Bishop Estate Trust Case Study: Avoiding Conflicts of Interest

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Most people involved with nonprofit organizations are familiar with the concept of “conflicts of interest.” Generally, nonprofit board members should have a high standard of care and undivided loyalty to the nonprofits they serve. There should be no instances of self-dealing for themselves, people, or businesses related to them. For example, if a nonprofit is interested in purchasing a board members’ piece of property to expand their organization, they should be made aware of any costly problems beforehand. If the board member does not disclose this information, they will have violated their fiduciary duty by transferring their problems to the nonprofit.

Most board members generously donate their time, talent, and money with no expectation of return other than the satisfaction of being involved with a significant cause. However, nonprofits should be proactive by enforcing a conflict of interest policy, in the event a conflict of interest arises. Potential conflicts of interest could end up destroying both the public and donors’ trust in the organization. A sample conflict of interest policy can be found on the IRS website.

One of the greatest case studies on conflicts of interest is the Bishop Estate Trust controversy.

At the time of her death in 1884, Princess Pauahi Bishop was considered to be the most affluent landowner in Hawaii. In total, she owned approximately 10 % of the land in the state. Detailed in her will, Princess Bishop established a trust where all income from the land would be used to erect and maintain two schools on the Hawaiian Islands. The citizens were extremely enthusiastic for the Kamehameha Schools that would educate their children in the years to come. Since 1884, the Hawaii Supreme Court justices have appointed numerous groups of trustees to oversee the trust. The new board of trustees in combination with the increase in land and development values, which have driven up the trust’s worth to be billions, have created a high probability for conflicts and self-dealing to occur.

In August 1997, a Honolulu Star-Bulletin article outlined some of the conflicts of interests regarding the trust. These types of conflicts went beyond the board members’ relationship with the organization:

  • Many cases regarding the Bishop estate went before the Hawaii Supreme Court justices who selected the trustees. Allegations arose that the appointments by the Supreme Court justices were based on a tangled web of politics and favors.
  • The stakes were very high. By 1997, the trustees received approximately $900,000 in compensation for their services. This was extremely unusual, as most nonprofit trustees serve without compensation.
  • Some trustees invested personal money in some of the active investments they selected for the trust, including oil and gas deals. This created conflicts to whether their decisions reflected what was best for the trust or for the individual trustees.
  • The organization spent millions of dollars lobbying against intermediate sanctions regulations. Generally, an individual trustee or insider could be held personally liable if they unfairly benefited from transactions with the organization, with repayment obligations to the nonprofit.
  • Trustees allegedly used school employees to work on their own properties during work hours with no repayment.

These conflicts were considered so corrupt that the IRS threatened to revoke the trusts’ tax exempt status. Ultimately, the allegations were resolved through private settlements and jail time. A full account of the case is detailed in the nonprofit management book, “Broken Trust: Greed, Mismanagement & Political Manipulation at America’s Largest Charitable Trust.”

Conflicts of interest are an important topic for many organizations. If you have any questions or would like to discuss any issues specific to your organization, please contact Aronson’s Nonprofit & Association Services Group at 301.231.6200.

About Craig Stevens

Craig Stevens has written 81 post in this blog.

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