Misplaced Trust?

State and federal regulators probe Hawaii’s wealthiest charity amid charges of mismanagement and financial abuse

Trustees of the Bernice Pauahi Bishop Estate, Hawaii’s wealthiest charity, are under investigation by federal and state regulators amid allegations that they have mismanaged the estate and improperly mingled their personal interests with those of the charitable trust they oversee.

The estate, which runs the Kamehameha Schools in Honolulu and oversees real-estate holdings and far-flung business ventures worth an estimated $5-billion to $10-billion, has for years weathered criticism over the secretive, high-handed way in which its five trustees are said to run their huge empire, the generous fees they award themselves (around $900,000 a year each), and the highly political process by which they are appointed.

But over the past several months, the public outcry over alleged financial abuses and poor management of the estate’s educational programs has reached unprecedented levels. For the first time, the trustees have faced a virtual revolt among the school’s students, parents, alumni, and faculty members.

Created by the 1883 bequest of Hawaii’s last princess, Bernice Pauahi Bishop, the school now serves about 3,000 students of native Hawaiian ancestry at its main campus and thousands more through off-campus programs. It was originally two schools, one for boys and one for girls, but they have since merged into a single institution.

At the request of Democratic Governor Benjamin J. Cayetano, Hawaii Attorney General Margery S. Bronster is now investigating a number of allegations:

• That the trustees may have spent more than $1-million of estate assets for legal and consulting fees trying to defeat federal legislation intended to prevent excessive compensation and other financial abuses at non-profit organizations. In a preliminary report on the investigation, Ms. Bronster wrote, “It is highly questionable how this furthers the interests of the beneficiaries as opposed to the individual trustees.”
• That the trustees invested $85-million of estate assets in the same Texas methane-gas venture in which several trustees and school officials had also invested $2-million of their own money.
• That one trustee helped members of an exclusive private golf club negotiate the club’s purchase in 1995 from a partnership that included the Bishop Estate.
• That some trustees have siphoned estate assets for their personal ends.
• That individual trustees have made unilateral decisions on matters of school policy or financial management without consulting their colleagues, in apparent violation of the terms of the trust, which calls for the decisions to be made by a majority of the trustees.

Attorney General Bronster said she would also examine two other controversial issues: trustee compensation and the process by which trustees are selected.

“I have concluded that the rights of the beneficiaries may be at substantial risk,” Ms. Bronster told Governor Cayetano in her preliminary report. “There are credible allegations that the intent of Bernice Pauahi Bishop is not being implemented, and that in specific instances a trustee may have breached the fiduciary duty owed to the trust beneficiaries.”

The Bishop Estate trustees declined to comment on the charges. But they previously have contended that all their activities have been approved by the probate court, which appoints an expert to periodically review the estate’s financial books. They say they are good stewards of the estate and, as evidence, point to the school’s numerous successful graduates and top credit rating with Standard & Poor’s rating service.

The trustees’ chairman, Richard S.H. Wong, has said that its financial footing is rock-solid and that the school “is in a period of unprecedented accomplishments in educational achievement.”

In addition to the state Attorney General’s investigation, the Internal Revenue Service is reported to be conducting an audit of the Bishop Estate, although the agency’s usual policy is not to comment on such investigations. What’s more, at the estate’s request a fact-finder appointed by the probate court is looking into alleged mismanagement at the school.

Even though those investigations are far from complete, newspaper editorial writers and some native Hawaiian leaders are already calling for at least four of the trustees to step down.

“The Bishop Estate has become so political, and has been so badly misused, that drastic action has to be taken,” says Beadie Kanahele Dawson, a Honolulu lawyer for Na Pua a Ke Alii Pauahi (“Flowers of the Princess Pauahi”), an organization of students, parents, and alumni of the school. The group was formed in May to protest what its members considered to be arbitrary and intolerable interference by the trustees into school affairs, including the cutting back of a popular education program for small children.

Among other grievances: that one trustee has dressed down teachers in front of their students and that Michael Chun, the school’s popular president, has been relegated to a strategic-planning role while the vice-president, Rockne Freitas, makes administrative decisions in frequent consultation with a Bishop Estate trustee.

Prominent citizens, including many native Hawaiians, are also calling for reforms in how the trust is run.

In August, two judges, a Roman Catholic priest, a law professor, and a former Kamehameha School principal wrote a 6,400-word opinion piece in the Honolulu Star-Bulletin that summarized alleged abuses by the estate’s trustees, decried what the authors termed the trustees’ “secretive,” “dictatorial,” and “vindictive” management style, and called on the Attorney General to investigate. The essay, entitled “Broken Trust,” sparked vigorous public debate that led to the state’s investigation.

The authors of “Broken Trust” have suggested that Ms. Bronster ask the court to appoint a receiver to handle estate affairs while her probe is under way. They allege that the trustees are wasting charitable assets by hiring pricey legal advisers in an attempt to hamstring her investigation, in part by fighting the subpoenas of trust documents and by intimidating estate employees to keep them from cooperating with investigators.

Kamehameha Schools teachers, whose contracts bar them from criticizing the school or estate and from forming an association, have been threatened with dismissal for speaking out about the controversy and for taking initial steps toward organizing a union.

Not all of the five trustees are united in their defense of the board’s actions. One, Oswald Stender, has been a strong supporter of increased spending for school programs and has broken ranks with his colleagues over several of the issues in contention. He has been publicly critical of some of the trustees’ decisions and is reported to be cooperating with investigators.

Mr. Stender has also been among the many critics of the estate’s investment-management practices. By focusing on high-risk, high-cost investments like shopping centers, golf courses, condominiums, and gas-drilling companies, the estate has received very uneven returns. In the 1995 fiscal year, for example, when the estate spent $84-million on its educational programs, it also wrote off $44-million in soured investments.

“Seeing these huge losses is especially painful for those of us who last year watched as the trustees completely eliminated the estate’s early-education program, among others,” wrote the authors of “Broken Trust.”

What’s more, by pursuing such capital investments — which provide ample opportunity for sweetheart contracts and other patronage for friends and allies — the trust “has missed the greatest surge in the market value of traded equity securities in American history,” declares Robert R. Midkiff, a retired Honolulu banker and the son of a former trustee of the estate.

Much of the princess’s original bequest remains in the form of land (the Bishop Estate is the largest private landholder in Hawaii), which is one reason why determining its asset value is so difficult; real-estate prices in Hawaii have fluctuated significantly in the past decade.

The investigations now under way may ultimately result in recommendations for changing the estate’s structure or management. Ms. Bronster has said her options include seeking removal of one or more of the trustees, as well as other sanctions.

Many critics believe that the Bishop Estate can only be set right by making structural changes — although they differ about what those changes should be.

According to the terms of Princess Pauahi’s will, the state’s Supreme Court justices appoint the trustees. That arrangement may have worked well in the trust’s early days, critics say, but it has long since become part of the political patronage system by which the Governor, who appoints the justices, is able to influence the selection of estate trustees.

All five current justices were appointed by the previous Governor, John D. Waihee III, a Democrat. When a trustee seat became open in 1995, those justices rejected all the candidates proposed by a citizens’ advisory committee and instead selected Gerard Jervis, a close friend and associate of Mr. Waihee’s.

Among the other trustees, Mr. Wong is a former state Senate president, Henry Peters is a former speaker of the state House of Representatives, and Lokelani Lindsey is a politically active former public-school administrator. Only Mr. Stender, who formerly ran another prominent Hawaiian trust called the Campbell Estate, lacks a long career in politics.

Ed Halbach, a former dean at the University of California at Berkeley law school and an expert on trust law, calls it “a big mistake” to have Supreme Court justices select trustees. “When the Supreme Court is the ultimate arbiter of what’s okay and what isn’t with respect to trustee liability, it’s most unfortunate to have them be the ones who have picked the trustees,” he says.

What’s more, the attorney general’s ability to oversee and regulate charities is potentially hampered when that official must also argue cases periodically before the same body that has appointed the trustees of a charity that he or she may wish to investigate.

Defenders of the current appointment system often contend that Princess Pauahi’s express wishes should be respected.

But changing circumstances sometimes call for modifying a trust’s founding documents, Mr. Halbach says. “People who write wills don’t get to do everything they want,” he observes. “They can’t get the whole world to serve their purposes.”

Other critics favor limiting how long trustees can serve — they now serve from the time they are appointed until age 70 — and argue that the Legislature should create an independent watchdog to monitor the performance of Hawaii’s charitable trusts.

Ms. Dawson of Na Pua says the trustees should act more as overall policy makers rather than as five chief executive officers, each of whom takes responsibility for one area of the estate’s activities.

“They should be hiring a C.E.O. that can perform the work, and if they don’t perform, you fire them,” she says. “When a board member goes out and tries to do it himself — who’s going to fire him? Nobody.”

Na Pua hopes to act as a permanent watchdog to insure that the kinds of practices now under fire do not reoccur. It hopes that the probate court will recognize it as a legitimate representative of the trust’s beneficiaries so it can pursue whatever legal action it deems to be appropriate.

The trustees have long contended that the school itself is the only legal beneficiary, not the people who work or study there or those who have graduated from its programs. Since supervision by previous probate courts and attorneys general has been lax, critics say, the trustees have felt accountable to no one but themselves.

“When a board does not know how to be a good fiduciary and a good policy-making board and transgresses and meddles in the management process, you have serious problems — particularly when there are no stated beneficiaries to report to,” Ms. Dawson says.

“By having students, parents, and alumni recognized with legal standing to request that the trust provisions be enforced, that group will always be able to monitor what goes on,” she adds.

Many observers believe that simply reducing the compensation to a token amount would insure that the school’s welfare, not pecuniary self-interest, would become the primary concern motivating the trustees. It would also encourage the trustees to be less involved in day-to-day activities, they say, since trustees currently treat the job as full time — at least in part to justify their high fees.

“If they want good people, they should reduce the pay to zero,” says Samuel P. King, a senior federal district judge who was among those who also helped write the “Broken Trust” piece. “Then they’ll get the best in the whole country.”

Governor Cayetano says he intends to ask the Legislature to pass a law setting a lower ceiling on trustee compensation — though similar attempts in the past have gone nowhere. Hawaii law currently permits up to 2 per cent of a trust’s annual revenue to be distributed as trustee compensation.

Many of the allegations now being examined had been widely reported in the past without sparking concerted action by the state’s native Hawaiians, who consider the Bishop Estate to be one of the richest legacies from their royal forebears. Traditionally, says Ms. Dawson, native Hawaiians considered the trustees as inseparable from the Kamehameha Schools, and therefore rallied to the trustees’ defense whenever they came under attack.

“The actual beneficiaries — the students, parents, and alums — have previously been in a solid servitude mode for 100 years,” says Ms. Dawson. “This is a huge turnaround for them to suddenly say, If our school is in serious trouble, we as beneficiaries have an obligation to do something about it.”

The impetus for the change, notes Judge King, was when trustees began tinkering with educational programs and taking other measures that directly affected teachers, students, and parents. “They’re all riled up,” he says, “because this affects their children.”