only 2.2 percent of family foundations, hardly justifying the trustee compensation paid by 55.3 percent of independent and 27.9 percent of family foundations.11
A vigorous effort to diversify board membership by race, ethnicity and class need not be daunting. Community leaders and activists would be thrilled to be able to directly participate in the philanthropic arts as decision-makers rather than simply as grant applicants. A foundation might then use fees to compensate these participants for wages lost on the days they volunteer for foundation service. But that is hardly the practice behind the trustee compensation described in the Georgetown report.
More than a quarter century ago, the Donee Group recommended to the Filer Commission12 “that organized philanthropies with broad purposes be required by law to expand their governing boards to include significant representation from the general public and nonprofit agencies and, in particular, women and minorities … [and] [f]or those philanthropies which have a specialized purpose or geographic or program limitation … that the law require representation of those communities which are affected by or which have a special interest in those programs or areas.”13 To date, however, there is no evidence that trustee fees have been used primarily to create a discernible impact on the democratization of foundation governance.
In America’s heartland of Peoria, Illinois, the local press ran a series of articles on the scandalous finances and investments of the Bielfeldt family and their foundation. Local nonprofits were appreciative of the $25 million the Bielfeldt Foundation had given away over its 17 years to charities such as the Peoria Ballet, the Peoria Area World Affairs Council, the George Washington Carver Center and CHOICES Youth Outreach. But they were unaware that the foundation paid family members, primarily Gary Bielfeldt, and businesses owned by or run by the Bielfeldt family $21 million for investment services.
In 2002 alone, the foundation paid Gary Bielfeldt, his son and their firms more than $3 million for investment advice, while paying out only $1.2 million in grants. Between 2001 and 2002, the foundation’s assets plunged 46 percent, while it continued to pay fees and commissions of almost $2 million to Bielfeldt family members. In the same time period, according to the Peoria Star Journal., the average drop in assets of other Illinois foundations was only 6 percent.14 Don’t ask the Bielfeldts to manage your 401(k). The Star Journal cited experts who suggested that the self-dealing practices of the Bielfeldts might be entirely legal. This is the big loophole in Intermediate Sanctions rules. The Intermediate Sanctions are basically a tax on foundation insiders (officers, directors, trustees and their families) for the use of a charity’s tax-exempt status resources for inappropriate private personal gain.15
While most of the philanthropic attention on Intermediate Sanctions has focused on the salaries of foundation executive directors, Intermediate Sanctions rules also cover trustee fees. When foundation trustees provide actual services—legal, accounting, investment—to their institutions for a fee, they will be penalized only if they receive an “excess benefit” from the transaction.
If you were a Bielfeldt, your defense might be straight from the Intermediate Sanctions playbook: “Trustees may be compensated for services that might ordinarily be performed by staff as long as the trustee has the requisite skills, the compensation is reasonable for the work performed, and the work was commensurate with the requirements of the foundation’s charitable activity.” 16 The fact that the Bielfeldts seem to have squandered the foundation’s assets with alacrity in a one-year period does not seem to affect the “reasonableness” of their charges to the foundation. As long as they can say that the foundation’s payments to the Bielfeldts for their investment services were generally similar to those paid for services by other organizations in “similar circumstances,” they meet the market test.
According to Council on Foundations surveys, more than a third of foundations receive professional services from board members, ranging from 28.9 percent of independent foundations and 33.2 percent of family foundations to 39.7 percent of community foundations. A survey of members of the Association of Small Foundations found that board members in 48 percent of responding organizations provide professional services to their foundations, and of those foundations, 55 percent pay the board members for their professional services;17 in other words, for small foundations, 26.4 percent paid board members for providing professional services. Undoubtedly, for some foundations, getting a below-market service from a board member might be a legitimate boon. For others, the practice simply calls for exploitation and abuse. Because the Intermediate Sanctions rules are so lax, it takes little imagination to see how unscrupulous proto-philanthropists might take advantage of their charitable endeavors as a line of business for their companies.
The swirl of controversy around the Ewing Marion Kauffman Foundation in Kansas City, Missouri, includes allegations that the foundation made a grant to the organization of one of its board members. He abstained but did not recuse himself from the board meeting approving the grant. He subsequently voted to save the job of the foundation’s controversial executive director in a 4-3 vote.18 Did the $50,000 grant sway his vote? Hard to say. Did it look lousy to the readers of the Kansas City Star? Probably.19
Grants to board members’ organizations are hardly unknown, but the practice is becoming increasingly visible to nonprofits. The public got a taste of grantmaking to board members’ organizations when the combined philanthropy of the Enron Foundation and the Kenneth Lay Family Foundation gave nearly $2 million to the M.D. Anderson Cancer Center. The leader of the center was the Enron board member in charge of the Enron board’s audit committee.20 That particularly odious misuse of philanthropy caught the attention of Congressmen John LaFalce (D-New York) and Michael Oxley (R-Ohio), who introduced legislation to require the disclosure of corporate philanthropic grantmaking to charities associated with corporate officers and directors. Though it passed the House, the disclosure provision disappeared in the conference committee that yielded the Sarbanes-Oxley statute.
A more recent example at the intersection of corporate and nonprofit is the New York Stock Exchange (NYSE), led by Richard Grasso. Not only is the NYSE incorporated in New York State as a “not-for-profit” corporation,21 it has its own philanthropic giving arm, the NYSE Foundation. According to the Council of Institutional Advisors, 40 percent of the foundation’s grants went to charities with NYSE board members on their boards (or on their staff), including the New York City Police Museum, the New York Philharmonic and the Leon and Sylvia Panetta Institute for Public Policy.22 Half of the foundation’s 2002 grantmaking went to charities affiliated with Home Depot’s Kenneth Langone, who chaired the compensation committee that approved Grasso’s controversial $140 million pay package.23
Were the well-heeled NYSE overseers bribable with grants to their charities? Doubtful, but grants to board members’ charitable organizations create the impression of a conflict of interest. “[S]uch contributions can help co-opt board members and make them less likely to challenge a chief executive they are…overseeing,” according to a Council of Institutional Advisors spokesperson.24
Let’s not just pick on corporate grantmakers that cannot defend themselves as their executives hopefully trundle off to jail. Try the Yawkey Foundation, established by Red Sox owners Tom and Jean Yawkey from the sales proceeds of the team for $420 million. This past May, the foundation approved a $15 million grant to Boston College, where the Yawkey chairman is a trustee, the college chancellor is on the Yawkey Foundation board and another person is on both the Yawkey and BC boards.25 A New York Times article described the recent behavior of the John Stauffer Charitable Trust, which paid each of its trustees $130,000, not including legal fees paid to the law firm of one of the trustees, and made nine grants, five to universities where two Stauffer trustees were also board members and another serves as a vice president emeritus.26
Nonprofit grant applicants are obviously at a distinct disadvantage when competing with foundation board members for grants, regardless of whether the trustees recuse themselves from deliberations, simply abstain from the vote or momentarily step out of the meeting room during the final headnodding. Tilting the grantmaking rules to favor foundation insiders doesn’t do much toward fairness, especially when the insider games are basically hidden from sight.
Foundation trustees sometimes forget that they’re working with other people’s money, “other people” meaning the public. It’s not Monopoly money, but tax-exempt money that the public has entrusted to the governing boards of foundations to use to benefit communities and the nation.
In some foundations, trustees are given their own pots of money to allocate as they see fit, with little or no connection to the mission of the foundation and frequently little or no due diligence other than checking that the grant recipients have 501(c)(3) status.
The practice might end up with grants made to trustees’ alma maters or their favorite houses of worship (with c3 fiscal agents) or who knows where. A Council on Foundations newsletter suggests giving money to geographically dispersed foundation board members to “allow board members to be creative and fund in their own backyards” in order to maintain their emotional connection with and commitment to the foundation.27 Another describes the practice as a mechanism under a header of “diffusing family tensions.”28 Some well respected institutional as well as family foundations allocate as much as 40 percent or more of their grant funds to trustee discretionary grant pools.
Of course, the entire board might be tempted to treat foundation assets as discretionary play money. The foundation associated with Florida Atlantic University gave the president of FAU a parting gift of a $42,000 red Corvette, running the gift through a hidden payment to the president’s wife.29 In Oklahoma City, the Kerr Foundation favors a $44,000 Jaguar, the Arthur S. DeMoss Foundation of West Palm Beach has a $36 million Bombardier jet used to ferry board chairperson Nancy DeMoss and her daughter and the Samuel Roberts Noble Foundation favors a less expensive Cessna Bravo jet. 30 These expenditures make amockery of the charitable purposes of the foundations.
Imagine the nonprofit submitting a proposal to a foundation with a budget line that includes payments to board members. Try including a line that calls for paying the board members for professional services rendered. Does the word “rejected” come to mind?
The foundation sector recently demonstrated its reluctance to deal forthrightly with these problems by successfully lobbying against the Charitable Giving Act of 2003 (H.R.7). The version of the bill passed by the House of Representatives this fall included higher Intermediate Sanctions penalties for transgressors–but not tougher, more explicit standards for challenging the “reasonableness” of trustee fees and self-dealing.
In fact, the foundation lobby used House Majority Leader Tom DeLay (R-Texas), that paragon of philanthropic rectitude, as their instrument of choice to disembowel the legislation. Approached by foundations and their lobbyists, Congressman DeLay intervened with the House Ways and Means Committee to fashion a compromise version of Section 105 that did not exclude all administrative and operating costs from private foundations’ qualified distributions, as the original proposal of Congressmen Roy Blunt (R-Missouri) and Harold Ford (D-Tennessee) envisioned, substituting a complicated provision for counting grant-related and charitable expenditures and excluding other administrative costs, whatever they might be.
The selection of Congressman DeLay as the purveyor of new standards of foundation accountability raised eyebrows in light of charges that his own philanthropic vehicle, the DeLay Foundation, has been used as a means for private political donors to provide expensive benefits–trips, golf outings, hotel stays, entertainment–for lawmakers under the guise of charitable fundraising, a practice that had been terminated as part of the Congressional “gift ban,” which was overturned as the first order of business in the 108th Congress this past January by DeLay and his ally, Speaker of the House Dennis Hastert (R-Illinois).31 DeLay inserted a provision into the bill permitting payments of up to $100,000 per trustee to count toward private foundations’ qualified distributions (payout). For foundations that might have been concerned about whether their trustee payments were too high, the House of Representatives gave them the signal that $100,000 for each live body attending a couple of foundation board meetings a year will pass. That is hardly the reassuring public gesture that the nonprofit sector and the American public are waiting for.
Some people mistakenly believe that foundation trustee problems are primarily small family foundation issues. New York Attorney General Eliot Spitzer, for example, has suggested Congressional elimination of all foundations with assets of less than $20 million to reduce the amount of abuse we see constantly among non-institutional private foundations.”32 Others, including national foundation trade association leaders, have intimated that the size of small foundations makes them economically inefficient.33 In reality, a Council on Foundations report shows that for foundations that compensate some or all board members, at almost all asset levels (except for foundations between $10 million and $24.9 million), independent foundations are more likely to pay trustee fees than family foundations. 34 With assets over $500 million, 85.7 percent of independent foundations and only 55.6 percent of family foundations compensate some or all board members for board service. For small foundations with assets between $5 million and $9.9 million, 53.9 percent of independent foundations and only 29.4 percent of family foundations compensate their board members. (These figures exclude foundations compensating trustees for travel and accommodations to attend board meetings.) It is a problem of philanthropy, not a problem of small foundations.
It is impossible to think of foundations tolerating anything like these practices among nonprofits. The foundation sector is writing itself its own nonprofit playbook, one that foundations can use, but not other 501(c)(3)s. According to the president of the Wallace Alexander Gerbode Foundation, Thomas Layton, the trustee compensation practice “subverts the whole volunteer process… To the extent that private foundations pay their trustees, it contributes to a kind of alienation of private foundations from the larger charitable sector.”35
Have some foundations lost their charitable compass? Is internal self-policing sufficient to deal with the problems? Because the foundation sector lobbied for $100,000 trustee fees in H.R.7, it’s clear that foundations cannot be left to regulate themselves on their own.
When the controversy concerning the compensation and gifts to the retiring executive director of the Irvine Foundation hit the press, the nation’s national philanthropic trade association suggested that the problem of philanthropy was only a few “bad apples” who would be exorcised were the IRS to receive enough money to do its job of nonprofit sector oversight. If you think this sounds like an echo, think back to the mid-2002 statement of Tom Donohue, CEO of the U.S. Chamber of Commerce, on Enron: “I think it is time for everybody to get together, address the question of the real criminals and get rid of them and put them in jail, and recognize that 99.9 percent of the 17,000 public companies are playing by the law.”36 Donohue also called for beefedup SEC oversight, with as much faux sincerity as the foundation leaders who vaguely call for increased funding for the IRS tax-exempt division. In the corporate world, as among foundations, the bad apples affect everyone in the barrel.
What might be done to clean up philanthropy’s own Enrons and Tycos, short of a Sarbanes-Oxley law for foundations?
Trustee fees are not the same as reimbursing board members for expenses incurred in attending foundation meetings–or replacing the lost wages of working people who might be invited to join foundation boards. Pablo Eisenberg has proposed alternatives such as paying trustees a nominal sum or severely penalizing foundations that exceed a reasonable trustee compensation limit.37 (Eisenberg and his Georgetown University colleagues called for limiting annual trustee fees to $8,000 per trustee and barring trustees from receiving compensation for legal, accounting, investment and other professional services, in Ahn, pp. 22-23.) That might be politically more feasible than simply ending the practice. But most foundation trustees are hardly in need of the extra cash. Moreover, even nominal fees ranging from $8,000 to $15,000 that simply compensate trustees for a couple of days of “work” a year of ten add up to huge annual salaries that few foundations pay their program officers–or that the bulk of nonprofits pay their staff.
It’s a philanthropic thumb in the eye of the nonprofit sector and the public to give predetermined approval for $100,000 trustee fees–or more, as the $100,000 is only the amount that counts toward foundation payout. The House Ways and Means Committee and Tom DeLay did not think this up on their own. It came from foundation lobbyists and it will come back to haunt the sector if it isn’t removed.
For all the foundation bellyaching about the inability of the Internal Revenue Service to carry out appropriate enforcement, no one seems willing to bite the bullet and re-link the foundation excise tax to IRS oversight and enforcement–except the National Committee for Responsive Philanthropy (NCRP). The excise tax was originally a mechanism to pay for the IRS role in this sector, but the revenues, now in the hundreds of millions of dollars per year, simply go into the general treasury. More IRS activity alone cannot answer the accountability problems of the sector. But the IRS has to be part of the solution, as do the charity officers in the offices of state attorneys general, who may well be much closer than the IRS to spotting foundation problems. It would be nice to see other national nonprofit leadership organizations join the NCRP in supporting the foundation excise tax dedicated to state and federal oversight.
Of course, enforcement begs the question of “enforcing what?” There is far too much leeway in the Intermediate Sanctions provisions. Beefing them up would give trustees, foundations and their trade associations tougher standards to meet, which like most law-abiders they will do without the prod of an IRS audit finding.
Some foundation trustees may actually get the experience of a perp walk, according to Dot Ridings, president of the Council on Foundations, commenting on the Connect icut Attorney General’s investigation of the Smith Richardson Foundation and the Beinecke Foundation (the latter having awarded two part-time trustees with $280,000 in retirement benefits plus addit ional money for healthcare coverage for them and their family members).38 New York State attorney general Spitzer has also gone after foundation misbehavior, bringing suit against the Grand Marnier Foundation, whose six board members received $3.4 million in trustee fees between 1990 and 1999 for making $6.5 million in grants to charities such as Meals on Wheels and the Friends of the Israel Defense Forces.39 But don’t count on a lot unless the enforcement standards have some teeth to catch the more widespread abuses, not only those that are completely over the top.
The philanthropic trade associations face a challenging balancing act. On one hand, they want to keep their members—and their dues—in the organization, and that means not criticizing them. On the other, they have to establish ethical benchmarks for the association, its members and the profession. The alternative is to sanction errant members whose behavior tarnishes everyone. The time is now for the philanthropic trade associations to get into gear and develop something more than milquetoast ethical standards that address self-dealing and self-enrichment schemes that circumvent the Intermediate Sanctions rules in the foundation world.
In a recent New York Times series on nonprofit accountability, Stephanie Strom wrote, “The first line of defense against the waste or misuse of charitable dollars is supposed to be the boards of nonprofits and foundations. Yet time and again, nonprofit boards have failed to uncover wrongdoing, pulled their punches or turned a collective blind eye.”40 There are thousands of foundations, trustees and executives so much better than these Enron-like foundations. It’s time for all foundation trustees around the nation to be embarrassed by this stuff, to see that their reputations are sullied by the behavior of their miscreant peers. They won’t be able to look the other way in the future, because all of us—the mainstream press, state attorneys general, maybe the Internal Revenue Service, nonprofit grant recipients and nonprofit watchdogs—will be looking and prepared to speak out. It is time to stop excusing the inexcusable.
The Nonprofit Quarterly is deeply grateful to the National Committee for Responsive Philanthropy (NCRP) for its careful ongoing research and unstinting independence in acting as an internal watchdog in the field of philanthropy.
1. Healy, Beth. December 3, 2003. “Foundations Veer Into Business.” Boston Globe.
2. Ahn, Christine, Pablo Eisenberg, and Channapha Khamsvongsa. September 2003. Foundation Trustee Fees: Use and Abuse. Washington, D.C.: Georgetown Public Policy Institute, Center for Public and Nonprofit Leadership.
3. Ibid., p. 9.
4. Healy, Beth, Francie Latour, Sacha Pfeiffer, Michael Rezendes, and Walter V. Robinson. October 9, 2003. “Some Officers of Charities Steer Assets to Selves.” Boston Globe.
5. Strom, Stephanie. July 10, 2003. “Fees and Trustees: Paying the Keepers of the Cash.” New York Times.
6. Tokasz, Jay. July 11, 2003. “Givers Under Scrutiny; Charitable Foundations Nationally Gave Nearly $30 Billion in 2002, but Some in Congress Think They Could Give More, if Less Were Spent on Salaries and Trustee Fees.” Buffalo News.
7. Shatzkin, Kate. May 11, 2003. “Some Foundations Spend Lavishly on Own Board Members.” Baltimore Sun.
8. Tice, Carol. August 18, 2003. “Some Foundations Pay Trustees Quite Well.” Puget Sound Business Journal.
9. Orosz, Joel J. August 21, 2003. Letter to the editor. Italic; color:black’>The Chronicle of Philanthropy.
10. Burbridge, Lynn, et al. April 2001. Diversity Practices in Foundations: Findings from a National Study. Joint Affinity Groups.
11. Foundation Management Series, Eleventh Edition, Volume II. Council on Foundations, 2003. Table 2.2.
12. Congress established the Filer Commission (officially, the Commission on Private Philanthropy and Public Needs) in 1973 to study the role of philanthropic giving in the United States and to make recommendations for improving and strengthening the voluntary sector’s effectiveness. Because the Commission’smembers were largely business and foundation executives, social justice leaders and nonprofit organizations soon established the Donee Group to provide Congress with their perspective on philanthropy’s performance and the needs of the nonprofit sector. See Eleanor L. Brilliant’s Private Charity and Public Inquiry (Bloomington, IN: Indiana University Press, 2000) for more information on the history and work of the Filer Commission and the Donee Group.
13. Private Philanthropy: Vital & Innovative? Or Passive & Irrelevant. The Donee Group, 1975. p. 19.
14. Meinhart, Dori. September 3, 2003. “Foundation Loses Millions Under Bielfeldts.” Star Journal. Also, data from the Bielfeldt Foundation’s 2001 990PF.
15. “Interim Intermediate Sanctions: IRS Issues Temporary Excess Benefit Excise Tax Regulations.” Nonprofit Navigator. Harmon, Curran, Spielberg & Eisenberg, LLP, February 2001.