The following is a transcript of Episode 2 of NCRP’s new video series, Unpacking Philanthropy.
Check out the video here on LinkedIn.
Hello and welcome to Unpacking Philanthropy. I’m Aaron Dorfman.
If you’ve ever lived in Minnesota, as I did for the first 25 years of my life, you’ve probably heard of the Otto Bremer Trust, which is one of the largest philanthropies in the state and among the top 150 nationally.
In 2022, they gave out nearly $69 million in grants and had net assets of slightly more than $2 billion.
And this spring, a Ramsey County District Court judge will rule on a case brought by Keith Ellison, Attorney General of the State of Minnesota, to remove the trustees of the Otto Bremer Trust for breaching their duties of loyalty and care, and for using the Trust to enrich themselves and for generally acting as lousy stewards of this large grant making organization.
But before we talk more about these greedy trustees and the failures of governance and oversight that allowed them to fleece the philanthropy [that] they were charged with stewarding, I want you to imagine a giant room full of undergrads taking the MCAT, the test you have to take to get into medical school.
Accountability in the Public Interest
Now, most of those students want to become doctors because they want to help people. Some of them have other motivations.
Getting into med school is highly competitive. Every student in that room knows that if they don’t score well on the tests, they might not get to pursue their dreams.
Now, imagine there is no supervision or oversight of the test takers.
No Proctor. No cameras. It’s all on the honor system.
How many of those students do you think would cheat on the exam?
Just a few? 25%? More than that?
In philanthropy, most donors and most staff and trustees and foundations want to help people, just like most of those students taking the MCAT. But the doctors who are supposed to be providing oversight for philanthropy and nonprofits have, for the most part, left the room.
And that’s a problem for all of us.
Ensuring the most qualified people become doctors is in the interest of society. If we have a nation served by mediocre doctors or doctors in it for the wrong reasons, we all suffer.
Similarly, if our philanthropic and nonprofit organizations have more than a few bad apples, it hurts everyone. It’s in the interest of society to ensure that philanthropy is serving the public good, not the private interests of donors, trustees or staff.
Private philanthropy, we must remember, isn’t entirely private. We subsidize it with preferential tax treatment, and so we all have a stake in how it’s practiced.
When Foundation Trustees Lose Their Way
Now back to the Otto Bremer Trust.
In June of 2014, Brian Lipshultz, Daniel Reardon and Charlotte Johnson – the three Trustees of what was then called the Otto Bremer Foundation – fired well-respected Executive Director Randi Roth and named themselves co-CEOs. Several NCP members and allies in Minnesota, contacted me and and were distraught and outraged.
‘Can they really do that?’ , several of them asked me.
I said I would look into the situation.
What we found was shocking. Over a ten year period, the trustees increased their compensation by 1,000%. They fired the executive director and made themselves co-CEOs so they could have a justification for even higher compensation. They had reached and exceeded the limits of acceptable compensation for trustees, so they needed to call themselves CEOs to justify their higher pay.
NCRP researchers found that over a ten year period, the trustees increased their compensation by 1,000%.
Now, in most foundations, the CEO is subject to supervision by a Board of Trustees. In this case, the trustees decided they should supervise themselves. NCRP called for the IRS and for Minnesota’s then-Attorney General, Lori Swanson, to investigate.
As far as we know, they did nothing.
It could be they never investigated because the oversight of philanthropy Is ridiculously underfunded.
The IRS’ Exempt Organizations Division has been woefully underfunded for years. A 2021 Treasury Inspector General report found that individuals were three times more likely to be examined by the IRS for tax compliance than nonprofits were. And businesses were audited five times more often than nonprofits were.
Meaningful oversight of our sector by the IRS isn’t happening.
And it’s not much better at the state level.
Many states have only one person in the AG’s office dedicated to oversight for all of the nonprofits and foundations in their state. Minnesota is better than average and has five attorneys assigned to the Charities Division. But they are responsible for overseeing more than 30,000 nonprofits and foundations in the state.
So, maybe Lori Swanson never investigated because her office was underfunded. Or maybe she was just another gutless politician who showed deference to rich people so long as they pretended to be doing some good?
We’ll never know.
But because Swanson never took any action, the situation with Bremer got even worse, if you can believe it.
In 2019, the Bremer Trustees decided to try and force a sale of the bank the Trust owns, under the pretense that it would mean more money available for philanthropy.
But the real reason, which came out in court, was so that the Trustees could increase their compensation again.
With a new Attorney General, former Congressman Keith Ellison, in charge, the office finally investigated and took action.
Lessons in Better Governance
The Otto Bremer case is outrageous, but the lesson here is not that they are an outlier or that they were just bad apples.
I should point out that the grant-making of the Otto Bremer Trust has been and continues to be pretty good.
Since ousting Randi Roth in 2014, about 70% of the foundation’s grant dollars have gone for the explicit intended benefit of marginalized communities, which is actually better than many of their foundation peers.
Source: NCRP Analysis of Candid date, via Tableau.
https://public.tableau.com/app/profile/ryan.schlegel/viz/BremerAnalysisFeb22/Dashboard1?publish=yes
The percentage of grants given as general operating support has been increasing, but is still a little below average for the field. And Bremer’s giving for social justice is also a little below their peers, but not egregiously low.
The point here is that it’s not just about the grants out the door. It’s also about what is happening inside.
If we want to philanthropic and nonprofit sector with integrity, not one that functions as a slush fund for the wealthy, we have to support rigorous oversight.
I see a few lessons here.
Lesson Number 1: If you’re a trustee of a philanthropy and you think you can provide meaningful checks and balances of your own actions, you’re delusional.
Good governance practices exist for a reason. Follow them. Make sure you have at least five people on your board and that they bring diverse perspectives into the boardroom.
If you’re a living megadonor and your philanthropy is governed only by one or two close family members and yourself, it’s time to start sharing power.
It took a divorce for Bill Gates and Melinda French Gates to seriously consider building a larger board, which we do expect them to announce this year. There’s no reason you need to wait for a triggering event like that for you to do the right thing.
You can act now and build a stronger board. Look at NCRP’s Power Moves toolkit if you want to know what to do.
Lesson Number 2: If you are the Attorney General of a state, we all need you to do your job.
Don’t back away from your oversight role with foundations and nonprofits because you think people will do the right thing most of the time. If you were the proctor of the MCAT exam, you wouldn’t leave the room because all those earnest young people want to become doctors for the right reasons.
Good people sometimes go astray, and they are more likely to abuse their positions if they think no one is watching.
Lesson Number 3: We must find a way to get back meaningful oversight at the Federal level.
The first step is a well-funded IRS. The budget President Biden proposed for FY 22 for the IRS included an additional $30 million dollars for the Exempt Organizations Division, which oversees nonprofits and foundations. If passed, those new funds will allow them to hire 244 new employees and conduct more than 9000 additional examinations each year.
Who knows? Maybe if the IRS had been fully funded back in 2014, they would have investigated Bremer back then and put a stop to the Trustees’ self-interested actions.
We’ve got to give the exempt organizations division of the IRS the resources it needs to do its job.
If we want philanthropy to serve the common good and not be hijacked for private purposes, we must have strong oversight; internal oversight with good governance practices and regulatory oversight by state and federal officials.
Otherwise, we’ll continue to see greedy people like these [screenshot of Bremer Trustees] abusing philanthropy – and then no one wins.
Philanthropy can help build a society where everyone thrives. It’s up to all of us to make it happen.
Be bold friends and use your power.