Better governance can take Kamehameha Schools forward
» First of two parts
» Tomorrow: A better way to manage Pauahi's estate.
Editor's note: Nearly nine years have passed since the Star-Bulletin published an essay by five citizens who questioned the operation of the Bishop Estate. Its trustees have been replaced, the method of choosing them has changed and it has been renamed Kamehameha Schools, but disagreement about its operation continues.
SOME Latin sage said "Experentia Docet" -- experience teaches. Some modern sage concluded that "a bad experience can teach more than a good experience". But in order for experience to teach, we have to be ready to learn. And we have to act on what we have learned.
What can we learn from the rapid decline and painful resurrection of the Kamehameha Schools/Bernice P. Bishop Estate?
Background of the will
To understand the guiding document, her Last Will and the Codicils, or supplements, we should look back at Bernice Pauahi's heritage and youthful training. A direct descendant of the great King Kamehameha, she was born in 1831 and at birth was hanai'd to Kinau, prime minister and adviser to King Kamehameha III. When the chiefs determined that their children should be educated at a Royal School, she was moved at age 8 into the new Chiefs' Children's School to live with and be taught by missionary teachers Amos and Juliette Cooke. She lived there with 15 other royal young children and the first five of the Cookes' children.
Her fellow students included future Kings Kamehameha IV, Kamehameha V, Lunalilo, Kalakaua, and Queens Emma and Liliuokalani. Neither Bernice nor any of her illustrious classmates parented a child who reached maturity. Without direct heirs, King Lunalilo, Bernice Pauahi Bishop, Queen Emma and Queen Liliuokalani left their estates to perpetual single-purpose charitable trusts.
In those years the population of Hawaiians declined steadily. When Captain Cook sailed to Hawaii in 1788 an estimated 300,000 Hawaiians were living in the Islands. By 1884, when Bernice died, the population had fallen to 60,000 and the number of pure Hawaiians was headed down to near-extinction. The sound of mourning for the dead was heard in the dusty streets of Honolulu every day.
King Lunalilo died without an heir in 1874, leaving one of the largest landed estates in Hawaii. Charles R. Bishop, who had been married to Bernice Pauahi in the Cookes' home in 1850, was named in the king's will as one of the trustees of his charitable trust for the benefit of "poor, aged and infirm people of Hawaiian ancestry".
This was the first of the alii single-purpose charitable trusts in Hawaii. There was neither an estate nor an income tax motivation for these charitable trusts. The alii children felt a strong Hawaiian tradition of stewardship, there were huge perceived human and social needs and there was the benefit of the strong Christian education at the Chiefs Children's School.
With the exception of some property in Waikiki, Lunalilo owned 65 ahupuaa (tracts of land extending from the tops of mountains down to the ocean) scattered throughout the islands. Few tenants were left to work the lands and created very little rental income. The trustees sold most of Lunalilo's lands for very little to raise cash to establish his charitable trust and build the first Lunalilo Home for "ancient and indigent Hawaiians."
After King Lunalilo's death, David Kalakaua was elected king. In 1875, he negotiated a reciprocity treaty with the United States. Without the prohibitive American tariff, sugar became profitable and sugar lands increased greatly in value.
In 1883, a year before Bernice's death, Princess Ruth Keelikolani died, leaving her inherited Kamehameha lands to her cousin, Bernice Pauahi Bishop, as her sole surviving heir. Thus Princess Bernice, in one stroke, became the largest landholder among the few remaining heirs of the high chiefs of Hawaii. Learning from the sad experience of the Lunalilo Trust land sales, Bernice added a codicil to her will advising the trustees of her charitable trust to avoid the sale of land unless necessary to support the schools.
The dramatic rise in value of the assets of the Bernice P. Bishop Estate has made the estate too large to be properly managed as a trust. A 19th-century trust document is no longer suitable to meet the challenges of the 21st century. As we shall see, almost every provision in the princess' will has been breached. The only one left standing is the provision that there shall be a trust, managed by five trustees.
Section 13 of the Will of Bernice Pauahi contains her directions to the trustees:
» To "erect and maintain in the Hawaiian Islands two schools, each for boarding and day scholars, one for boys and one for girls, to be known as, and called the Kamehameha Schools".
My father became president of the schools in 1923 when the two schools were consolidated under one CEO.
In his history of the schools, Colonel Harold Kent, the president from 1946-1970, wrote, "The Kamehameha Schools couldn't have survived had Bishop not soon returned the lands to the Estate, which his wife willed him for life, and had he not dug into his own self-earned resources for the cash dollars to construct the major portion of the buildings. He had his own concept of an essential broadening of Mrs. Bishop's program and initiated the preparatory department and paid for the buildings."
» To "expend the annual income for the maintenance of said schools" (teachers' salaries, the repairing of buildings and other incidental expenses).
In 1997 Colbert Matsumoto, the court-appointed master, detailed how the Bishop Estate trustees moved $350 million from income to principal. Much of this was reinvested in illiquid investments, starving the operations of the school.
» To "devote a portion of each year's income to the support and education of orphans, and others in indigent circumstances, giving the preference to Hawaiians of pure or part aboriginal blood".
This is the only reference to racial preference in the will. At one of the early meetings of the new trustees, the policy of Hawaiian preference was established, following the strong recommendation of trustee Charles R. Bishop.
» "I also direct that my trustees shall annually make a full and complete report of all receipts and expenditures and of the condition of said schools to the Chief Justice of the Supreme Court, or other highest judicial officer in this country; and shall also file before him annually an inventory of the property in their hands and how invested, and to publish the same in some Newspaper published in said Honolulu."
This instruction in the will was disregarded for many years. The former trustees knew how many dollars the trust had received from the proceeds of leasehold conversion, but had no idea how their illiquid reinvestments were doing. They eventually were faulted for having operated in extreme secrecy and for submitting misleading and inaccurate financial information to the probate court.
» "I also direct that the teachers in said school shall forever be persons of the Protestant religion."
Because the trustees operated Kamehameha Schools as a secular institution, this provision of the will was attacked by the federal Equal Employment Opportunity Commission and found invalid by the courts. The schools no longer are able to inquire as to the religious beliefs of employees.
» "I appoint my husband Charles R. Bishop, Samuel M. Damon, Charles M. Hyde, Charles M. Cooke, and William O. Smith, all of Honolulu, to be trustees."
These five gentlemen were haole friends of Mr. and Mrs. Bishop and outstanding leaders of the small community of Honolulu.
There is no provision for mandatory retirement in the trust. My father served as trustee until his death at age 96. He participated in the decision by the trustees to recommend a mandatory retirement age of 70 for future trustees. The justices at the time adopted that rule despite lacking authority to do so under the terms of the will or established law in Hawaii.
In 1982, then-Chief Justice William Richardson -- formerly lieutenant governor and chairman of the state Democratic Party -- was appointed trustee for a term ending at age 72, two years beyond the agreed-upon limit of age 70. This particular appointment and exception to the relatively new mandatory retirement rule made clear that the selection process had become politicized. A new pattern for selection was established. After that, with the exception of Oz Stender, only part-Hawaiian politicians were selected.
» "Vacancies shall be filled by a choice of a majority of the justices of the Supreme Court".
This provision was temporarily nullified by the decision of the majority of current Supreme Court justices to recuse themselves from appointing replacements for the five fired trustees. They have delegated appointment responsibility to the Circuit Court probate judge and have agreed to refrain from exercising this personal responsibility under the trust.
» "The selection (of trustees shall be) made from persons of the Protestant religion".
The senior trustee, Richard Wong, supposedly met this provision of the trust by conversion from his Catholic religion to become a Protestant. Other trustees did not even bother to go through the motions. Trustee Gerard Jervis remained a Catholic and trustee Lokelani Lindsey was a Mormon. So long as the probate judge controls the selection of trustees, this provision cannot be honored.
» "I further direct that my said trustees shall not sell any real estate, cattle ranches, or other property ... unless in their opinion a sale may be necessary ... or for the best interest of my estate."
This provision was inserted into the first codicil to the will because of the demonstrated losses to the W. C Lunalilo Trust Estate caused by the provision in that king's will that his extensive lands should be sold and the proceeds reinvested in "good stocks and bonds."
Charles Bishop wrote in a letter to fellow trustee Charles M. Hyde in 1896, "The capital of the B.P. Bishop Estate should not be any further reduced, and as there is no better security than the lands owned by it, they should not be sold, but they should be leased in large lots or tracts or small lots and for long term or short term at fair rates of rent."
Former trustees followed this provision even when inflation drove renewals of leasehold rents out of the reach of residential tenants. Eventually, the state forced residential land sales through a mandatory leasehold conversion law, and was victorious in a contested case before the U.S. Supreme Court in 1984.
More than a billion dollars was received by the former trustees, who reinvested it in various speculative ventures, primarily for capital growth. The investment in a Wall Street limited partnership was a ten-strike, offsetting the losses from the other speculations.
ABOUT THE AUTHOR:
Robert R. Midkiff is president of the Atherton Family Foundation and former president of American Financial Services of Hawaii. He is the great-great-grandson of Amos Star Cooke, one of the founders of Castle & Cooke, and son of Frank E. Midkiff, president of Kamehameha Schools from 1923 to1934 and a Bishop Estate trustee from 1939 until his death in 1983.