Non-profits’ Executives Avoid Scrutiny, Valid Reforms

Published 2/11/2004

At a time when efforts to reform the corporate world are getting all of the attention, there is another group of chief executives who remain insulated from the effects of scandals at Tyco, WorldCom and the like. They are America’s not-for-profit profiteers: the executives who cash in at universities, foundations and other tax-exempt organizations.

A review of media accounts and public information reveals that many of the same questionable transactions detailed in the corporate scandals are occurring in the world of non-profits. University and foundation presidents are using tax-free dollars for luxury apartments and cars, personal loans and other perks. These abuses occur because non-profits are getting a pass from some promising corporate-accounting and conflict-of-interest reforms.

Recently, the Nature Conservancy, the world’s largest environmental organization with nearly $3.3 billion in land and investments, was accused in a series of Washington Post articles of violations ranging from hiding the personal income of employees to sweetheart land deals for favored parties to using not-for-profit funds to give a $1.5 million loan to a board member. Congress is looking into the transactions, and the IRS took the rare step of announcing that it will physically move into the headquarters of the charity for a long-term audit.

Last fall, corporations faced mounting calls for reform after the disclosure of a $187.5 million pay package for former New York Stock Exchange chairman Richard Grasso. While the stock exchange is a not-for-profit organization, the public attention focused on for-profit corporations, to the relief of many non-profit executives.

Under federal law, including the 2002 Sarbanes-Oxley Act that was passed in the wake of Enron and other Wall Street scandals, for-profit corporations now are required to fulfill new requirements of transparency and ethics. They include 1) requiring top executives to attest personally to the truth of financial statements; 2) assuring greater independence of auditors and outside reviewers; and 3) creating conflict-free procedures of corporate governance.

These rules, however, were not extended to not-for-profit corporations, despite the huge size of some of the 850,000 U.S. charities. As a result, the chances for conflicts of interest and out-of-control executive compensation remain high.

The public pays dearly for such excesses. By granting universities, foundations and charities tax-exempt status, the public forgoes billions in revenue. For that reason, federal law prohibits not-for-profits from being operated for financial gain. But profits — both personal and institutional — now are the focus of many of these institutions. Giving huge loans and personal perks to executives absorbs millions of tax-free dollars that are supposed to be spent advancing education, the environment and other causes. Besides the public’s loss of revenue, these excessive compensation packages are supported by increasingly scarce donor and student funds that should be given even greater protection from abuse.

A survey last November by The Chronicle of Higher Education for example, found that the number of college presidents earning more than $500,000 in 2001 was double the number in 2000. Some of these academics make $1 million when their salaries and benefits are calculated. More than a quarter of schools pay their presidents more than $400,000 annually. In comparison, the average college or university academic salary is $62,895, and the average salary for community college teachers is $51,000. Some executives have secured as much as 50% increases in a single year, while others have received personal loans that later were written off by their boards.

If the market sets salaries in a fair and open process, these salaries could be accepted as the price of high-quality labor. But a close look reveals a system rife with conflicts of interest and self-dealing.

Because of the structure and laws governing academic institutions, a university president often heavily influences or dictates the selection of the board of directors, which sets the president’s salary.

Sound familiar? In the Tyco trial, for example, former CEO Dennis Kozlowski’s defense lawyers claim that the board of directors approved all of the multimillion-dollar loans and bonuses he received. Similar accusations were made in other corporate scandals.

The same phenomenon is occurring in not-for-profit organizations, according to an annual survey by The Chronicle of Philanthropy For example, Susan Berresford, president of the Ford Foundation, receives $651,713 in salary plus $169,477 in other benefits. Likewise, Philippe de Montebello, director of the Metropolitan Museum of Art, has been paid more than $866,000 in a single year. (His spokesman emphasized that his salary is a paltry $518,151; the rest is “expenses,” charged to the museum.)

While many such institutions have faced declines in revenue, their chief executives have continued to receive salary increases. For instance, although the American Museum of Natural History’s income declined 26% in 2002, the salary of its president, Ellen Futter, increased 15% to $623,000. It recently was disclosed that Chimes, a Baltimore not-for-profit handling vocational training and disabled care, paid its chief executive, Terry Perl, $1.07 million at a time when such groups’ government support and donations are shrinking.

Of course, these executives insist that they run huge corporations and are entitled to salaries commensurate with their budgets and fundraising. When asked about de Montebello’s compensation, a spokesman said he is “worth every penny” due to his prestige and experience. Phone calls to other executives and the American Association of University Administrators were not returned.

The reasons that these non-profit salaries are soaring have little to do with market forces, earnings, reputations or other objective criteria. The salaries stem from a system without meaningful checks and balances: No shareholders exist to sue for violation of fiduciary duties or corporate abuses. Tax regulations impose only limited restrictions. Presidents can influence the selection of boards, which return the favor in increased salaries.

Not-for-profits remain one of the last unexplored territories for reform. It is time to extend corporate-governance laws to large not-for-profit corporations. Until then, not-for-profits will continue to be a draw for profiteers.