Cabot’s story offers a lesson not just in how foundations can be exploited by foundering scions, but also how this abuse can occur in plain sight. For whatever else Cabot may have done wrong, at least he was honest. He disclosed his largesse to the IRS and the Massachusetts attorney general, and when the Boston Globe called, he told the whole story.

A combination of ills have battered the foundation world in the past year. There have been dispiriting revelations of officer excess and malfeasance. Congress has attempted to raise the minimum amount that foundations are required to distribute each year under the Charitable Giving Act from its current 5 percent of assets. (The House and Senate continue to bicker over a watered-down version of the act, which would prohibit private foundations from including operating expenses and salaries above $100,000 within that 5 percent.) And then came a series of articles in the San Jose Mercury News and Boston Globe that exposed how easily philanthropic money can be misspent, whether it be on trustees’ pay, furnishings for the institution’s headquarters, or retainers steered toward lawyers and accountants related to directors.

None of these latter expenditures is illegal per se. The IRS stipulates only that fees for the board of directors or hired professionals have to be “reasonable.” State laws vary, but generally they rely on a similar standard of what constitutes reasonableness. Attorneys general and the IRS, however, evaluate the propriety of these activities on a case-by-case basis, which means a foundation has to be investigated before the government determines what “reasonable” means in that particular instance. That is what the Massachusetts attorney general began doing after the Cabot case hit the papers. But watchdog organizations such as the National Committee for Responsive Philanthropy in Washington are lobbying for a quantifiable definition.

The rapid growth in the number of foundations over the past decade and the failure of the regulatory apparatus to keep pace with them has multiplied the number of cases like Cabot’s. Still, this issue is not new. The problem of trustee compensation dates back as far as the creation of foundations themselves, to the mid-19th century. The regulatory overload merely brings an old question to the fore: Who will prevent a trustee from voting on his own raise?

The IRS lacks both the technology and manpower to proctor these activities, particularly since the departure of some of its senior experts in tax-exempt institutions in a mid-1990s agency shakeup. Private foundations are required to file a special tax form outlining their revenues and expenses, including salaries, and these documents are available to the public. But these forms have yet to be stored digitally, and 60,000 of them flood in each year. It is rumored that IRS staffers only look at the first page of the filings, and the risk of a foundation being audited is less than one-fifth of 1 percent. Meanwhile, state attorneys general, while somewhat more diligent, have lately shown a tendency to allow the news media to lead the chase, concentrating their efforts on those foundations that have hit the headlines.

Dubious Largesse
It is next to impossible to ascertain how many foundations even pay their trustees, much less the amounts. A Council on Foundations survey found that 41 percent of private foundations paid trustees beyond simply reimbursing their expenses in 2001. But that survey did not include thousands of foundations that do not belong to the council, which upholds an ethics code stricter than federal law.

The council advises board members to compare their fees to those of trustees who perform similar work at other foundations. But such research is tedious and generally inconclusive. Pablo Eisenberg, the lead author of a Georgetown University study of trustee stipends based on tax forms, found that pay varied widely. For example, the May and Stanley Smith Charitable Trust in San Francisco paid its three board members $250,000 each in 1998 for four hours of work a month. The Houston Endowment, by contrast, paid its seven trustees $10,000 each for four hours of work a week.

Since trustees sometime act as foundation officers, an investigation of trustee fees alone does not tell the whole story. Sometimes trustees are paid healthy salaries but also hire professionals to run the office, and it is hard to tell where the board begins and the staff ends.

One example from the Georgetown study is the Park Foundation in Ithaca, N.Y. In 2001, when its endowment hovered around $550 million, the foundation gave its six senior trustees a total of $899,688, according to its tax form, even though none of them are listed as working more than half time. Its president, Dorothy D. Park, the widow of founder and newspaper publisher Roy H. Park, received $167,688 for a job that records indicate required 7.9 hours a week. The current executive director, Linda Madeo, says that Park spends her “whole life” on foundation business, and that the figure on the tax form is wrong. The salaried employees (there were several at the time) merely provide office support, according to Madeo, who claims that Park’s current salary is less than $100,000, in part because the endowment was split in two when her son, Roy Jr., left the board to set up the Triad Foundation with his children.

This mixing of the personal and public, of staff and trustee, is endemic to family foundations. Eisenberg believes foundations should not employ relatives. “If they are paying reasonable and necessary fees to their own family members, then they can employ a nonfamily member to do the job,” he says.

On the other hand, such a rule could potentially dampen the philanthropic urge and is not widely supported by regulators. “Foundations need to be concerned about the due diligence issue,” says Belinda Johns, a deputy attorney general in California. “But there is no reason why they can’t employ people who are related if they are getting what they pay for.”

Though Senate opposition may kill the measure, debate continues in Congress over whether it is a good idea to put a $100,000 cap on the salaries, an approach that could discourage foundations from spending more on personnel than on charity. However, Harvey Dale, the director of the Center for Law and Philanthropy at New York University, predicts that the stipulation would accomplish the opposite because it would legitimize any salary under six figures. He sees no problem with the “reasonable” standard. It might need greater enforcement, he says, but “it is one of the oldest standards of law.”

The Fallout
The legislative moves and media exposés have made an impact. Many foundations have been shocked into reexamining their administrative practices. These efforts are long past due, according to many philanthropic consultants, among them Julia Kittross, founding partner of The Giving Practice in Seattle. “One thing that happens with foundations,” Kittross says, “is that the family may be engaged in philanthropy, but they end up not creating the kind of policies that any organization should have, whether it be staff and CEO review policies or who has the ability to write checks. It isn’t until they get stung that they realize they should have had those policies.” One foundation abandoned a program that matched donations made by trustees and employees to charities of their choosing for fear that this practice would be regarded as self-serving. “I didn’t think people would perceive that negatively, but they didn’t want to cross that line,” Kittross says.

Virginia Esposito, the executive director of the National Center for Family Philanthropy, recommends that foundations in which a CEO sits on the board should set up a separate compensation committee, so that no one votes on his or her own raise. “It should not be a job for someone who cannot find a job somewhere else,” Esposito says. “But if a member of the board is also qualified to be a paid staff person, I think that is a terrific staff person to have.”

The Council on Foundations discourages calculating trustee fees as a percentage of the endowment on the grounds that it would prompt risky investment strategies. But exactly what constitutes a reasonable trustee fee is less clear. The Council on Foundations survey, as unscientific as it was, found the mean trustee compensation to be $12,600. That number, adjusted for inflation, is more than a third higher than it was 15 years ago.

In any case, outrageous payouts may attract unwanted attention and damage trustees’ reputations. It is infinitely easier to undertake site visits and award grants if people view trustees as out to help others, rather than to enrich themselves. When it comes to determining how much is enough, trustees will need to recall that when the trust was set up by the founders, it was with the intention of using it for noble purposes. Giving away money might indeed be hard work, but it remains a privilege to hold the job. 

Illustration by Michael Gibbs