American University Faces Scrutiny Over President’s Pay, Spending

A controversy over compensation and spending by Benjamin Ladner, president of American University, has raised questions about board scrutiny of executive pay and drawn the concern of a key member of Congress.

A recent audit of Mr. Ladner, sparked by an anonymous letter to the board that made allegations of excessive spending, quickly became a major investigation into $614,117 in expenses over the past three years. Splashed in the local news media were embarrassing allegations gleaned from the audit, including that Mr. Ladner had billed the university $43,892 for expenses such as private parties featuring 13-course meals, and $22,345 for a first-class plane ticket to Nigeria.

Mr. Ladner has denied the gist of those allegations, saying the few mistakes he made with expenses were minor and inadvertent. He received $633,000 in salary and $181,000 in benefits in 2003-4. Last year, he requested a $1.12-million bonus and $5-million in retirement benefits, according to Paul M. Wolff, a trustee who has called for the president’s ouster.

“His spending and perks, and the very clear lack of understanding of what was necessary for university business versus his own enrichment, raise troubling questions about whether the governing board was doing its job,” Sen. Charles E. Grassley, an Iowa Republican and chairman of the Senate Finance Committee, said in a statement he provided to The Chronicle of Philanthropy.

Mr. Grassley is planning to propose a package of legislative measures designed to improve nonprofit accountability. “My reforms will encourage and empower boards to have more oversight of their operations,” he said. “That will help to ensure that the wheels don’t fall off, as they appear to have in this case.”

IRS Review

The tumult at American University comes as the IRS has been stepping up its scrutiny of nonprofit organizations over compensation paid top officials. Last year the tax agency began examining groups that provided their executives $1-million or more or otherwise appeared to be awarding excessive compensation and benefits.

Meanwhile, the California attorney general’s office is investigating the J. Paul Getty Trust after articles in the Los Angeles Times raised questions about its compensation practices. Trust officials deny any wrongdoing.

“Executive compensation is a hot issue,” said Deborah S. Hechinger, president of BoardSource, a Washington nonprofit group that helps organizations build effective boards. “All nonprofit boards need to take their responsibilities very seriously when it comes to setting executive compensation.”

The controversy at American has put the institution’s Board of Trustees in a tough spot. If board members have provided Mr. Ladner with overly generous financial benefits, they — and Mr. Ladner himself — could be fined by the Internal Revenue Service.

American University and its trustees do have reason to be concerned about federal regulators, said a former top official of the tax agency.

“The IRS has been explicit in its desire to reestablish itself as a policeman of the boundaries of charitable behavior,” said Marc Owens, who formerly ran the IRS division that oversaw private colleges and other nonprofit groups. “And I think that is one of the factors that is leading the IRS to be more aggressive.”

Mr. Owens noted that a federal law enacted in 1996 gives the IRS the authority to fine charity officials for receiving salaries and other benefits that are deemed excessive as well as to penalize trustees who approve the compensation. It is known as the intermediate-sanctions law because it gave officials a way to avoid the extreme case of revoking a charity’s tax-exempt status.

Mr. Owens said he believes that the IRS is likely to review the compensation Mr. Ladner received and might look at a provision in his contract that guaranteed him a high-paid job for life unless he was dismissed as president “for cause.”

Leader’s View

In an interview with The Chronicle of Higher Education and The Chronicle of Philanthropy, Mr. Ladner, who has been suspended by the university, said he was dismayed because, in his view, American’s Board of Trustees did not properly follow IRS guidelines to the intermediate-sanctions law, which are designed to help tax-exempt organizations head off trouble over the compensation they pay. Mr. Ladner said trustees should have — but did not — formally review his performance this year as it had in every other year of his time as president.

IRS rules say that the government will presume compensation to be reasonable if it was approved by a board that had no conflicts of interest with the person compensated, collected compensation figures for similar organizations and used them in determining salaries, and adequately documented the basis for its decision. For example, the rules say, if a board decides that reasonable compensation is higher or lower than the range of comparable data obtained, the governing body must record the basis for its determination.

Mr. Ladner said that “the pivotal point of intermediate sanctions is the board itself must decide and justify in writing, on the basis of a performance review, what the CEO’s compensation is. If it is doing it right, a board says, ‘We can justify this on the basis of performance and the record.’

“I demanded that they follow the intermediate-sanctions law and do a performance review,” said Mr. Ladner. “I said, ‘I don’t care if I make less, that’s fine, I really don’t care about the money.’ But the fact is they never did that.”

James P. Joseph, a lawyer who represents the Board of Trustees, said he could not comment on Mr. Ladner’s charges because the board is in the middle of an internal investigation.

Mr. Ladner said the board decided not to conduct the performance review after an outside lawyer who helped trustees obtain comparable compensation figures told them he would not sign off on Mr. Ladner’s compensation beyond a certain figure that he felt was appropriate. “Suddenly, an outside expert comes in and redefines the territory for decision making” — a step that the board should not have allowed, he said.

Mr. Ladner said the board’s acquiescence revealed the “difficulties that are hovering around the edges of higher education as consultants who make their living this way — attorneys, accountants, and so on — and are eager to get contracts and to come in and say, ‘This is what you need to do.’”

Mr. Ladner said the board also felt “legal pressure” from the Sarbanes-Oxley Act, a federal law designed to rein in rogue corporations. Sarbanes-Oxley does not apply to colleges and universities but it “was one of the driving factors” behind the actions of board members — some of whom work for corporations and therefore must deal with the law in their day-to-day activities, Mr. Ladner said. “A level of fear sets in that is quite remarkable,” he said. “It’s almost palpable: ‘Oh my God, we’re going to be sued. Oh my God, we’re not following IRS regulations.’

“It’s a case study in one institution being driven by a kind of fear that we’re out of compliance.”

Pete Smith, a former American trustee who left the American board last November, took issue with Mr. Ladner. “It was not the case of a bunch of board members being led by consultants looking for contracts. We went out and looked for these consultants ourselves.”

Added Mr. Smith: “He wants to categorize us as a bunch of ninny board members being worried about IRS regulations and not understanding them. That’s not the case at all.”

Paul Fain, a staff writer at The Chronicle of Higher Education, and Elizabeth Schwinn contributed to this article.