Trustees gave lax financial oversight

The "very sophisticated board'' that oversees Eckerd College failed to notice the school's dwindling endowment.

By ADAM C. SMITH

© St. Petersburg Times, published June 23, 2000

ST. PETERSBURG -- Imagine getting dozens of Tampa Bay's elite business leaders to watch over and guide a small liberal arts college. Imagine adding to the mix assorted community leaders, wealthy business whizzes from across the country and church representatives for spiritual grounding.

Then imagine if that who's who of corporate titans sat back as one of the most fundamental measures of the college's financial health, its endowment, was drained of nearly two-thirds of its money.

That's precisely what happened at Eckerd College, whose 52-member board of trustees appears to have been living in blissful ignorance for at least the past year.

"This is not a story of a board that didn't do its job. This is a very sophisticated board," insisted Helmar Nielsen, an investor and trustee from Charlotte, N.C.

"But we probably should not have taken the excuses (for late financial reports), because most of the business-type people on the board wouldn't have accepted that in our own business," Nielsen said. "But when you're working with a school, when you can't get to every meeting, these things tend to get blurred."

Over the past 11/2 years, Eckerd's endowment had dwindled from $34-million to less than $13-million, with the money spent on capital projects and college operations that should have been financed by other sources.

In the aftermath of the surprise departures of longtime Eckerd President Peter Armacost and J. Webster Hull, the chief financial officer, a portrait of a remarkably passive board of directors is emerging.

Trustees, recruited by Armacost, lead such corporate heavyweights as Lykes Brothers, Tech Data and Primex Technologies. But for at least a year they tolerated chronically overdue financial reports, failed to delve into the reports they did receive and persistently presumed all was well under their 23-year president's leadership. A number of trustees appeared to view their role less as an oversight body than as a vehicle for financial support and overall vision.

Trustee chairman Arthur Ranson III, an Orlando lawyer and 1965 Eckerd graduate, credited the board with finding and decisively acting on the endowment problem. He acknowledged, though, that trustees could have been more aggressive in demanding answers to questions.

"The board must bear some responsibility," he said. "By and large, the college administration was quite adequate, and perhaps we were, shall we say, used to the way it had been managed."

Passive boards are not unusual at private colleges, said Thomas Holland, a University of Georgia professor and authority on non-profit boards.

"I've been on hundreds of college campuses, and unfortunately this is all too common -- not raiding the endowment, but boards that basically go to sleep and depend on an aggressive CEO and president," Holland said.

"The board members are supposed to be the bosses, and the president is their hired help. But these board members are your leaders in the community, and they just check their brains at the door. They don't want to work hard, and they go into this social mode of meetings, banquets, just showing up," said Holland, who said he is well acquainted with Eckerd but declined to discuss it specifically.

To be sure, there were members of the unpaid Eckerd board who took their responsibility seriously. If there is a hero, it is probably Bluford Putnam III, a 1972 Eckerd graduate and investment manager who divides his time between New York City and Maryland.

Putnam agreed to succeed Brandon businessman E. Leslie Peter as head of the board's investment committee starting in July. In May, Putnam decided to get up to speed on the endowment's investments. Reviewing the paperwork, he quickly saw numerous withdrawals from the investment funds, directed toward the college's cash needs.

"I knew there were some challenges, but things were a little different than I thought," a chuckling Putnam recounted in a phone interview Thursday. "We certainly weren't where we thought we were."

Trustees had plenty of red flags about the college administration long before the endowment problem came to light.

Two troubled real estate ventures on campus, College Landings and College Harbor, had been bleeding millions of dollars from the college. What's more, since 1998 the college has spent nearly $570,000 to settle claims from people who lost money in an investment scheme linked to Eckerd.

Former vice president for finance James Christison, who retired three years ago, had used college letterhead to entice prospective investors into a dubious and failed investment plan. Trustees had turned down Christison's recommendation that endowment funds be invested, and, along with Armacost, said they were unaware of Christison's activities. Christison said Armacost supported and encouraged his efforts, hoping that trustees could be persuaded to invest endowment money.

After settling three claims against Eckerd, trustees sought an independent review to assess Eckerd's exposure from the investment fiasco. Led by Jacksonville lawyer George Ridge, that review gradually expanded to look at a range of issues, including the endowment. It was submitted to the full board last weekend, when trustees agreed to bid goodbye to Armacost and Hull.

As that review was under way, trustees said they found financial information about the college hard to come by. Regular financial reports were chronically late, partly because the business office was understaffed. For a year, the college had no comptroller, and it wasn't until last week that trustees received their annual audit report for 1998-99. They hope to receive the 1999-2000 report in a few months.

The board includes a host of accountants and business executives, but many of them didn't notice any potential problems on the financial reports they did receive.

Attorney Ridge showed the Times a copy of an endowment report from the end of 1998. At that time, more than $5.7-million had been diverted from the endowment, but that wasn't clear from the report. The $5.7-million was listed as "cash management" funds, and trustees said they did not see that withdrawals from the endowment were increasing.

"When you're on a board, you get a flow of information. Some of us were asking questions, and we were getting partial answers, which caused us to ask more questions," trustee P.N. "Bud" Risser of St. Petersburg, head of Risser Oil Corp., said, defending the trustees' stewardship of Eckerd.

"The board did figure out there were deficiencies and did act, in my opinion, in a very professional manner," Risser said.

What took so long?

"Time flies," Risser said.

At 52 members, the board is about twice the size of typical private colleges' and relies on committees to focus on specific issues, from audits to finances to investments. Ranson said about 60 percent of members show up for the two yearly business meetings, and fewer attend the summer retreat.

That time lag between meetings made it harder for trustees to spot the fast escalating endowment spending, said St. Petersburg Mayor David Fischer, who sits on the finances committee.

A board that size offers inherent challenges to oversight.

"Everyone assumes there's someone among those 52 who's in the know about what's happening," said Richard Chait, a Harvard University professor and expert on non-profit boards. "And the board members really bear no accountability, because there's no sanction or personal cost to misgovernance."

Now, trustees are vowing much more vigilant oversight. They plan to hire a general counsel to monitor compliance with internal policies. They no longer will allow endowment spending without express approval from their executive committee, and several trustees are now personally overseeing troubled areas such as the business office and the problematic real estate ventures.

For his part, Bluford Putnam is kicking himself for not taking the financial reports more seriously.

"Many of us on the board feel like we could have done a better job," he said. "Each person has to look at himself in the mirror and say, "Should I have asked this question?' and "Should I have done this or that?' "

Times staff writer Helen Huntley contributed to this report.

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