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Small Boards Left Foundations Vulnerable to Madoff Scheme

Resource Center - Foundation

(Sept. 15, 2009) A recent study reveals that the foundations hit hardest by the Bernard Madoff scandal had very small, homogeneous boards.

Of the 150 foundations listed by The New York Times as having been affected by the Ponzi scheme of Bernard Madoff, 105 of them lost between 30 and 100 percent of their assets. What is clear from a study by the National Committee for Responsive Philanthropy (NCRP) is that foundations with very small boards (fewer than five trustees) were particularly vulnerable.

A mere 16 percent of the foundations that lost 30 percent or more by investing with Madoff had boards comprising five or more individuals. Forty-five foundations listed three or four trustees and 39 foundations listed only one or two trustees.

“Simply put, reputational reference and reputational trust trumped due diligence in this situation,” notes the NCRP report.

Though not blaming the boards for choosing to invest in the corrupt Madoff, Rick Cohen, former executive director of NCRP, suggests a lack of due diligence was a factor for the foundations affected, highlighting the governing board’s fiduciary duty to protect tax-subsidized dollars.

“It may be time to turn a very tough eye on family foundations, large and small, where the stewardship of tax exempt moneys is left to a handful of people all with the same surnames,” Cohen wrote recently.

Avoiding the Next Madoff

As a result of its findings, NCRP recommends that foundation boards have at least five members with diverse perspectives and backgrounds. Of particular concern to NCRP was that the foundation boards were very homogeneous, at times composed simply of the people who started the foundation (or their family) with no others with outside perspectives. NCRP points to the system set in place (insufficiently large boards) rather than the board members themselves as to blame for falling victim to Madoff.

NCRP recommends expanding board membership by adding people who have different life experiences and who may consequently view issues before the foundation with a different lens. “It is possible that the foundations analyzed here could have avoided their over-reliance on their trust in Madoff by including external and more disinterested points of view,” NCRP has stated.

Additionally, NCRP advises that maintaining policies and practices that support ethical behavior and disclosing this information publicly can help retain the public trust and ensure ethical stewardship of a foundation.

Such policies and practices include, but are not limited to: maintaining and implementing conflict of interest and whistleblower policies; subscribing to any of the numerous available codes of ethical conduct and good governance for nonprofit organizations; and sharing demographic information on a foundation’s trustees and staff.

NCRP’s full report, Learning from Madoff: Lessons for Foundation Boards, can be found here.



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