Smithsonian scandal is the latest
nonprofit sector black eye

Lawrence M. Small, the secretary or top official of the Smithsonian Institution, a tax-exempt charitable organization, resigned in March when details became public about his lavish expense-account spending. What followed were two stinging reports on his spending and decision making that faulted the Smithsonian's regents for giving Small carte blanche and failing to exert adequate oversight.

According to the New York Times, "Two lacerating reports – one internal, another from an outside review committee – describe a chief executive run amok, devoting much of his time to corporate boards."

“It seems to me the Smithsonian has some of the same problems I’ve seen at other charities,” said Senator Charles Grassley, former chair and ranking member of the Senate Finance Committee, when Small’s activities first became public in February. “The top executive appears to have arranged a sweet deal for himself, apparently charmed his board of regents into signing off on that deal, and done a lot of it without any effective oversight from a permanent, independent inspector general.

“The Smithsonian can find money to give the director $1.15 million to make his house available for official functions, but can’t protect national treasures from a leaky roof,” Grassley said.

In early June, Grassley asked the Inspector General's office at the museum to investigate executive compensation throughout the institution. In May, the House Appropriations Committee approved legislation to cap salaries of Smithsonian employees at $400,000, the salary of the U.S. president. Six Smithsonian employees, including CEO Small, currently make more than that.

“Our suggestion is that those leading … nonprofit regulatory reform efforts see the situation at the Smithsonian for what it is – an indicator of their willingness to apply the standards they demand of the broad base of the nonprofit sector on those at the highest levels,” said Ruth McCambridge, editor of the Nonprofit Quarterly.

The table of contents of the Smithsonian’s independent review committee's report fully outlines this latest national scandal to rock the nonprofit sector. It includes recommendations that could have more universal application throughout the nonprofit sector:

Summary of committee findings:

• Mr. Small’s compensation far exceeded the compensation of prior secretaries
• The terms of Mr. Small’s compensation were not fully disclosed to the board
• Private grants and contributions and business revenues have declined during Mr. Small’s tenure, making the Smithsonian more reliant on federal appropriations and grants
• Mr. Small’s expenses were not reviewed for reasonableness
• Mr. Small and the deputy secretary have been absent from the Smithsonian for substantial periods due to vacation and compensated service on corporate (for-profit) boards
• Mr. Small’s disposition was ill-suited for the position of secretary
• The board exercised inadequate oversight over Mr. Small
• The “Gatekeepers” of the Smithsonian were marginalized
• The Smithsonian’s internal financial controls and audit function are inadequate
• Smithsonian Business Ventures has operated with insufficient oversight from the board or senior Smithsonian management
• The Smithsonian appears to remain a strongly ethical institution despite the problems with the office of the secretary and Smithsonian Business Ventures

Summary of recommendations:

• The Regents must act quickly to address the governance crisis
• The expenses of Mr. and Mrs. Small should be subject to an audit for reasonableness and the expenses of senior Management should be subject to annual audits
• The compensation of the secretary (CEO) should be seasonably competitive and transparent and take into account the Smithsonian’s unique nature
• The Smithsonian’s policies should be consistent with federal regulations and its salary schedule should be consistent with government salary schedules
• The Smithsonian should have an active governing board with a chairman who can provide the time and proper oversight
• The role of the Chief Justice and Vice President should be clarified (both Chief Justice John Roberts and Vice President Dick Cheney are on the Smithsonian Board of Regents; Roberts is also its chancellor)
• Congressional regents should accept fiduciary responsibilities (three House members and three senators are on the board)
• The board should be expanded or reorganized to allow for the addition of regents with needed expertise
• Internal financial controls, audit functions and the role of the general counsel and inspector general must be strengthened
• Smithsonian executives should be permitted to participate in only nonprofit board activities subject to prior approval
• The selection of the next secretary must reflect the governance challenges facing the Smithsonian
• Achieving effective oversight and governance at nonprofit organizations may ultimately require legislative action

Click here for the complete, 392-page Report to the Board of Regents of the Smithsonian Institution by the independent review committee.