Madoff Scandal Proves That Foundations Need Stronger Leadership

Original Source

The National Committee for Responsive Philanthropy and Independent Sector are Atlantic grantees.

by Aaron Dorfman, Executive Director of the National Committee for Responsive Philanthropy

There were more than 100 charitable foundations that lost a combined total of more than $2 billion to Bernie Madoff and his Ponzi scheme. These are funds that were intended to serve the public good and cannot be replaced.

The blame for this rests overwhelmingly with Mr. Madoff, who cleverly and willfully deceived thousands of investors, including foundations that had been established by generous donors seeking to give back to their communities. Mr. Madoff is scheduled to be sentenced on June 29th for his crimes.

The men and women who serve on those foundations’ boards, however, are not completely off the hook. They are supposed to be stewards of the public trust, overseeing tax-exempt assets for the benefit of the broader public. Many observers have commented about the need for foundation boards to improve their due diligence when considering potential investments, and there can be no doubt there is real room for improvement in that regard. But a new analysis conducted by my organization leads to an important and startlingly simple conclusion: To avoid falling prey to the next Bernie Madoff who comes along, foundations would be wise to increase the size and diversity of their boards.

The foundations that had the poor judgment to invest with Mr. Madoff share one thing in common: they all were governed by small, homogeneous boards of trustees. This put partially-public foundation dollars under their care at greater risk.

Of the foundations documented to have lost funds, 105 showed a particular lack of judgment by investing more than 30 percent of their assets with Mr. Madoff. And those 105 foundations had a median board size of only 3 persons. On federal tax forms, 38 foundations listed only one or two trustees, 46 foundations listed three or four trustees, and only 16 listed five or more. Five foundations did not list any trustees. Also troubling, the trustees of the foundations that were victimized by Madoff in most cases appear to all be from the same family.

The small size and homogenous nature of foundation boards is a systemic weakness of institutions designed to channel private wealth towards public purposes. Sector-wide, the median size of foundation boards is 3 and the average size is only slightly higher at 4.4. The most recent data show that 87 percent of foundation trustees nationwide are non-Hispanic whites.

Nevertheless, a notable subset of foundation leaders have wisely chosen to maintain larger, more diverse boards. The Association of Small Foundations and the Council on Foundations have reported that their median board sizes are five and 11, respectively. Some family foundations have found real value in adding trustees who are not members of the family.

Given the fact that virtually no large or diverse boards fell victim to Madoff’s scheme, it seems reasonable to conclude that smaller homogeneous boards were more vulnerable to Madoff and his abuse of relationships of trust.

Recent research from the University of Michigan suggests pretty convincingly that diverse groups make better decisions. People who have had different life experiences view problems in different ways and come up with different solutions to those problems.

There is no “one-size-fits-all” perfect board size or make-up. A board of four women who all live on the same block, have the same number of children, make the same salary and are the same age is not necessarily “diverse,” even if the women are of different ethnic backgrounds. Diversifying foundation boards isn’t only about race and gender; it is also about age, geographic location, professional expertise, life experience, social class and more. What is true is that while there is no one formula that can be prescribed, all foundations can benefit greatly from engaging a broad range of perspectives at the trustee level.

In 2007, Independent Sector recommended that nonprofit boards comprise at least five people and that they include a diversity of perspectives. My organization recently reiterated that call a few months inCriteria for Philanthropy at Its Best where we identified board size and diversity as one of ten benchmarks we recommend for exemplary philanthropy.

The law clearly allows for small, homogeneous boards for private foundations. But mounting evidence shows that larger, more diverse boards are less vulnerable to scams and more effective at achieving their organization’s philanthropic mission. So why wouldn’t all foundations begin moving in that direction?

Aaron Dorfman is executive director of the National Committee for Responsive Philanthropy, a watchdog and advocacy organization based in Washington, D.C. A full listing of the foundations that were victimized, the percentage of assets they lost to Madoff, and the number of and names of trustees can be found in a special white paper on the NCRP website at www.ncrp.org.