• November 24, 2014

Foundation Trustees Shouldn’t Be Paid Millions of Dollars

The tens of millions of dollars that foundations pay to trustees every year is a total waste of money that could be used to finance needy nonprofit organizations.

Fresh concerns about those fees were raised when the news become public that the Otto Bremer Foundation, which last year gave $38-million in grants, had paid its three board trustees more than $1.2-million in 2013. So egregious was the payment that Aaron Dorfman, executive director of the National Committee for Responsive Philanthropy, requested an immediate investigation by the Minnesota attorney general.

The Bremer trustees had fired the foundation’s executive director, leaving them totally in charge without any accountability mechanisms in place.

While the Bremer Foundation is not typical—it is a holding company for the Bremer banks, which are located in three states—its operations have given rise to serious questions about the practice of trustee compensation.

Data about the total amount trustees are paid are hard to come by, but a Chronicle of Philanthropy survey in 2011 found that 38 of the nation’s 50 largest foundations paid a fee to their trustees amounting to a total of $11-million.

A 2006 Urban Institute report about the compensation practices of 10,000 of the largest foundations based on 2001 tax returns found that 3,400 of the foundations had paid a total of almost $200-million in trustee fees.

And an earlier study of 238 foundations I conducted with two of my graduate students at Georgetown University in 2003 revealed that they had paid more than $44-million in trustee fees. About two-thirds of the 176 largest foundations compensated their board members, while 79 percent of the 62 smaller foundations surveyed paid their board members.

On the basis of this sample garnered from 1998 tax returns, we estimated that foundations throughout the country had paid more than $300-million in trustee fees.

The situation hasn’t changed much. I have been examining the sample in the Georgetown study and have found that almost all the foundations that had reported fees in 1998 continued to compensate their board members in 2012, some paying more than they did in 1998 and some less. Since the number of foundations in the country has substantially increased during the past 15 years, it is safe to conclude that the amount foundations annually pay their board members probably far exceeds the sum we found initially.

What has infuriated foundation critics and many nonprofits is that foundation trustees are among the wealthiest and highest-paid individuals in the country. As Aaron Dorfman has noted, most foundation trustees would take on their duties even if they weren’t paid. Most other nonprofits don’t pay their trustees, after all.

But habits die hard. Many foundations maintain that it is important to offer fees as an incentive to busy corporate and wealthy individuals who might otherwise not give their time. And, they add, it is difficult enough to recruit topnotch board members; fees just make the process easier. The corporate culture that believes "time is money" is a tradition that lingers on.

Annoyance at the practice of trustee fees has not yet ­morphed into sufficient energy and public pressure that could produce some changes. The Council on Foundations, the largest philanthropic trade association, has remained neutral on the issue, preferring to leave the decision up to individual foundations, although cautioning those members that provide fees to be reasonable about the matter. The council’s position has not changed since 1990.

The Philanthropy Roundtable, an organization that represents wealthy donors and foundations, is a little more sympathetic toward fees. The roundtable chastises Independent Sector, the coalition of nonprofits and foundations, for statements it has made that some people interpreted as suggesting that trustee fees are either unethical or poor governance. But while Independent Sector raises some questions about the appropriateness of fees, it does not condemn the practice.

What’s more, none of the major philanthropy associations defines what is "reasonable." Is a fee of $30,000, $50,000, or $100,000 reasonable? Where do they draw a line? The problem is they don’t.

It’s surprising not to hear from the key associations in the wake of the Bremer news. Either they don’t care about what they see or they don’t want to anger foundations or don’t want to bother to push for change.

The regulators and legislators are no better. The IRS has never bothered to issue any rulings on trustee fees. And it seems to condone them in part in regulations that say while self dealing is illegal at foundations, it is permissible if it is "necessary, reasonable, and not excessive."

The Senate Finance Committee, despite its bravado talk about philanthropic accountability, has chosen to overlook the problem, and the House hasn’t touched the topic.

The 2003 Georgetown report proposed that the IRS place an $8,000 cap on trustee fees—a minimal amount that would permit people who work, including those with low incomes, to serve on foundation boards. The plan would also prohibit foundations from counting trustee fees as part of the 5 percent of assets they must distribute annually.

The proposal is still a sound recommendation that could vastly increase the annual coffers of nonprofit organizations.

Nonprofits should start a campaign to ask Congress and the IRS to curtail excessive fees. Almost all nonprofit groups hungry for new dollars should be willing to support the idea, and how could politicians be opposed to the idea that more money goes to communities than affluent trustees? Now we just need some leadership to get the movement going.

Pablo Eisenberg, a regular Chronicle contributor, is a senior fellow at the Center for Public and Nonprofit Leadership at the Georgetown Public Policy Institute. His email address is pseisenberg@verizon.net.

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