Smithsonian Takes Steps to Clean Up Governance After a Scathing Review

The Smithsonian Institution’s board violated numerous principles of good management during the tenure of its former top executive, Lawrence M. Small, including overcompensating him and allowing him to create an “imperialistic and insular culture,” an independent review committee said in a report released last week.

“The Board of Regents allowed this culture to prevail by failing to provide badly needed oversight of Mr. Small and the operations of the Smithsonian,” it said.

The three-member committee, headed by Charles A. Bowsher, a former U.S. comptroller general, was asked to review Mr. Small’s compensation and expenses after the former secretary resigned in March following accusations that he was spending lavishly for himself on the Smithsonian’s dime.

The report portrays a board that was so impressed by Mr. Small’s business contacts and reputation as a strong fund raiser that it gave him virtually free rein, allowing him to “run and dominate the meetings, set the agendas, and determine who would contact the Regents and what information would be provided them.”

Two days before the report was released, the board adopted changes to its operations that were proposed by its governance committee, which submitted a report that also faulted the regents for their hands-off approach.

They include prohibiting staff members from serving on corporate boards, as did both Mr. Small and Sheila P. Burke, the Smithsonian’s deputy secretary and chief operating officer.

The independent committee took Ms. Burke to task for excessive absences due to outside activities, including service on corporate boards for which she earned more than $10-million from 2000 to 2006. Ms. Burke resigned two days before the independent review was issued.

Warning Other Charities

The independent-review committee also issued a warning to other charities, urging them to comply with the Sarbanes-Oxley Act and other federal rules that regulate for-profit companies. “Failure to take voluntary action will likely lead ultimately to action by Congress, state legislatures, and the courts to impose reforms from without,” it said.

The Senate Rules and Administration Committee scheduled a hearing on the committee’s findings for this week.

A Smithsonian spokeswoman said Mr. Small was traveling, adding that he had declined to be interviewed by the independent review committee.

In his resignation letter, Mr. Small called the accusations against him “baseless” and said they could not change his record of accomplishments, including revitalizing the Smithsonian’s exhibits and facilities and introducing modern management systems.

The committee’s specific findings include:

• At the time he resigned, Mr. Small’s compensation, $915,658, was almost two-and-a-half times that of his predecessor, I. Michael Heyman, who left at the end of 1999. It included $150,000 that was styled as a housing allowance, but was actually a “packaging device” to deliver Mr. Small additional pay, according to the report. The initial package was negotiated by a small group of regents who did not consult the board as a whole.
• Mr. Small took more than 70 weeks of vacation during his seven-year tenure and earned more than $5.7-million in cash, stocks, and stock options for service on corporate boards.
• While some regents defended Mr. Small by saying he raised more than $1-billion for the Smithsonian, both the amount of grants from private sources and business revenue declined during Mr. Small’s tenure. Smithsonian officials later contested the report’s figures on private fund raising, saying that information from the organization’s informational tax returns showed that Mr. Small and his staff raised $950.4-million over seven years, compared with Mr. Heyman’s $388.3-million over six years. But James Joseph, a Washington lawyer who worked on the report, said Mr. Heyman had built up the fund-raising apparatus practically from scratch and in his final year raised more than Mr. Small did in four of the seven years he was at the helm.
• Mr. Small and his staff exercised sole discretion about which expenses to charge to the Smithsonian, with no review either internally or by outside auditors. An inspector general’s report detailed almost $90,000 in unauthorized expenses from 2000 to 2005, including charges for chartered flights, a trip by Mr. Small’s wife to Cambodia, floral arrangements, luxury car service, and catered staff meals. It said other expenses were poorly documented and some “might be considered lavish or extravagant.”
• The executive board agreed to numerous requests from Mr. Small for increased compensation without adequate investigation or discussion by the full board.
• Mr. Small took steps that the report said were designed to isolate the Smithsonian’s inspector general and general counsel from the board so they could not provide meaningful oversight.
• The Smithsonian management used compensation consultants primarily to justify substantial increases for Mr. Small and other top executives — for example, by lowering the percentage of public universities that were used for comparison. Those institutions generally pay less than select universities and big nonprofit groups like the Ford Foundation and the Metropolitan Museum of Art that were also part of the mix.

The Smithsonian, a nonprofit organization that operates 19 museums as well as the National Zoo and six research facilities, receives 70 percent of its budget from the federal government.

The committee made numerous suggestions, including asking an independent auditor to review the expenses of Mr. Small and his wife to see if they are subject to tax penalties.

It also suggested that the regents create an active governing board to take on primary fiduciary responsibility for the Smithsonian, with a chairman who can spend more time on oversight than the chief justice of the Supreme Court, who has traditionally served as chancellor.

Acting on a similar suggestion from its five-member governance committee, the board agreed to split the functions of board chair and chancellor, designating the chair to supervise oversight functions and deal with the Smithsonian’s senior management.

The board also tightened its expenses policy, changed the leadership of all of its committees, gave the chief financial officer and general counsel direct access to the regents, and agreed to hold at least four business meetings a year.

It also agreed that Smithsonian Business Ventures, the arm that operates the institution’s commercial activities, should follow established Smithsonian policies instead of having its own policies in areas such as travel, contracting, and accounting.

The governance committee will continue to look at ways to restructure the board and improve its operations.

‘Sobered’ by Findings

Diana Aviv, president of Independent Sector, a coalition of major charities and foundations in Washington and the only outsider to serve on the governance committee, said that other nonprofit board members should take heed of the Smithsonian’s troubles.

“In organizations, particularly large institutions, the prestige of sitting on boards may attract a lot of prominent people,” she said. “If board members don’t fulfill their governance responsibilities, they may find themselves in a situation where they are blamed for the organization’s woes rather than thanked for their contributions and commitments to that organization.”

Roger Sant, chairman of the board’s executive committee, said the board was “sobered” by the independent committee’s findings and took them seriously. However, he said, it was disappointed the committee had overlooked the “remarkable successes of the Smithsonian leadership and staff over the past seven years” — including opening the National Museum of the American Indian and the National Air and Space Museum’s new Steven F. Udvar-Hazy Center.

Sen. Charles E. Grassley, the senior Republican on the Senate Finance Committee — who was harshly critical of Mr. Small — praised the regents and the independent committee for undertaking the review. “Members of Congress need to stay engaged and make sure we help the Smithsonian’s renewal happen as soon as possible,” he said in a statement.

The reports by the independent review committee and governance committee are available on the Smithsonian’s Web site.