5 trustees
get raise, maybe
to $1 million

Peters says commissions
were up last year, topping
1997's pay of $844,600

By Rick Daysog
Star-Bulletin

Bishop Estate's five trustees each received pay raises last year, despite the passage of a state law limiting board members' compensation and a pending Internal Revenue Service investigation into excessive salaries.

Bishop Estate trustee Henry Peters yesterday confirmed that board members' commissions increased during the fiscal year ending June 30, 1998, from the prior year's $844,600.

Peters said he could not recall the exact amount that trustees received last year. But sources say that Peters and fellow trustees Richard "Dickie" Wong, Oswald Stender, Lokelani Lindsey and Gerard Jervis may have been paid as much as $1 million last year.

The issue of trustees' compensation has been a major theme in the 2-year-old controversy surrounding the Bishop Estate and the estate-run Kamehameha Schools. That trustees took a pay raise when the trust's operations have been in turmoil underscores board members' arrogance, critics said.

"It's an egregious breach of trust, but after so many you just stop counting," said University of Hawaii law professor Randall Roth, a co-author of the 1997 "Broken Trust" article that criticized trustees' management of the multibillion dollar estate.

"I think they are taking as much of the legacy for themselves while they can."

Peters defended trustees' compensation as performance-based. He noted that the estate in the year ending June 30, 1998, enjoyed one of its best-ever years as operating income reached $250 million. In the year-earlier period, the estate enjoyed a record operating income of $260 million.

Peters said trustees didn't take commissions on capital gains that the estate enjoyed from successful investments last year. He noted that trustees typically waive hundreds of thousands of dollars in commissions each year on educational revenues, land sales and capital transactions.

A more definitive listing of trustees' pay and the 114-year-old estate's finances will be made public next month in the estate's annual filings with the IRS.

"We're not apologizing for the success of the institution," Peters said.

"I expect a pat on the back on that and not a kick in the ass."

The trustees' pay raise comes after the state Legislature last year passed a measure limiting trustee compensation of charitable organizations to reasonable levels set by the state probate court. The new law went into effect on Jan. 1, but standards on determining reasonable pay for the Bishop Estate's trustees have not been finalized by the court.

Meanwhile, the IRS's exhaustive audit of the Bishop Estate also is focusing on the issue of trustee pay, according to a confidential report filed with the state probate court on Tuesday.

The eight-page report -- authored by a special five-member panel appointed by Probate Judge Kevin Chang -- said the IRS may seek to revoke the Bishop Estate's tax-exempt status if trustees do not immediately resign from the estate and if the estate does not set up a process to determine reasonable compensation for trustees and the estate's top executives, sources said.

The report also said the IRS is calling for a process to select replacement trustees and is requiring the trust to resolve all tax-related issues pending since 1990.

Loss of the estate's tax-exempt status could cost the trust tens of millions of dollars each year and could affect the budget of the Kamehameha Schools.

Yesterday, members of the Kamehameha ohana expressed outrage at the developments involving the IRS audit. Toni Lee -- president of the 3,300-member Kamehameha Schools parents and alumni organization Na Pua a Ke Ali"i Pauahi -- called on the trustees to voluntarily step down to avoid further harm to the school and the legacy of the estate's founder Bernice Pauahi Bishop.

"This whole situation has moved to a new level and it is dangerous," added U.S. District Judge Samuel King, a co-author of the Broken Trust article.

"If the trustees had any regard for the children of Hawaii they would take heed and move out now and overlook their own greed and stubbornness."

Yesterday, trustees Peters and Wong said it's premature to step down since they aren't aware of many of the details raised by the IRS audit.

Wong noted trustees' hands "were tied" when Judge Chang in February removed the trustees from the IRS audit process and forbid them from communicating with trust staffers involved with the audit.

Chang's ruling -- which found that trustees had a conflict of interest since many of the issues raised by the IRS directly affect board members' personal interests -- forbade trustees from communicating with the IRS and named a five-member panel of special-purpose trustees to negotiate with the IRS.

"To step down might be a consideration, but first tell us what we've done wrong," Wong said.

"I'd like to see what I did wrong, then I can make up my mind if I should step down."

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