We talk to the man who put the California trust in hot water

Written by Peter Laufer

It's been a ghastly year for the J. Paul Getty Trust, as the multibillion-dollar foundation faces a growing, nasty pile of misconduct charges. Tabloid-like headlines have been screaming worldwide about exquisite malfeasance: stolen art, ludicrous expenses for its CEO's travel and entertainment, self-serving favoritism in its hiring practices and real estate sales. The bad press and criminal allegations were topped off by the ultimate in peer pressure when the Council on Foundations (COF) placed the Getty on probation.

That low point was followed by a continuing housecleaning of executives and board members at the trust, along with an extensive rewrite of the trust's bylaws. The COF - a non-profit association of foundations that seeks to self-police philanthropic organizations - was satisfied that the changes were not mere window dressing, but rather "positive and significant" reforms. They restored the Getty's full membership. That's when I caught up with the COF's president and CEO, Steve Gunderson.

Gunderson and I talked about the role of the COF in regulating the philanthropy industry, using the Getty situation as an example. Extreme as were the ethical violations leveled against the Getty (see the sidebar "The Gory Details" for some of the startling facts), the lessons it learned can apply to all foundations with ethics problems, whether it be those engaged in nefarious activities by design or those poised for trouble by mistake.

Peter Laufer: I think the best way to start this conversation is to get a bit of an understanding of what the leverage and involvement of the COF is in affairs gone wrong, such as what happened at the Getty. What does it mean when the COF places an institution on probation? Is there any muscle there, or is that just a little wagging of the finger?

Steve Gunderson: That's a great question, and I think it's an evolving process. It's important to know that up until last year, when the COF had taken disciplinary action of any kind, it had done so privately. So the foundation that was disciplined knew, but the public didn't know, the media didn't know, the policymakers didn't know, potential donors didn't know. Nobody else knew and it was like: "Okay, what's the leverage here?"

Q: Not much, right? So what precipitated the change in COF policy that led to the very public criticism of the Getty?

A: I made the recommendation to our board that we not only put them on probation, which indicated that their status as a member of the COF was in jeopardy, but that we do so publicly.

Q: However the COF isn't a governing authority, so the COF wasn't charging the Getty with anything. You were using the muscle of the public eye to try to force the Getty to recognize what you perceived to be egregious problems with their operation?

A: Absolutely. What we're doing is, if you believe that we ought to engage in self-governance rather than having increased government regulation, then you have to be willing to take that role seriously.

Q: And that is the belief of you and the COF? Rather than have the government impose authority, the world of foundation-based philanthropy should be engaged in a self-governing

process?

A: There are certainly some roles that nobody would object to the government getting engaged in - clear tax fraud and other kinds of violations like that. No question about that. But here are some basic actions regarding what we would call "traditional standards of practice" that ought to be dealt with, I think, by this sector. They don't need to be dealt with by increased government regulation.

Q: Sure, if such self-policing is successful. Was Getty the first foundation to be on the receiving end of this new policy?

A: They were the first to be publicly reprimanded, yes.

Q: And so far are they the only ones to be publicly reprimanded?

A: The only ones that have been publicly reprimanded at this time. Anybody can file a complaint with the COF. We have the most wide-open process in the world. You could file a complaint against a foundation if you wanted, and we would take your complaint seriously, even if they had fired you as an employee last week. We would look at it to see whether there was merit and whether it should be referred to a review panel that we have set up, and then the review panel would conduct the review and they would report to the board. It's a very clear process.

Q: And it's after that process - after a complaint and an inquiry - that you would initiate whatever series of events leads to a public probation, such as the one the Getty suffered?

A: The process is what gets us to a public determination. I mean, we don't put anybody on public probation instantly. And the whole process is confidential, for obvious reasons, until we find they have committed what we think is inappropriate conduct.

Q: And with Getty, was that initiated internally, or did someone come to you and complain?

A: You know what? I can't answer that.

Q: Okay. Now, the charges against Getty are consequential: using assets for personal benefit, excessive travel and entertainment costs, the inappropriate compensation for the CEO, potential self-dealing. That's not a parking ticket.

A: The charges that have been leveled against the Getty have been very serious. A lot of them relate to issues that would be more appropriately investigated by the California Attorney General.

Q: . . . who is indeed doing that.

A: Who is doing just that. We look at the appropriate standards and official conduct as established by the ethical standards of the COF when we review a complaint. Members have to sign an ethical conduct statement when they join the COF, and that gives us the authority to conduct reviews. Much of what we did when we looked at the Getty was to focus on how their conduct resulted in these actions.

Q: Right, in other words: How did they get into this mess in the first place?

A: Yeah. Our goal is not to censor. It's not to use someone for a political agenda. It's not to embarrass them. It's to correct the conduct of philanthropy.

What we really want to do is use both that public leverage of a public decision, such as probation, and the private support of providing some of the best experts - either on COF staff or in the field - to work with them to bring them back as a member in good standing.

Q: So you imposed yourselves - with their approval, at their invitation probably - but you were invasive. You did not simply make an announcement that they're on probation.

A: [laughs] I don't know that it was with their invitation. I would suggest to you it was not.

Q: So they were resistant?

A: To be honest with you, part of the reason for the probation was a result of a lack of cooperation by the Getty leadership at that time . It was very clear once we did the public probation that we had gotten their attention.

Q: And did they realize what a mess they were in? Was this naivete or was this overt misconduct?

A: That's a great question, and I can't comment on the motives of certain individuals. But I have to tell you that there were many, many professional employees at the Getty who were uncomfortable with the conduct and the actions that were occurring under [the trust's] name. There were many people pleased to have this kind of intervention.

Q: "Intervention" is a good word. And so once that intervention started, were they cooperative, or was it like pulling teeth to get appropriate responses?

A: Well remember, during the process, they had a change in leadership. [President and CEO Barry Munitz resigned while the Getty was on probation by the COF.]

Q: Yeah, but they still had some of the same board members, and it was only recently that the top guy, Board Chair John Biggs, said good-bye.

A: That's right. But we were never convinced of how much the board knew about what was happening with the senior executive leadership there. That the board and the executive leadership. All of this relates to issues about appropriate governance.

Q: Because even if Barry Munitz were doing something wrong, it's the role of the board to be overseeing his work.

A: That's right.

Q: So even if they were ignorant, they're still at fault because they're supposed to be monitoring him.

A: That's correct. It goes back again, at least from our perspective, to the question: Do you have the oversight, accountability, and governance functions in place for a board so that a president and CEO does not have the ability to impose certain activities upon the board and the foundation with little or no resistance?

Q: Was part of the problem that Munitz stacked the board with his own supporters, who he knew would be loyal to him, as he engaged in the activities your probation notice criticized?

A: Well, you know, I can't answer that. [pauses] Um, that may be the case.

Q: What were the mechanics of the turnaround? How did you work with the Getty to go from probation to rehabilitation? How did you clean house?

A: The process starts with the complaints. Our legal department does an initial review. They believe that there is merit for going forward into a further review of the case. We then turn it over to independent panels - not COF staff, but people who are recognized as sort of statespersons in the field. We ask at least three of them to conduct an investigation. They report back to us. We then take their recommendations and report to our board. The decision to issue a public probation of the Getty was a decision made by our entire board.

Q: But you didn't simply criticize them and discipline them, you extended a hand. You offered to help.

A: We offered them our professional assistance. They accepted that. As a result, we sent two of our senior staff members - experts on the issue of philanthropic governance - out to California for extensive meetings with their staff, with their board, with their legal counsel, to review all of their documents, all of their processes and make appropriate recommendations.

Q: That's not free. Who paid for that?

A: We pay for that. I'm quite proud of this organization because it is absolutely committed to the highest ethical standards in the philanthropic community. You know, there are some foundations who say: It's our money, we can do with it what we want. Everybody who joins the Council on Foundations knows that, in becoming a member of this organization, you have signed up for higher standards of principle and practice.

Q: That must make you quite proud to be leading an organization like that.

A: Absolutely.

Q: So then your experts made the recommendations to the Getty, and what did the Getty say? "Get out of here"? "Go back to Washington"?

A: No. We required evidence that the Getty was making the changes before we chose to remove them from probation. And we have both specific changes in their bylaws and the evidence of the minutes of their meetings that prove that all of that occurred.

Q: And the changes in some personnel must also be mitigating factors for removing them from probation.

A: And the changes in personnel. But we saw this as a much bigger issue than just a personnel issue. It wasn't just "Fire Barry Munitz and we'll take you off probation." That was never the goal of the COF.

Q: Because there was an institutional problem?

A: Yes.

Q: And does that come from the arrogance of wealth and power and position? The Getty is an operation worth several billion dollars, and as you said, it must be easy to adopt an attitude of "it's our money, we can do with it what we want."

A: It's one of the big challenges that I personally, as the head of this organization - and this organization itself - face. There are many foundations that simply don't have access to the legal expertise and advisors to know exactly what is right or wrong. If you saw the number of applications to join the COF that, when we look over their paperwork, we say, wait a minute, this is a mistake, this is a mistake, and this is a mistake. They say, "I had no idea." I remember last January, right when the whole Getty thing was going on, we had a conference of family foundations, and one gentlemen who was from California stood up and said, "Life's been good to me. I and my family started a family foundation. But I don't know how to operate under all of these standards. And if I'm going to become a criminal by doing it, then I think I'm going to disband my foundation."

Q: Incredible. What a clear statement that your work is of value and needed.

A: What we need to do is find appropriate balance in situations like that. We want to encourage the growth of philanthropy. We want to work with these individuals. We want to give them the benefit of our expertise, our educational programs, and our legal assistance, because we want him to have a foundation. We don't want him to go out of business. At the same time, we are sensitive to the fact that if government gets into overregulation, people are going to be driven out of this field, not attracted to it.

Q: There may have been a cultural acceptance of excess in organizations for a while in our society. Is it possible that some of the excesses in the business world that we're suffering from in our hangover from the go-go '90s, like the fates of Enron and Tyco, naturally spilled over to foundations?

A: I don't think there's any doubt about that. Many of these people are private businesspeople who made money on their own, and they've never had codes, bylaws, codes of ethics, or boards, and they say, "What is all this stuff?" [laughs]

Q: They live in their own world.

A: They're not criminals. They're not villains. They just are not in tune with the reality that once you put that money into a foundation, it's really a public trust.

Q: How does a foundation cited, like the Getty, get that public trust back? Now that you've taken them off probation, is it the old story that the headline persists, but the correction is on the back page of the newspaper?

A: I think that there's some truth to that. There have been a lot of stories in the Los Angeles Times over the summer about things the paper discovered. Best we can tell, it's all old news. These are things that were part of the previous discussion.

Q: So you're saying then that the Getty is clean now?

A: We believe that the present leadership, Deborah Marrow [interim president and CEO], and certainly the changes in governance in the board, suggest that they are moving in the right direction. Our board voted unanimously to take them off probation.

Q: But moving in the right direction is not quite a clean bill of health.

A: We required that they didn't just commit [to change], they had to prove to us that they'd done it. They changed their bylaws. Now, is there the potential that somebody can change the bylaws and ignore them? Of course. And if that happens, we'd go back. But we made very clear to them that it was not just intent, it had to be evidence. And they provided us the evidence.

Q: And you'll look very closely at what the Attorney General's office comes up with, I imagine?

A: Well, I don't think there's any question that we will, if and when the Attorney General's office makes some kind of a recommendation, and especially if there is new information there.

Q: And the same thing with these charges and ongoing trials regarding the complaints from Italy and Greece? [For more information on these complaints, see the sidebar "The Gory Details."]

A: We will keep our eyes and our ears tuned to all news on this

or any other foundation.

Q: How do you feel about the Getty case at this point? The COF must feel pretty great that it imposed these requests for change and got the results.

A: Yeah, we feel good. The process worked in the case of the Getty. But in all honesty, it worked because the new leadership there wanted it to work. With the growth of philanthropy, someplace down the road we will face a foundation who resists our help, who doesn't want to make corrections, and then we will have to take the appropriate steps.

Q: And that might mean that there are some foundations who decide to live on the wild side, and that's okay?

A: Well it's not okay from our perspective, because every foundation out there that engages in misconduct gives a bad mark to all of us, the ninety-nine percent who engage in appropriate, high ethical standards. We are very concerned about that. We all pay the price.

Q: You cite the increase in philanthropy. Are we giving away more money?

A: We are looking at a dramatic increase in the growth of philanthropy, primarily because of generational demographics. You're looking at both the World War II generation and the baby-boom generation. We have now hit over $500 billion in foundation assets in this country. We gave out over $30 billion in foundation grants in 2004, the most recent year for which we have data. According to the World Bank, over the next thirty to forty years, that will increase tenfold. And that was before Warren Buffett's announcement.

Q: Those impressive figures don't help take governments off the hook, do they? All those billions of dollars don't allow them to reduce services because they can make an easier case by saying, "Hey, it's not our responsibility, Buffett and Gates will pay for those needs"?

A: Oh, boy, if you want to get the dander up in the philanthropic community, you tell them they're supposed to step in where government's walked away. That is simply not the role of philanthropy. You know, I'm a former Republican member of Congress, and I will be as adamant and as vocal as I can that it is not our job to step in where government fails to act. Government should not see us as that insurance policy.

Q: But that's a danger isn't it, especially at a time when government is seeking votes by cutting taxes and, consequently, services?

A: It's obviously a challenge. What we need to do is explain the difference between philanthropy and the public sector. You could take all of philanthropy, all of our assets today, the entire $500 billion dollars, and that doesn't match one year of the federal budget.

Q: Right.

A: So we can't compete in that regard. Unlike the public sector and the public dollars, philanthropy is meant to be innovative and creative, and to take risks and to fail. We don't believe in "one size fits all." The Gates Foundation can stand up and say that some of the things we have done in high school education haven't worked. That's exactly what philanthropy can do better than government can - admit its failure and go on and try different strategies.

Q: And government should be, by definition, providing a baseline?

A: That's right.