Shaken Trust

Kamehameha Schools Bishop Estate looms larger on the Hawaiian landscape than any other private institution. Land, money, political connections--you name it, the estate has it.

The legacy of a revered Hawaiian princess, the 113-year-old educational trust has long drawn on its potent assets and the aura of its benefactor to deflect all but the occasional sniping critic.

No longer. For the first time, Bishop Estate--Hawaii’s biggest private landowner and one of the nation’s richest charities--is under siege.

The state attorney general is investigating the possibility of conflicts of interest and “self-dealing” by estate trustees. Gov. Benjamin Cayetano ordered the inquiry after pillars of the native Hawaiian community, including a senior federal judge and an esteemed Roman Catholic cleric, publicly accused four of the five trustees of financial mismanagement.

The Internal Revenue Service also is looking into activities of the tax-exempt public charitable trust, whose endowment is valued at more than $8 billion.

Even the estate’s beneficiaries--the usually loyal alumni, students and staff members of its flagship Kamehameha Schools--are openly protesting trustee actions.

“In the past, we figured it was their kuleana [turf] and we had to trust them and their best judgment,” said Roy Benham, an alumnus and former Kamehameha Schools teacher. “We are no longer willing to blink our eyes.”

The trustees have said they welcome the scrutiny and are actively trying to resolve concerns about their management of the trust.

Unlike board members of many tax-exempt foundations and educational institutions, who usually receive nominal stipends, Bishop Estate trustees each collect commissions averaging $900,000 per year.

The estate was created in 1884 as a stipulation of the will of Princess Bernice Pauahi Bishop, the great-granddaughter of King Kamehameha I, who unified the Hawaiian Islands in 1810. Princess Pauahi left 378,500 acres of her land in a self-perpetuating trust with a single mission: the education of Hawaii’s children. Today, the private Kamehameha Schools enroll 4,400 of the brightest native Hawaiians, from preschool through high school.

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But the legacy of the princess has become much more than schools producing “good and industrious men and women,” as she envisioned. Bishop Estate’s massive land holdings, roughly 9% of the entire state, give it great sway in the local real estate market. Its political connections are legendary. Today, a former president of the Hawaii Senate and a former speaker of the House are among the trustees.

The estate’s vast resources also make it a player in the world market, although its presence is veiled because it operates through numerous subsidiaries. Among its assets: the Royal Hawaiian Shopping Center in Waikiki, one of the world’s most profitable retailing centers per square foot; a 10% stake in New York investment powerhouse Goldman, Sachs & Co.; 300,000 acres of timberland in Michigan; a majority stake in Southern California Federal Savings & Loan Assn.; assorted golf courses; methane gas ventures; and even a Chinese bank.

Over the years, the estate has made friends in high places. It teamed up with former Treasury Secretary William E. Simon on investment projects and has an unusual link to current Treasury chief Robert E. Rubin. To avoid any conflict of interest, Rubin pays Bishop Estate roughly $100,000 a year to hedge his hefty investment in Goldman Sachs. While the deal insulates him from the fortunes of his former company, it ties him directly to the estate. Rubin, who oversees the IRS, has recused himself from decisions involving the trust.

As Bishop Estate has built its global investment empire in recent years, critics contend that its educational mission has gotten short shrift, or worse. In a scathing op-ed piece that was published Aug. 9 in the Honolulu Star-Bulletin, several prominent Hawaiians accused trustees of losing tens of millions of dollars in risky investments.

It was signed by senior U.S. District Judge Samuel P. King; Msgr. Charles Kekumano, chairman of the Liliuokalani Trust; Gladys Brandt, former chairwoman of the University of Hawaii Board of Regents and also a former Kamehameha principal; Walter Heen, retired judge for the Hawaii Intermediate Court of Appeals; and Randall Roth, a University of Hawaii law professor who is an expert in trusts.

The authors claimed that politics has perverted trustee appointments, which are made by members of the state Supreme Court, and that patronage and conflicts of interest taint the estate’s financial management. “More so than any other charitable trust,” they wrote, “Bishop Estate has been quick to engage in deal-making, as opposed to plain old investing.”

Three days later, Cayetano ordered state Atty. Gen. Margery Bronster to investigate. In her preliminary report, released in September and recommending further action, Bronster found evidence that individual trustees may have failed in their fiduciary duties and put beneficiaries at “substantial risk.” She highlighted the following:

* Trustees allegedly invested their own money in projects in which the estate was also an investor, calling into question their duty to avoid “self-dealing.”

* Trustee Henry H. Peters has been accused of an irreconcilable conflict of interest for negotiating on behalf of a group that was buying an exclusive Virginia golf course from Bishop Estate.

* Trustee Lokelani Lindsey reportedly used trust resources to improve her personal residence.

* Estate funds were used to lobby against legislation, subsequently passed, to limit trustee compensation.

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The trustees declined to be interviewed for this story. Board Chairman Richard S.H. Wong said in a written statement that Bishop Estate financial statements are regularly reviewed by court-appointed masters and that “many of the claims have already been scrutinized and laid to rest.”

The other two trustees are dissident Oswald K. Stender, who has been spared criticism because he has publicly opposed some decisions of the board, and Gerard A. Jervis, who has lately begun to question actions of Wong, Peters and Lindsey.

In a recent speech, Peters decried the rush to “judge and convict” the estate, and expressed disappointment that “the attorney general has allowed herself and her office to be swept up in this frenzy.” He said the estate is financially stronger than at any time in its history and is spending more on Hawaiian education than ever, roughly $100 million a year.

According to its tax return for the year ended June 30, 1996, the latest one available, the estate’s annual income was $203 million. It listed total net worth at $1.71 billion, with its land valued at 1965 prices. However, the county assesses the estate’s land holdings in Honolulu alone at just under $5 billion, and the estate’s true worth is estimated at $8 billion to $10 billion.

“In our role as a global investor, we will go wherever there are opportunities to get the biggest bang for our buck,” Peters said. “For the last 15 years, we have enjoyed in excess of a 15% compounded rate of return on our investments.”

However, Bishop Estate’s primary for-profit subsidiary, Pauahi Holdings Corp., reported a mere $4.2 million in net income in fiscal 1996 on an investment of $598 million, a return of less than 1%. Pauahi Holdings, however, includes the estate’s highly profitable stake in Goldman Sachs, which Peters has said earned it $200 million in 1996. When queried, estate tax administrator Gilbert Ishikawa noted that numerous entities fall under the Pauahi umbrella and said the estate “wrote down some assets” that year.

“You need to look at it as a complete portfolio,” cautioned estate spokeswoman Elisa Yadao. “If you look at any given item at any given time, there could be cause for concern. The goal is for the estate to do well in any economic condition and market. The horizons of this organization are different because we’re a trust in perpetuity.”

Bishop Estate has at times minimized its tax bite by shifting assets between its taxable for-profit subsidiaries and its tax-exempt parent. A private ruling from the IRS, for example, allowed it to transfer the assets of the Royal Hawaiian Shopping Center into its tax-exempt division in 1986.

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The estate, which has always held its cards close to its vest, has responded to the public hubbub by doing its best to keep a lid on it.

It refused to comply with subpoenas from the attorney general for minutes of board meetings and other records, calling them “proprietary business information.” Bronster has had to obtain court orders to force the trust to surrender documents.

After learning that an estate employee might be deleting computer files relevant to the case, Circuit Judge Kevin Chang issued an order Oct. 17 prohibiting such action and directing employees to “restore and undelete” any records. The order also prevents the estate from retaliating against employees who give information to the attorney general.

Earlier, at Kamehameha Schools, the elected leaders of a newly formed 200-member faculty group had been reprimanded and threatened with dismissal for signing a letter to the editor lamenting the “climate of fear and threat of personal intimidation” on campus. Teachers work on one-year contracts and are forbidden to talk with the media about school matters without clearance. The group, Na Kumu o Kamehameha, which represents more than two-thirds of the faculty, defied the administration again late last month with an op-ed piece that declared, “We have been contained and controlled for years.”

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Bishop Estate also has tried to rein in workers who are no longer in its employ. It recently went to court and succeeded in preventing the former head of its insurance division from disclosing information about its business dealings. Last month, it filed countersuits against two former teachers who had filed bias complaints against the school. It has also subpoenaed the notes of local reporters who have written about its finances.

Up until now, when allegations of trustee mismanagement have surfaced, the Kamehameha Schools “ohana” (family) and its powerful allies have rallied around the estate. Criticism has often been depicted as “anti-Hawaiian” or an attack on the princess, and critics were brushed off as outsiders who just didn’t understand.

This time, however, that argument isn’t holding. Ninety percent of the Hawaii residents polled in September by the Honolulu Star-Bulletin supported the decision to investigate the estate.

“The big difference is that Hawaiians who are alumni, students, parents and teachers are in an uproar,” King said. “Otherwise there would be no change, it would just be guys on the fringe saying this is wrong.”

The trigger for the recent unrest was not so much concern over how the trustees were handling estate finances, but how they were handling education.

Two years ago, citing a financial squeeze and consolidation of the estate’s mission, the trustees eliminated community education programs that were reaching 10,000 people a year. Those shut out included public school children in largely native Hawaiian areas, preschoolers and young parents.

The decision meant a shift from trying to help as many needy Hawaiian children as possible to focusing on those who could make the competitive cut to enter Kamehameha Schools. In place of the community-based outreach, trustees announced plans for four new elementary schools on outer islands. Two have opened in temporary quarters and have 210 children enrolled.

“We found that we had the most impact on students in our own facilities with our own curriculum,” Yadao explained. “In some of these programs, we were serving more non-Hawaiians than Hawaiians.”

The trustees also opened an office at the main Kamehameha campus in the hills overlooking Honolulu and began to exert strict control over the schools’ day-to-day activities. Before sending home any correspondence with students, for example, teachers were told to clear it with trustees. Popular schools President Michael Chun appeared to be shunted aside, upsetting many students and faculty. Language instructors were forbidden to use new Hawaiian words developed to keep the language relevant.

“There were grave problems at the school as the result of dictatorial rule by the trustees,” said Beadie Kanahele Dawson, lawyer for a group of 1,800 concerned alumni, parents, students and others. “The minutest item required trustee approval. The best teachers were leaving, and students were feeling the effects.”

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Frustrated with what they called micro-management and rebuffed in their attempts to meet with the board, more than 700 alumni and Kamehameha supporters marched on May 15 from the princess’ grave site 3 miles to Bishop Estate headquarters downtown. They walked in a dignified procession, singing school songs, in hopes of drawing attention to their concerns.

“In the past, the trustees have called upon us to support them, and we have been there for them,” said Benham, president of the Kamehameha Schools Alumni Assn./Oahu Region. “In this instance, we just wanted to talk, to have some input.”

The trustees instead petitioned the Circuit Court, which handles probate matters, to appoint retired Judge Patrick Yim as a fact finder to look into allegations of micro-management. He is being paid $250 an hour by the estate for his services.

As for as their management style, the trustees “would much prefer to be accused of working too hard and managing too much than not taking enough care,” Yadao said.

The estate contends that the trustees’ huge salaries are justified because all five work full time as “CEOs,” with hands-on management responsibilities. Gov. Cayetano, however, plans to introduce a measure in the next legislative session to cap trustee commissions. He has called on the chairman of the Judiciary Committee of the Hawaii House of Representatives, who is on a $4,000-a-month legal retainer with Bishop Estate, to recuse himself on the issue.

Some observers suggest that a new amendment to the U.S. Tax Code, commonly known as the “intermediate sanctions law,” may be brought to bear on the trustees. Under the law, which Bishop Estate lobbyists opposed, trustees of charities who receive unreasonably high annual compensation may be fined and required to return the excess.

“If that happens to these trustees, I think we’ll have an explosion,” Judge King said. “The way to get the best people is to pay them nothing. When you have a pot of gold out there, the eyes light up and everyone wants to get that pot of gold.”

Faced with the onslaught of criticism, trustee Peters is reprising the estate’s familiar refrain: “What started as an internal family dispute, which we are actively seeking to resolve, has been manipulated into a movement to break the will of Bernice Pauahi Bishop,” he said in his recent speech.

In radio spots airing on local stations, Peters declares that Bishop Estate has survived the overthrow of the Hawaiian monarchy, U.S. annexation and two world wars. It will, he predicts, survive this challenge as well.

What is far from clear, however, is whether the same can be said for its beleaguered board of trustees.

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An Island Empire

With an endowment of more than $8 billion, the Bishop Trust owns more than 365,000 acres of property throughout Hawaii, making it the state’s largest landowner. Its annual income exceeds $200 million; its assets are estimated to be worth as much as $10 billion.

Property, in acres

Residential: 4,219

Conservation: 172,630

Agricultural: 187,635

Commercial: 639

Income Generated

Agricultural: 2%

Residential: 6%

Commercial 92%