With the announcement of a $400 million gift to Harvard University, one of the largest higher-ed gifts ever, now's a good moment to look back at a landmark case on donor intent and endowment management—and how big campus gifts can go wrong.
In 1961, Charles and Marie Robertson, inspired by the words of President John F. Kennedy to “bear any burden, pay any price in the cause of freedom,” devised a program to develop young Americans for government service. They made a contribution of $35 million to Princeton University, the largest donation ever made to the university at that time, to endow the Woodrow Wilson School of Public and International Affairs. The donation was so large that it was segregated into a separate foundation within the Princeton endowment—the Robertson Foundation.
In 2002, after years of disagreement about Princeton’s spending practices, the children of Charles and Marie filed suit against the university contending that Princeton was committed to a course that their parents had not intended and would not have supported. In their view, the Wilson School had increasingly become a feeder for private management consulting firms and the financial services industry. The children sought to transfer the foundation’s funds (that had since grown to over $930 million) to another institution—one that would follow the intent of their parents. In the end, in 2008, Princeton paid $100 million to settle the Robertson lawsuit.
Donors everywhere should thank the Robertson family for standing up and protecting the very important principal of donor intent.
The details of this case demonstrate a number of important concepts and principles of restricted giving and appropriate stewardship over donor-restricted funding. You can Google Robertson v. Princeton and work your way through the 375,000 hits, or you can read the excellent summary prepared by Neal B. Freeman for the Bradley Center for Philanthropy and Civic Renewal at the Hudson Institute. Freeman’s work is titled The Robertson v. Princeton Case: Too Important to Be Left to the Lawyers. Indeed, the concepts and principles discussed in this case should not be lost and forgotten among the plethora of legal mumbo-jumbo proffered by Princeton as it sought to grind down the Robertson family.
Another very good resource on this epic case are the writings of Martin M. Wooster of the Capital Research Center. Interestingly, Wooster characterizes the settlement as a “triumph” for Princeton, the complete opposite conclusion of Freeman! Wooster notes that this and other cases should provide guidance for both donors and charities about how donor funds should be used.
Many of the local newspapers and other media outlets write as if this settlement was a draw (it never went to court), never establishing which party was right or wrong. Remember, however, Princeton paid $100 million to settle, and that is not the action of the righteous party. Even before the settlement, Princeton established a new Office of Stewardship whose responsibility is to conform campus spending to donor intentions. Considering that the Robertsons wanted the take the endowment away from Princeton in total, the fact that the fund stayed with the university is a triumph of sorts, less the $100 million cost, of course.
This is the largest “donor intent” award in history, and hopefully, it emphasizes the fact that at the heart of every charitable contribution is the concept of trust—trust by the donor that the recipient will do what they have agreed to do to get the donation.
Let’s look at some of the details of the case.
The Robertson family hired the national accounting firm of PriceWaterhouseCoopers to conduct a forensic audit of the Robertson Foundation accounts. PWC found that a number of expenses were incorrectly charged to the foundation. These included professors and other personnel and, remarkably, the cost of constructing a new building. In total, PWC documented more than $100 million of foundation funds that had been misused by the university.
Part of Princeton’s $100 million settlement payment was approximately $40 million to pay for the Robertson’s lawyers. The average donor likely does not have the resources to take on a large nonprofit such as Princeton that is convinced or wants to convince you that it has done no wrong. Ideally, a donor who believes that his donation is not being used in accordance with the gift instrument can enlist the aid of the state’s attorney general, who is charged with protecting the public interest in dealing with charities. Realistically, state AGs do not have the resources or inclination to become involved. At a minimum, donors should take whatever steps are necessary at the time of the gift to obtain a clear gift instrument and clear understanding of how their donated funds will be used.
This case was a colossal waste of time, money and effort. Princeton should have done whatever was necessary to settle the case immediately. Actually, it should have listened to the Robertson family concerns long before they became a lawsuit. I say this not because it is evident in retrospect that Princeton was wrong all along, but because it would have been the right thing to do with any donor dispute. The fact that this case dragged on for six years points to the arrogance of Princeton (like many other charities when a donor dispute arises). "Who knows more about how your money is best used but us?" If that is indeed true, settle any disagreements at the outset. But charities seem to prefer to get the money first and work out the details later, if necessary.
Things change over time. Evolution is so slow that in many cases, change is imperceptible until years later. Regardless of how the charity uses the funds, they are probably used for a good cause.
Assuming all of that is true, what can the endowment donor expect 50 or 75 years after the gift? Charities are more often insisting on variance power in gift instruments. But it is often very hard to determine when a charitable intent has become impossible or impractical to implement. The death of the original donor removes the one person who really knew what the intent of the gift actually was.
Some suggest that donors who are concerned about this should simply avoid endowment gifts and make operational gifts while they are alive. The purpose of an endowment may lose its urgency and importance years down the line. There are a number of academic endowments created years ago to fund the study of the Soviet Union. Are these relevant today?
While perhaps not a perfect solution, operational gifts should be considered by every potential endowment donor. I don’t want to scare the endowment donor away from an endowment gift, however. Princeton’s need for the Robertson endowment money did not end—the mission was as necessary in 2002 as it was in 1961; Princeton just decided to use the money elsewhere. And, even if the world does change and the need for the endowment purpose completely disappears, there are options in state law available to charities to change the purpose of a donor restricted gift.
But endowment giving should always be approached with caution. When a leading institution of higher learning can so easily spend over $100 million outside of the purpose of the gift, it clearly raises a yellow flag on gifts in perpetuity. Donors might consider leaving endowment-like legacies to intermediary institutions that will disburse the funds to the beneficiary and monitor performance. A charitable trust established with an independent third party is always an option for the endowment donor. However, clarity of purpose is still essential in these situations as well.
Another option for the endowment donor concerned about mission creep or mission change is the limited-term endowment. In this circumstance, the terms of the endowment gift include a sunset provision whereby the gift restrictions are removed after a specified amount of time. In such situations, the institution, upon expiration of the specified time, converts the fund to unrestricted, general purpose endowment.
The first step is realizing there is a potential solution to the problem. Donors should not give no-strings-attached donations to charities trusting that the charity will do what it has agreed to do. As Ronald Reagan was fond of saying, “trust, but verify.” A donor should apply the same kind of diligence and vigilance they would when making any other similar sized investment. Donors have a responsibility to make sure that they give wisely. In addition to clearly stipulating their instructions in writing, they must follow up to ensure that the donation was properly implemented. It would not be onerous to request that the charity’s auditors prepare a report the performance of the endowment as part of their annual audit. Assuming that the auditors examine each endowment gift and that no news is good news is ill advised for donors.
A final issue that was never resolved due to the settlement vs. resolution in the courts was whether the Robertson children actually had legal standing to bring this action in the first place. The New Jersey attorney general is charged with monitoring the performance of charitable organizations in that state, and he offered not one word of input into this case.
Legal standing in charitable litigation is a very gray area. As I have written in the Sweet Briar College situation, legal standing of the plaintiffs is an issue and the Virginia State AG is staying out of the case, although he has questioned the legal standing of a Virginia county attorney who has filed a lawsuit. The bottom line right now appears to be that if you are a donor, don’t assume you will have an avenue of redress open to you through the courts.