Senate Plans Scrutiny of American U.

Finance panel's review to focus on board's due diligence in setting ex-president's pay -- and nonprofit trustee oversight generally.
December 5, 2005

The chairman of the Senate Finance Committee said Friday that the panel would examine whether trustees at American University "have performed their duties and responsibilities to the standard of what should be expected for such a major university" in the controversy surrounding its former president.

Sen. Charles E. Grassley's announcement came a day after American's trustees sent the senator a 12-page letter that explained and largely defended the board's oversight of Benjamin Ladner's compensation.

Grassley's staff has been exploring issues related to the governance of nonprofit organizations for some time now, and the senator said, in an October letter demanding information from American's trustees, that the university's board "could be a poster child for why review and reform are necessary." 

It is unclear where the Finance Committee's investigation is heading and what its implications are broadly for colleges and universities; American is but one institution, after all, and relatively little known outside the mid-Atlantic and Northeastern United States. But between the Finance Committee's inquiry and pending Congressional investigations into alleged improper behavior by charities stemming from the scandal involving the lobbyist Jack Abramoff, colleges have the potential to get singed.

American's board fired Ladner in October amid an investigation into alleged excessive spending by the president, but the controversy laid bare major divisions among the trustees and provoked criticism that they had done a poor job managing the institution and overseeing Ladner's compensation.

In the 12-page cover letter to their response to Grassley Thursday, the chairman and vice chairman of American's Board of Trustees, Gary M. Abramson and Thomas A. Gottschalk, acknowledged that "certain" practices of the board, in hindsight, "were deficient," and that the board was "actively engaged in correcting" them.

The letter, for example, asserts that Ladner's original employment contract from 1994 was reworked in 1997 by the president and a select few members of the board, rather than shared with top university administrators or the full board, as the university's bylaws at the time suggest that it should have been (Ladner partisans, however, say that key board members, including the heads of the compensation and audit committees, signed off on the new contract). The 1997 contract terms had no expiration date and assured Ladner that, upon leaving the presidency, he would always be paid at least 20 percent more than the next highest paid member of American's faculty.

While acknowledging their warts, the trustees' letter also revealed some heretofore unreported information about the board's activities, some of which suggests that the board had monitored Ladner's pay closely, and even cut the president's compensation back this spring after concluding that it "could be subject to challenge as excessive."

According to the trustees' letter, the board's compensation committee replaced one outside consultant with another in 2004 because of concern that it wasn't getting good advice. The new firm, Mercer Consulting, advised the panel that Ladner's annual pay was "at the high end of what comparable university presidents reportedly earn, and might be subject to challenge under Internal Revenue Service regulations."

In response, the board in April 2005 capped Ladner's total annual compensation at $793,000, down from a high of $886,750. "This process reflected a significant oversight initiative, voluntarily undertaken by the board," the board letters said in their letter Thursday, clearly intended as a signal to Grassley that the AU board has taken its fiduciary responsibilities seriously.

In the reply he released Friday, Grassley suggested that the American trustees had not exactly won him over. In meetings with his staff, Grassley said, students, professors and others at the university had "expressed strong concern about whether the current board members are capable of moving American University forward." As well as reviewing the situation at American, Grassley said, "I’m looking at legislative reforms that will encourage and empower boards to have more oversight of their operations. The best way to avoid problems like Benjamin Ladner’s excessive compensation and severance is for boards to know that the buck stops with them.”


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