June 25, 2009 | Read Time: 2 minutes
Of the foundations that have been hardest hit by the Bernard Madoff financial scheme, the majority of them lacked adequate board size or diverse board leadership, factors that contributed to their becoming victims of the investment scandal, says a new report.
Of the 150 or so nonprofit organizations affected by the Madoff Ponzi scheme, 105 lost 30 percent to all of their assets. Of that group, the median board size was three people, said the report by the National Committee for Responsive Philanthropy, a foundation watchdog group in Washington.
In addition, many of the boards consisted mostly of family members.
“The major lesson is pretty clear,” said Aaron Dorfman, the committee’s executive director. “Small, homogeneous boards were much more likely to fall prey to Madoff’s Ponzi scheme.”
The National Committee for Responsive Philanthropy recommends that a foundation have at least five board members and that they have a diverse background. The committee also encourages foundations to have a conflict-of-interest policy, a code of conduct, and make public demographic information about the board.
While saying these practices would not entirely insulate a foundation from the potential for investment fraud, Mr. Dorfman said it would help to prevent such problems.
“They make it more likely that a board is going to actually do due diligence, rather than simply make investment decisions or other decisions based on trust or reputation,” he said.
For its analysis, the National Committee for Responsive Philanthropy looked at the 150 foundations listed by The New York Times as being Mr. Madoff’s victims and examined the informational tax returns of the ones that suffered the biggest asset losses.
Of the 105, 38 foundations had one or two board members, 46 had three or four, and 16 had five or more. Five foundations did not include the names or number of board members in their tax data.
Most of these grant makers were family foundations and relatively small, with a median $3.23-million in assets.
But the list also includes the Picower Foundation, which lost nearly $1-billion. The foundation and its founders, Jeffrey and Barbara Picower, are being sued by the court-appointed trustee who is overseeing the liquidation of the Madoff investment firm for allegedly being complicit in the scheme.
A lawyer for the Picowers has denied any wrongdoing by his clients. (Read The Chronicle’s article about the lawsuit.)
While not addressing the Picower case in particular, Mr. Dorfman said the committee is not recommending that trustees should be sued for falling victim to Mr. Madoff.
The committee “believes that most trustees at foundations impacted by their Madoff investments neither acted in bad faith nor colluded with Madoff,” said the report.
