June 25, 2009
Madoff Foundation Victims Lacked Adequate Board Size, Says Report
By Ian Wilhelm
Of the foundations that have been hardest hit by the Bernard Madoff financial scheme, the majority of them lacked adequate board size or diverse board leadership, factors that contributed to their becoming victims of the investment scandal, says a new report.
Of the 150 or so nonprofit organizations affected by the Madoff Ponzi scheme, 105 lost 30 percent to all of their assets. Of that group, the median board size was three people, said the report by the National Committee for Responsive Philanthropy, a foundation watchdog group in Washington.
In addition, many of the boards consisted mostly of family members.
“The major lesson is pretty clear,” said Aaron Dorfman, the committee’s executive director. “Small, homogeneous boards were much more likely to fall prey to Madoff’s Ponzi scheme.”
The National Committee for Responsive Philanthropy recommends that a foundation have at least five board members and that they have a diverse background. The committee also encourages foundations to have a conflict-of-interest policy, a code of conduct, and make public demographic information about the board.
While saying these practices would not entirely insulate a foundation from the potential for investment fraud, Mr. Dorfman said it would help to prevent such problems.
“They make it more likely that a board is going to actually do due diligence, rather than simply make investment decisions or other decisions based on trust or reputation,” he said.
For its analysis, the National Committee for Responsive Philanthropy looked at the 150 foundations listed by The New York Times as being Mr. Madoff’s victims and examined the informational tax returns of the ones that suffered the biggest asset losses.
Of the 105, 38 foundations had one or two board members, 46 had three or four, and 16 had five or more. Five foundations did not include the names or number of board members in their tax data.
Most of these grant makers were family foundations and relatively small, with a median $3.23-million in assets.
But the list also includes the Picower Foundation, which lost nearly $1-billion. The foundation and its founders, Jeffrey and Barbara Picower, are being sued by the court-appointed trustee who is overseeing the liquidation of the Madoff investment firm for allegedly being complicit in the scheme.
A lawyer for the Picowers has denied any wrongdoing by his clients. (Read The Chronicle’s article about the lawsuit.)
While not addressing the Picower case in particular, Mr. Dorfman said the committee is not recommending that trustees should be sued for falling victim to Mr. Madoff.
The committee “believes that most trustees at foundations impacted by their Madoff investments neither acted in bad faith nor colluded with Madoff,” said the report.
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I believe that the National Committee for Responsive Philanthropy is making a mistake by not recommending that the trustees of foundations and organizations be accused of malfeasance for doing business with Madoff. It will only be when boards that have fiduciary responsibility are punished for neglecting their responsibilities that other boards will wake up. We at JNF are proud to have a diversified board that meets monthly with representation from around the US and with clear fiduciary responsibilities and well-defined rules about conflict of interest, and code of conduct.
Rabbi Eric M. Lankin, D.Min.
Chief, Institutional Advancement and Education
Jewish National Fund
— Rabbi Eric M. Lankin, D.Min. Jun 25, 02:55 PM #
Diversified boards are necessary for both foundations and non-profit organizations. It is the responsibility of management to ensure that an investment committee is appointed with clearly defined due diligence guidelines which include an understanding of the money manager’s asset allocations, who their accounting firm is, along with a conflict of interest policy, and a policy limiting the percentage of funds to be invested with any one money manager. Finally it is recommended that organizations have a clearly defined spending rule which is reviewed and approved annually by the board of directors. Investment committees should meet at least quarterly to review the performance of their investments. It is also important that donors be advised of these guidelines and policies.
While legally endowments are “owned” by the organizations, all of us responsible for the management of non-profits including the boards of directors need to be wise custodians of donor contributed funds and thus be transparent with their policies, procedures, and guidelines concerning these endowments.
The “Madoff scandal” is a lesson for all of us to have in place investment committees whose members experienced in the world of stocks, bonds, etc. While it is no gaurantee against future bad investments, it is another firewall which will hopefully safegaurd against these typesd of losses.
— Peter Willner, Nat'l Executive Director, American Friends of Hebrew University Jun 26, 09:14 AM #
I am not surprised by the premise in this report. While most states require only three board members and there is no perfect size for a board, group dynamics’ research teaches us a number of things. Among them, small groups – such as those reflected here – often lack the diversity of opinion necessary to avoid group think. In some cases it is due to the fact that people ask their friends, or others “like them” to join them on the board. In such cases, there is an increased likelihood of similar thinking – or, as in this case, that many of the members of the board know and rely on the same investment people. In other cases it is just due to the fact that with such few people on the board, it is easier to go along because everyone knows they will have to get along in the future.
If this scandal teaches us anything, it should remind us that one of the most important skills a board member brings to the table is that of critical thinking. This means that every option should be questioned. All the pros and cons should be considered and the ramifications projected. Potential benefits should be tested against potential costs. Underlying assumptions and motivations should be brought to the surface. And board members must remember before making a final decision that they are responsible to the community for leaving the organization stronger than when they came in. That their decision should be consistent with their organization’s values and move the organization closer to the accomplishment of its mission and vision. This charge is made easier with a larger, more diverse board.
— Terrie Temkin, Ph.D., Founding Principal, CoreStrategies for Nonprofits, Inc. Jun 29, 11:13 AM #
I have seen this issue to many times and way before the “Madoff Scandal”. There are really 2 typical problems here:
1. Foundation BOD members fiduciary resposibilty of selecting investment mangers and investments. 2. BOD members roles and experience in serving the “Mission” of the foundation. Let me adress them both.
The 1st issue is really too often just plain misunderstood. In my view all foundation boards should pass off the responsibility of choosing asset managers and holding said managers accountable. They just don’t realize that this IS in fact possible. I have guided my clients to us a firm called SEI. They are one of the only firms in the world that soley manages asset managers, does not use thier own managers (a conflict of interest), nor serves as a for profit trading company (like Goldman or Merrill Lynch). Not only do they screen and intimately review all managers in the world on behalf of thier clients, but they will (in writting) assume the fiduciary responsibility for such. This then passes the liability to SEI vs. the Foundation’s board of trustees etc. Having worked with SEI for years, I know they evaluated Madoff years ago (due to his “eye popping” rates of return, and in fact why most other Foundations simple chose to work with him). SEI “passed” on Madoff for our clients because he did not pass certain criteria to insure these things don’t happen. In this case it was that Madoff would not disclose this trades nor holdings despite being a hedge fund. SEI was not willing to hire Madoff based on this fact and it leading to possible exposure to SEI as a fiduciary!
On the second point, In my view a superior foundation board needs to perform as a body to drive the “mission” of the foundation itself. I see abuses here too in things like members being there for personal reasons such as networking, resume, or self dealings. All of these are conflicts of interests too. But the best of the best work very hard to always avoid these conflicts of interest. That should be the key rallying cry for all foundation BOD’s.
When I see headlines and stories like these, I am reminded of how so many important organizations lack this important information with regard to conflicts of interest and the fact that there are firms that can reduce or eliminate such. Why would they not do this? Foundation Boards need to serve, bring thier giftings, and grow in thier own lives glorifying the mission of thier foundation first. Anything that distracts from this (like choosing investments) is destracting at best. Furthermore it might just land you in a courtroom.
I can be reached at Jscott@cedrusfinancial.com if you want to share/learn more.
— John A. Scott CEO Cedrus Golden, CO Jul 15, 01:15 PM #