The controversy over trustee pay raises is costing Kamehameha Schools big bucks.

Last year, a Probate Court-appointed panel recommended increasing board members’ pay between 65 percent and 123 percent.

Instead, Kamehameha Schools trustees Robert Kihune, Douglas Ing, Nainoa Thompson, Diane Plotts and Corbett Kalama took a 10 percent pay cut, citing the trust’s weakened financial condition.

Now, Probate Judge Colleen Hirai has approved payments of more than $135,000 to Mercer Inc., the compensation expert that recommended the ill-fated pay raises.

Mercer is the San Francisco-based executive pay consulting firm  that recommended increasing board members’ pay from $100,000 to about $187,000.

Compensation for the board’s chair would rise from $97,000 to $217,500 under the study.

Mercer is a unit of Marsh & McLennan Companies, which received hefty fees as the Kamehameha Schools insurance company during the 1980s and during the 1990s trust scandal.

In its trustee pay report, Mercer argued that Kamehameha Schools board members spends more than twice as much time on trust matters - 21/2 to 3 days a week - than do the boards of comparable nonprofit organization and for-profit corporations.

Mercer said its recommendations also were based on an analysis of board pay at multi-billion dollar foundations, publicly traded corporations, for-profit real estate investment trusts and some local publicly traded companies such as Bank of Hawaii Corp. and Alexander & Baldwin Inc.

The Mercer study did not include the pay policies of local nonprofit boards due to “lack of comparability,” the committee said.

Board members of most local nonprofits receive no pay for their work.
The issue of trustee compensation played a major role in the late 1990s turmoil at Kamehameha Schools.

The Internal Revenue Service threatened to revoke the trust's tax-exempt status due in part to the $1 million a year paid to then-board members Richard "Dickie" Wong, Henry Peters, Lokelani Lindsey, Gerard Jervis and Oswald Stender.

The IRS later settled with the estate after board members resigned and the trust reformed its governance and pay policies.

Mercer’s findings did not sit well with many members of the Kamehameha Schools ohana, whose memories of the 1990s trust scandal are still fresh.

It’s one thing to argue for overdue pay increases, it’s another to advocate for 65 percent pay raises when the value of Kamehameha School’s endowment has dropped by at least $1.7 billion.

While the $135,000 may look like a drop in the bucket for a multi-billion dollar trust but from a microeconomic standpoint, it’s the cost of educating nearly five Hawaiian kids for a year.

Trustees of the Kamehameha Schools received much deserved applause last month when they rejected a court-approved pay increase plan and instead took a 10 percent pay cut.

After all, it's the prudent thing to do in face of the trust’s weakened financial condition, members of the Kamehameha Schools ohana have said.

But others, including former Gov. Ben Cayetano believe the way trustee pay is set is still out of whack and opens the trust to the type of abuses that haunted the estate during the late 1990s.

Previously, trustee pay was based on a formula set by law which entitled them to up to 2 percent of the estate’s annual gross. That resulted in $1 million-a-year trustee pay checks that nearly got the trust's tax-exempt status revoked by the Internal Revenue Service.

Now, trustee pay is supposed to be set at reasonable levels. Every several years, a Probate Court-appointed panel is supposed to come up with recommendations on what those reasonable levels are.

In 2004, the panel approved raising trustees maximum pay by more than 69 percent, generating much criticism among the schools’ ohana and the state Attorney General.

Probate Judge Colleen Hirai approved that  increase but trustees turned it down.

Last year, the panel approved a similar plan before trustees decided to take  their pay cut. The increase was again opposed by some members of the Kamehameha ohana as well as by the Attorney General’s office.

According to Cayetano, the lack of a more permanent trustee compensation schedule exposes the trust to future controversies.

In the past, the lucrative trustee compensation served as the “root cause for the ethical and political problems” that plagued the estate during the 1980s and 1990s, Cayetano wrote in his recently published memoir “Ben.”

It not only led to corrupted trust but it also tarnished the state Legislature and the state judiciary.

No doubt, the ethical characters of current Trustees Nainoa Thompson, Douglas Ing, Robert Kihune, Diane Plotts and Corbett Kalama are unquestioned. All are dedicated to the trust’s mission of educating native Hawaiian children.

But in approving steep pay raises for the trustees, Cayetano see a potential for history repeating itself:

“One could only wonder whether the panel, the probate judge and the new trustees had learned any lessons from the Bishop Estate controversy,” he wrote.

“The failure of the new trustees to ‘clean house’ left me wondering whether the problems that vexed the old trustees and the Bishop Estate would emerge again one day when the passing of time had blurred the reasons the reforms were made in the first place.”

Trustee pay at the Kamehameha Schools, always a controversial issue, was in the headlines again this weekend.

A report by San Francisco-based Mercer LLC, an executive compensation expert hired by an independent probate court-appointed trustee compensation committee, recommended raising trustee pay by 65 percent or more, citing the complexities faced by a board that sets policy for a $9.1 billion trust. (See)

Mercer found that Kamehameha Schools board spends more than twice as much time on trust matters — 2 1/2 to 3 days a week — than do the boards of comparable nonprofit organization and for-profit corporations.

In a “CEO team Message” on Kamehameha Schools’ website, the trust expanded on that theme:

“The Committee and Mercer, LLC also observed, among other things, that the issues regularly confronted by the Trustees, from expansion of the Schools under the new Education Strategic Plan, to improving the quality and diversification of the endowment, land use and environmental issues, and litigation concerning admissions policies are highly significant, complex and time consuming matters that require a substantial commitment of time above and beyond that which is required of a typical corporate board.”

The trustee compensation committee's recommendations aren't a done deal: They require probate court approval and board members can always turn down any raise that gets approved as they did several years ago.

But Mercer's findings and the trust’s follow-up comment raises a key questions about the estate’s governance policy.

Under the CEO-based management system should those duties be delegated to Kamehameha Schools’ executives and administrators or should those duties be relegated to the board?

There's no doubt the board needs to set policy on major issues such as the admission policy litigation and the trust's education strategic plan.

But are things like the "diversification of the endowment, land use and environmental issues" typically the responsibility of a CEO and their staff?

(By the way, Kamehameha Schools’ own tax filing with the Internal Revenue Service state that board members spend 10 hours a week on trust matters.)

There’s no doubt that Kamehameha Schools’ trustees -- Diane Plotts, Douglas Ing, Nainoa Thompson, Robert Kihune and Corbett Kalama -- are remarkable people, who have displayed much compassion for plight of native Hawaiians and much courage in wake of the many challenges faces by the trust.

Under their stewardship, the estate’s finances have grown at a record pace and schools are reaching more Hawaiian children than ever.

But what about future board members five, 10, or even 20 years from now? If those future board members are still spending 2 1/2 to 3 days a week on trust matters, will that open future boards to criticisms of “micromanagment?”