Friday, August 7, 1998

Bishop Estate Master's Report

Weak managers, big losses

The report: Calls the
estate's investment performance
spotty ... Criticizes the trustees
for conflict-of-interest policies ...
Urges lead trustee be replaced
by a chief executive officer

By Rick Daysog


The court-appointed master for the Bishop Estate today harshly criticized the estate's investment performance, called for stronger conflicts-of-interest policies and urged the estate to implement a management system headed by a chief executive officer to replace the "lead trustee" management system.

In a 145-page report filed in state Circuit Court this morning, Special Master Colbert Matsumoto said the estate suffered losses and loss reserves of $242.4 million during its 1993-1996 fiscal years.

Matsumoto said that the estate managed a total return of minus 1 percent for the same three-year period and a total return of 2.4 percent for the five years ending June 30, 1996. Those figures lag the growth of the stock markets and are well below the 17.3 percent compound annual return the estate said it has experienced since 1970.

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Critics of the Bishop Estate called the report devastating and said the report, as well as other recent findings, could lead to the removal of several trustees.

"It makes it increasingly clear that trustees simply were not up to the job and have in fact done a terrible job," said Randall Roth, University of Hawaii law professor and co-author of the "Broken Trust" article that criticized trustees' management of the estate.

"This really is the end of the world as the trustees know it."

A spokesman for the estate could not be reached for immediate comment, and individual trustees were not available for comment.

William McCorriston, the estate's attorney, said the report takes much of the estate's finances out of context. He noted the estate continues to enjoy its best-ever financial health and will continue to enjoy substantial growth.

He said the estate's investment in Goldman Sachs & Co. alone will be worth from $2 billion to $3 billion. The estate paid about $500 million for 10 percent of the investment banking firm.

In its filings with the Internal Revenue Service, the nonprofit estate reported revenues of $303.6 million for its fiscal year 1994, $257.7 million for fiscal 1995 and $203.4 million for 1996.

"This doesn't give the whole picture," said McCorriston. "The money's there."

Matsumoto's report comes as trustees of the estate have come under intense scrutiny during the past two years. State Attorney General Margery Bronster is investigating allegations of financial mismanagement and breaches of fiduciary duties by trustees, and the IRS is conducting an audit of the estate's finances.

Established in 1884 by the will of Princess Bernice Pauahi Bishop, Bishop Estate is the state's largest private landowner and operates the Kamehameha Schools for children of native Hawaiian ancestry.

According to Matsumoto's report, which relied on findings by the national accounting firm of Arthur Andersen, the estate recorded losses and loss reserves of $55.2 million in the year ending June 30, 1996, and $51.7 million in the year-earlier period.

The report said the trust suffered losses and loss reserves of $135.5 million in the fiscal year. Last November, Matsumoto said the estate has losses and loss reserves of about $264 million.

The three-year loss reserve totals are on top of some $151 million in write-offs and reserves identified by past master Benjamin Matsubara for the estate's 1992 and 1993 fiscal years, Matsumoto said.

The numbers cited by Matsumoto include actual losses and reserves for losses. Loss reserves represent amounts that the estate aren't likely to recover. Some of the losses have been offset from gains from other estate investments.

The report also called for reforms of the estate's management system, recommending the establishment of a single-voice management system headed by a chief executive officer. The CEO-management model would replace the so-called lead trustee system that places trustees at the head of various estate departments.

Matsumoto said the so-called lead trustee system caused confusion on the Kamehameha Schools campus and may violate the will of the estate's founder.

Previous masters of the estate have recommended similar management systems for governing the estate, but the recommendations have not been approved by the state probate court, which oversees trusts in Hawaii.

McCorriston said the estate would review the recommendation for a CEO-governance structure, but he noted that the estate implemented such a system long ago with little success.

The report also called for stronger conflicts-of-interest policies and criticized trustees for using estate funds to lobby against national legislation affecting trustees' compensation.

Matsumoto recommended that the trustees show why they should not be charged for those lobbying expenses, which could end up benefiting individual trustees.

The master's report also raised questions about Bishop Estate trustee Henry Peters and former trustee Matsuo Takabuki in their dual roles as trustee of the estate and director of company Mid Ocean Ltd., in which the estate has a substantial investment.

The Bishop Estate trustees, from left,
Richard Wong, Henry Peters, Lokelani Lindsey,
Oswald Stender and Gerard Jervis.

The critical report
raises few eyebrows

By Helen Altonn and Susan Kreifels


Bishop Estate management and investment issues cited in a report filed in court today aren't new or surprising, and changes are long overdue.

That was the general reaction to a critical report on practices of Kamehameha Schools/Bishop Estate trustees by attorney Colbert Matsumoto, court-appointed master.

The trustees couldn't be reached immediately for comment.

State Attorney General Margery Bronster, who has been investigating the estate since last August, said she hadn't seen Matsumoto's report yet but "had he found nothing wrong, it would have been a surprise."

Many of his recommendations have been made before, she said, such as replacing the lead trustee form of management with a chief executive officer.

"We believed that was an appropriate recommendation last February when the preliminary report came out, and we were the only ones insisting that recommendation be adopted immediately, which it hasn't. Hopefully, it will now," Bronster said.

Also, she pointed out: "A lot of these things are already required by the will and their (trustees') fiduciary duty. So again, none of this comes as any surprise."

Beadie Kanahele Dawson, attorney for Na Pua a Ke Ali'i Pauahi, a 2,700-member parent, teacher and alumni group, also noted similar recommendations in previous reports, particularly the need for a CEO.

But she said trustees ignored them. She also faulted previous attorneys general and probate courts for not putting more pressure on the trustees to make changes.

"When policy makers both create the policy and carry it out, this creates an invariable loss of checks and balances," Dawson said. "Based on the performance of these trustees, they will continue to ignore the master's report unless the attorney general leans very hard and clear in that direction."

Bronster said she hopes all information Matsumoto collected will be made available to her office "and it will all be added into the work we're currently doing.

"We've working diligently to try to get something completed, but we have, throughout, been stymied by just constant stonewalling."

The Bishop Estate was founded by the will of Princess Bernice Pauahi Bishop, who "required an awful lot of public disclosure," Bronster said. Common-law duties of the trustees also "require the highest standards" which trustees should already have followed, she said.

"These are responsibilities of the trustees for 113 years."

Regarding a recommendation to establish "reasonable compensation," Dawson said the trustees have paid themselves the maximum amount available under current law as if it were a "vested right ... irrespective of their poor management."

She said the terms of the will don't call for compensation, and again criticized the past court and attorneys general for "allowing these abuses to continue."

Dawson said the report should have pointed out the multiple directorships the trustees hold in other organizations which create a conflict of interest.

"It's to our (Hawaii's) own shame that we have not stood up to this previously. They can't serve two masters."

Dawson "absolutely opposed" a master's recommendation that the trustees be ordered to adopt the financial statements and supplemental schedules proposed by Arthur Andersen.

The attorney general needs to study that report as well as others already made, she said. "They can't be accepted on face value."

Regarding estate losses and profits, Dawson said she finds it "offensive that trustees have consistently lied to the court and community that they have made such great returns by basing figures on 1964 valuations of estate assets.

Na Pua President Toni Lee said the trust's "Las Vegas style of investments has really been a problem. They are taking these tremendous gambles."

Lee said most Kamehameha Schools graduates have never cared about the trustees' salaries. "But as we've gone through this year and a half of trying to settle the problems of our schools, we have come to the conclusion that salaries have a lot to do with it. It's the arrogance and power of money that seem to be prevailing over everything."

Roy Benham, president of the Kamehameha Schools Alumni Association, Oahu Region, said hiring a CEO "makes sense to restrict their (trustee) activities to setting policies and assuring the policies are implemented."

Retired state Intermediate Court of Appeals Judge Walter Heen said Matsumoto's report is "the most comprehensive, detailed, knowledgeable analysis of the estate reports on its management and investment functions that has ever been done.

"And some of these recommendations have been called for for so long, there cannot be any argument now with this in-depth analysis that they should have been instituted previously and they should be instituted immediately now."

He said a recommendation calling for a reasonable trustee compensation plan would "preclude a lot of litigation in the future."

"You have to note that the issue of the removal of one or more of the trustees is not addressed," said Heen, one of the five community leaders focusing on estate mismanagement in the "Broken Trust" essay in the Star-Bulletin a year ago.

"That will have to be, again, determined by the probate court. But I think this report and the attorney general's investigation should be very helpful in that regard."

Other "Broken Trust" authors were U.S. District Judge Samuel King and former Kamehameha Schools for Girls Principal Gladys Brandt.

King, sitting on the court in Chicago temporarily, said today that "the estate has been run too long as though it was a commercial business instead of an educational institution, a mission that was very important to the Hawaiian community.

"One of the difficulties has been the failure of the trustees to accept advice and input from the school's own faculty and from other members of the Kamehameha ohana, namely parents, alumni and even students."

King said he would be interested in their reactions to the report and "would be prepared to support what they think" rather than the trustees' reaction.

He said criticism with the way Kamehameha Schools were being run has "all proven to be correct based on fact."

After hearing Matsumoto's recommendations, Brandt said, "Well, well, well."

She said her initial interest was geared to the campus environment, "the climate where students, I felt, were not properly helped in their educational venture, and the faculty particularly."

"I had no idea that all of this would come out when I entered into stemming forth my concerns.... I am very pleased with what this report is indicating, and I would hope it would hasten the slow pace of legal proceedings.

"I think the public at large is anxious to get something done, and a lot of good has been done." She said she hopes remaining issues will be settled as soon as possible for the sake of the students and teachers. "I have nothing but praise for the faculty there."

She also feels "dialogue put aside between the alumni and trustees is a no-no. They need to be heard and need to be received with understanding that they (trustees) certainly care about what is happening at the school and to children there."

Larry McElheny, Kamehameha Schools Faculty Association president, criticized the trustees for their investments and spending money trying to stop the teachers union. "This shows more loss of money, poor judgment and stonewalling," McElheny said.

The recommendations

Master Colbert Matsumoto made 19 recommendations for Bishop Estate in his report released today. Among those were:

Bullet Stricter conflict-of-interest policies and procedures should be adopted.

Bullet A plan for determining reasonable trustee compensation should be prepared.

Bullet The estate's lead trustee system should be abolished and a new chief executive officer-based system should be instituted.

Bullet Trustees should show why they should not be charged for expenses incurred in opposing intermediate sanctions legislation.

Bullet The estate should adopt the financial statements and supplemental schedules proposed by the accounting firm Arthur Andersen.

Bullet The estate should annually submit financial statements which conform to the trust accounting format as prescribed in the Andersen report;

Bullet Future reclassifications of accumulated income should require court approval.

Bullet Investment performance schedule should be regularly prepared and incorporated as a supplemental schedule to estate's financial statements.

Bullet Analysis of estate's investment return should use appropriate industry standards or performance measures.

Bullet The estate should strengthen its due diligence and investment monitoring policies, practices and procedures.

Bullet Investment and management decisions should be properly documented.

Bullet Court-monitored strategic plannning should be initiated by the estate.

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