Hawaiians Clash With Trustees of Estate-Run School

By Todd S. Purdum, New York Times, October 14, 1997

A portrait of Bernice Pauahi Bishop, whose trust finances the Kamehameha Schools in Honolulu, see also 1999 article
HONOLULU -- It is the fabled legacy of a Polynesian princess, a feudal empire so vast that it could never be assembled in the modern world. It owns 8 percent of all the land in Hawaii, which makes it the largest private property owner in the state. It is worth perhaps $10 billion, with investments from the Pacific Rim to Wall Street. It is also one of the richest private charities in the world, whose sole beneficiary is the Kamehameha Schools, a 3,200-student school for Hawaiian boys and girls in the lush heights above this harbor city. It is governed by a five-member board of trustees, most of them former local politicians, each of whom earns more than $800,000 a year.

For 113 years, the Bishop Estate has been the biggest kahuna in Hawaii, by turns the preserve of the old plantation oligarchy, then of the Republican territorial government and, since statehood, of the Democratic machine that has dominated politics here for more than three decades. Its inner workings shrouded in secrecy, the estate has drawn its share of controversy, most notably in the early 1980s when the U.S. Supreme Court upheld a state law that forced it to sell off some of its vast holdings to the private homeowners who had leased its land for decades.

But now, for the first time, the Bishop Estate is drawing fire from the one group that has always rallied around it: Hawaiians themselves. Angered at the interference of one trustee in day-to-day school affairs, and by allegations of self-dealing and financial mismanagement by others, a group of Kamehameha students, faculty members, alumni and parents rose up last spring and demanded an accounting -- and changes. In the process, the group unleashed a firestorm that led the estate's trustees to seek a court-appointed fact-finder and prompted the Democratic governor, Benjamin J. Cayetano, to order an inquiry by the state attorney general, Margery Bronster. She recently issued a preliminary finding that "the rights of the beneficiaries may be at substantial risk," and that there were credible allegations that trustees may have breached their fiduciary duties. Local officials say the Internal Revenue Service is also conducting an inquiry that could threaten the estate's tax-exempt status. The attorney general is examining a range of issues, among them how the estate apparently spent hundreds of thousands of dollars in lobbying fees in an unsuccessful effort last year to defeat legislation intended to prevent excessive compensation for trustees of tax-exempt organizations; how the trustees invested some $85 million of trust assets in the same Texas methane gas venture in which some individual trustees also invested; how one trustee helped members of the exlcusive Robert Trent Jones Golf Club outside Washington, D.C., negotiate the purchase of the club from a group that included the Bishop Estate itself.

The affair has consumed the entire Hawaiian establishment, from the justices of the State Supreme Court, who appoint the Bishop trustees, to a group of leading Hawaiian elders, who called this summer for the ouster of four of the five trustees. It has pitted old friends and allies against each other, divided the trustees themselves, and widened a long-running debate about the rights and privileges of native Hawaiians. "We've heard these kinds of things before," Cayetano, the state's first governor of Filipino descent, said in a recent interview, referring to the allegations of mismanagement. "But I think that every elected official in the state doesn't want to get into a tussle with the Bishop Estate. The atttitude was, 'If the beneficiaries don't get excited, why should we?' "

But now, Cayetano added in an assessment universally shared by the combatants here, "For the first time, the Hawaiian community rose up and said: 'Wait, we want to look into this, we want to clean it up.' " Lawyers and spokesmen for the estate contend that the attorney general's inquiry in unncessary, and they won the right to have a judge determine whether documents she subpoenas should be shielded from disclosure on the grounds that they could harm business negotiations by the estate. They say that the estate is already one of the most scrutinized institutions in the islands, subject to annual review by a probate court master.

But so far the trustees have largely declined to comment on the details of the allegations against them, including the fact that some made personal side investments in the same entities the trust invested in, a practice that could be a violation of their fiduciary duties and one that the estate's lawyer says the trustees have since expressly prohibited. None agreed to be interviewed in any detail for this article. Henry H. Peters, the trustee most responsible for overseeing investment policy, met by a reporter in the lobby of the estate's headquarters in downtown Honolulu, would say only: "We're a private organization, and we'll compare our track record to anybody else's in town, or anywhere else."

The estate was created in 1884 by the will of Bernice Pauahi Bishop, the great-granddaughter and last direct descendant of Kamehameha I, the great 18th century king who unified the Hawaiian islands. Having married Charles Bishop, an American businessman and banker from Glens Falls, N.Y., against her family's wishes, and having turned down the chance to become queen, Princess Pauahi died of cancer, childless at the age of 52. She left the great bulk of her estate, some 400,000 acres of family lands, including a prime tract on Waikiki Beach, "to erect and maintain in the Hawaiian islands two schools, each for boarding and day scholars, one for boys and one for girls, to be known as, and called the Kamehameha Schools."

Princess Pauahi made her bequest at a time when the native Hawaiian population had been greatly reduced by Western diseases, and she provided that the schools, which became one coeducational institution years ago, should offer instruction "in such knowledge as may tend to make good and industrious men and women." She did not specify that the schools were to be exclusively for children of Hawaiian descent, but that has been the school's policy in practice. The princess decreed that the estate's five member board of trustees should be chosen by members of the Hawaii Supreme Court. That has led to the highly unusual arrangement whereby the five members of the current State Supreme Court, acting, they say, as individuals, choose the trustees. It is a process that critics deride as arbitrary at best, and a system of post-employment sinecures for retired officeholders and ready-made conflicts of interest for the court at worst.

Of the five current trustees, who function as a collective executive and can serve until age 70, the chairman, Richard S. H. Wong, is a former president of the state Senate, another, Peters is the former speaker of the State House of Representatives, a third, Lokelani Lindsey is a former district superintendent of education and failed mayoral candidate on the island of Maui, and a fourth, Gerard A. Jervis, is a longtime friend of former Gov. John Waihee who served as a member of the panel that recommends candidates for appointment to the Supreme Court. Only one trustee, Oswald K. Stender, had professional experience managing financial assets, as a chief executive of a for-profit family trust here. "If they left Hawaii, I don't think there's a one of them who could earn $100,000 a year, with the possible exception of Oz Stender," said Randall Roth, a professor at the University of Hawaii law school and co-author of "Broken Trust," a scathing indictment of the estate's management practices that was published in the opinion section of The Honolulu Star-Bulletin in August, and called for the ouster of all the trustees except Stender. Roth's co-authors were a cross-section of Hawaiian island elders: Samuel King, a senior Federal District Court judge and son of a former governor and Bishop Estate trustee; Msgr. Charles Kekumano, a retired Catholic priest who heads another royal trust; Walter Heen, a retired state appeals court judge, and Gladys Brandt, a former principal of the Kamehameha School for Girls. Under a 1959 state law, the trustees' collective compensation is capped at 2 percent of the estate's gross annual revenues, and in recent years they have each waived hundreds of thousands of dollars in fees for which they would be eligible. Sorting out the estate's finances is difficult, but it is estimated to be worth between $7 and $10 billion and its current annual income from investments alone runs something above $200 million, about half of which is spent on educational programs.

For most of its life, the estate was land-rich and cash-poor, but the forced land sales of the 1980s caused a huge cash infusion, some of which the trustees have reinvested in such speculative ventures as a 10 percent stake, worth half a billion dollars, in the investment banking firm of Goldman, Sachs. Over the years, both the manner of the trustees' selection and the amount of their compensation has prompted calls for overhaul. And despite the sharp increase in the value of the estate's assets, Kamehameha still enrolls just under 7 percent of the children in the state of Hawaiian ancestry, the same percentage it did in the early 1960s with assets valued at a few hundred million dollars. In 1995, when it spent $84 million on educational programs, it also wrote off $44 million in soured investments.

The current controversy has its roots in the involvement of one trustee, Mrs. Lindsey, in day-to-day affairs at the school, and the board's decision in 1995 to cut about $11 million for school "outreach" programs, resulting in the dismissal of about 170 employees. Alumni and parents say that Mrs. Lindsey, who was appointed to the board in 1992, broke with past practice, taking an office on the school campus, undermining the school principal, Dr. Michael J. Chun, demoralizing the faculty and acting unilaterally in a way that may violate the terms of the trust, which requires collective decisions. They have also accused her of using estate workers to help with the construction of her personal residence. Upset at such events, the president of last year's student body, Kamani Kualaau, drafted a letter expressing his concerns, intending to publish it in the local newspaper. When Mrs. Lindsey learned of it, she summoned him to her office, and implicitly threatened to complain about him to Princeton University, which had offered him admission to its freshman class. "She said, 'I'm not going to do this, but how would you feel if I wrote a letter to Princeton and told them you were a rabble-rouser?' " Kualaau recalled in a telephone interview from Princeton. Two weeks later, a group of alumni and parents staged a candlelight vigil outside the estate's headquarters, incorporated themselves as a formal organization, and obtained the services of a volunteer lawyer. That in turn led one trustee, Stender to go public with various criticisms, including complaints that board members were letting large contracts for services without adequate discussion. He also said the estate should be restructured with a highly-paid chief executive to manage investment affairs and part-time board members paid a few thousand dollars a month. "Years of pent-up gossip and backroom talk has now surfaced," Stender said in a brief telephone interview. Referring to Mrs. Lindsey's actions, he added: "It's the most egregious thing I've ever heard of."

Another trustee, Jervis, recently published a long statement in The Honolulu Advertiser, in which he called for lowering trustee fees and acknowledged, "The truth is that both in substance and in attitude, the Kamehameha Schools Bishop Estate hasn't done enough to change with the times," and added: "What hasn't worked, and what must stop, are any actions by trustees that create the perception of conflict or impropriety." Mrs. Lindsey did not return telephone calls seeking comment, but in the past has said she has simply discharged what she regards as the active management duties of a trustee.

Once such allegations were out in the open, Mrs. Brandt, the former Kamehameha principal said, she had no choice but to join Professor Roth and the others in protest. "Kamehameha, to me, is a great legacy, and something that anyone with a smidgen of Hawaiian blood has to take pride in," said Mrs. Brandt, a regal presence at 91. "And to have it sullied in that manner to me was inexcusable."

Ms. Bronster, the attorney general, declined in an interview to offer details of her investigation, but she made it clear that her options include seeking removal of the trustees, or a restructuring of the estate or the appointment process or other changes. And she complains that the trustees' legal delaying tactics are making it hard for her to obtain information. "It could be a long haul," she said. But Beadie Kanahele Dawson, the lawyer for the Kamehameha alumni group, said there was no turning back now. "This will not go away," she said. "The community at large is stepping forward at last."

Copyright 1997 The New York Times Company