March is National Ethics Awareness month. Many organizations of all types use this time as an opportunity to reflect on their awareness and practice of ethical behavior. It is all the more ironic that, as this month came to a close, an additional five employees of the infamous Bernard Madoff’s company were convicted of fraud on the 24th. This serves as a harsh reminder that even the most well-meaning foundations can fall prey to chicanery because of relationships of trust and a lack of fiduciary oversight.
NCRP released a white paper in 2009 examining the characteristics of foundations that lost substantial amounts of money by investing in with Bernard L. Madoff Investment Securities. We found numerous correlations among board size and diversity in those foundations affected by the Ponzi scheme. These included:
- 71 percent of the nearly 150 foundations in the dataset lost between 30 to 100 percent of their assets because of investing with Madoff.
- Among these 105 foundations, the median board size was three.
- Only 15 percent of these foundations have boards composed of five or more individuals.
- Of these 15 percent, trustee names showed significant homogeneity.
In the Ethics chapter of our Criteria for Philanthropy at Its Best, we propose that boards comprise at least five members who bring a diversity of perspectives, including those of the communities they serve. Our analysis of foundations impacted by Madoff found a strong correlation between small boards, many of them made up of people who likely could not have brought an external perspective to decision-making.
As we noted in our research, many of the trustees had personal relationships of trust with Madoff. But friendship and trust cannot replace fiduciary duty and the possible need for intermediaries to ensure prudent investments. Our recent quarterly journal features a piece on fiduciary duty in the context of mission investing. But that sense of stewarding foundation dollars entrusted to trustees extends well beyond the realm of mission investing. All grantmakers, regardless of how they leverage their assets for impact, should seriously consider whether their current investment policies are sound, ethical and transparent. If they did, is it possible we wouldn’t see great foundations like the JEHT Foundation perish because of poor investment choices?
Niki Jagpal is director of research and policy at the National Committee for Responsive Philanthropy (NCRP). She frequently blogs about philanthropy and social justice.
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