June 06,2006

Grassley Hopes for More Reform from American University, Awaits Student Views


To: Reporters and Editors
Re: American University’s response to May 17 letter
Da: Tuesday, June 6, 2006

Sen. Chuck Grassley, chairman of the Committee on Finance, is conducting a broad review
of tax-exempt organization practices. He made the following comment on American University’s
response to his May 17 letter. Grassley’s May 17 letter follows here.

“The board has taken some steps in the right direction, but I’m disappointed with some of
the comments in its response. On whistleblowers, and the votes on the Ladner compensation
package, as well as other votes cited in my letter, it seems the board is more interested in excuses
than meaningful reform. I fear some board members are still wearing rose-colored glasses. The
board’s response underscores for me that the D.C. City Council is right on target to look at giving
real teeth to the city’s oversight of non-profits. On my next steps, my understanding is that the
American University student leaders are preparing a letter to me on the board’s actions so far, and
I look forward to reading their analysis. I’m preparing broad-based legislative reforms for charitable
governance based in part on the recommendations of the Panel on the Nonprofit Sector of the
Independent Sector. The nonprofit panel, composed of the leaders of the nation’s top charities, has
given Congress recommendations that will enhance board governance, improve transparency, and
build accountability from non-profits to the public.”

May 17, 2006

Gary M. Abramson, Chair of the Board
Thomas Gottschalk, Vice Chair of the Board
Office of the President
American University
4400 Massachusetts Ave., NW
Washington, D.C.

Dear Mr. Abramson and Mr. Gottschalk:

I am writing to you regarding the Finance Committee’s review of governance issues at American
University (“AU”). AU is a federally chartered non-profit, tax-exempt educational organization.
Congress enacted the law in 1893 that first incorporated AU, appointed its initial individual
corporate members, and specified the and composition of its board of trustees. Act of Feb. 24,
1893, ch. 160. In 1953, Congress enacted legislation, altering, among other things, the process by
which the AU board of trustees is elected. Act of Aug. 1, 1953, Pub. L. No. 183, ch. 309. The
Finance Committee’s review is predicated on this unique history of the legislative relationship
between the federal government and AU as a congressionally chartered institution, as well as on the
Committee’s general legislative and oversight jurisdiction over tax-exempt charitable organizations.

In conducting its governance review, the Finance Committee has reviewed the numerous documents
provided by AU and material provided by other sources, as well as discussions with current and
former board members, faculty, students and AU employees. In addition, I have heard concerns
raised by AU students from Iowa and their parents. To allow students, faculty and staff, and the
public to have a better understanding of the governance issues still facing AU, I am today releasing
relevant material provided to the Finance Committee. It says volumes about problems of AU
governance that students, faculty, and supporters often have to learn about the work of the AU board
from the U.S. Senate Finance Committee rather than from the board itself. I understand that
governance changes are to be proposed that proponents claim will ensure that there will be greater
openness and transparency at AU. I look forward to meaningful reform in this area and expect to be
informed of the details of those proposals.

While I am releasing quite a bit of information today, I am frustrated that there is certain key material
that I cannot release today. When the Committee began this investigation on October 27, 2005, I
received assurances of cooperation. The Washington Post stated on October 28, 2005, “Gottschalk
said yesterday that the board would do everything it could to cooperate.” Unfortunately, those words
have not always been met by deeds. While AU has over time provided material requested, AU
continues to redact material provided and most frustratingly labels key documents ‘confidential’ and
not to be released to the public. This is not what I would expect from a university that benefits from
tax-exempt status and was chartered by act of Congress. I call on you to hold to your public
commitments of full cooperation and allow for public release of all documents without redaction that
have been requested. AU students, faculty and supporters have a right to a full understanding of the
board’s actions.

One of my principal governance concerns relates to the legal structure and composition of the AU
board. The Finance Committee, during its roundtable discussion on charitable governance, heard
from AU student leaders, faculty, and former board members, a number of whom called for the
removal of certain AU board members – particularly focusing on members serving on the ad hoc
committee that took actions regarding former AU president Dr. Ladner without the knowledge of
key board members.

In reviewing the material, I understand the views of those who believe the members of the ad hoc
committee should be removed. In the course of our review, I have also focused on several key votes
by some AU board members. In particular, given all related information reviewed by the Finance
Committee, I am seriously troubled by votes cast in October 2005: 1) to amend the audit committee’s
recommendation and secondly to reject the audit committee’s recommendations on a vote for
reconsideration; 2) to reject three identical recommendations from counsel, including Manatt Phelps
as well as Arnold & Porter, that had concluded that Dr. Ladner’s 1997 employment agreement was
invalid; 3) not to terminate Dr. Ladner for cause; and 4) to increase cash severance to Dr. Ladner by
an additional $800,000 over eight years – after the board had already voted to increase Dr. Ladner’s
cash severance by $950,000.

It is important to bear in mind that these votes were made after the findings from protiviti
independent risk consulting reports, which I am releasing today, were known to the board and that
provided in detail the expenses of Dr. Ladner and his wife that he charged to AU. The report shows
expenses that would make for a good episode of ‘Lifestyles of the Rich and Famous’ – a lifestyle
paid for by AU students and their parents. In addition, as noted above, the board members were
aware of the findings of two respected law firms that found that Dr. Ladner’s 1997 employment
agreement was invalid.

While I fully understand that as Chairman of the Senate Finance Committee, I’m not here to direct
the management of the affairs of AU or its board, I do want you to know that I am considering
proposing federal legislation that would require changes in the structure, composition, and
governance of the AU board, as Congress has done previously. In particular, in discussions with
Finance staff, AU board members have noted that they do not view that under current federal law
the AU board has the authority to compel a board member to resign. Please confirm if that is
accurate, and please also provide your views about the wisdom of Congress amending the law to
provide the AU board such authority and, if so, suggested changes to the law.

In addition, I want to draw your specific attention to a board meeting that discussed Mr. Ladner’s
compensation package. In general, under federal tax laws, outside review and justification for the
salary of a highly compensated individual at a public charity provides a safe harbor from penalties
under Section 4958 of the Internal Revenue Code. My review of tax-exempt organizations and
corporations has found that in the overwhelming number of cases outside consultants provide a
justification for the salary request that is being considered. In fact, the AU situation is the only
example Finance Committee staff have seen of an outside consultant stating that a salary of an
individual at a public charity is too high.

However, in calling for a salary for Dr. Ladner higher than that recommended by outside consultants,
some AU board members appear to have rejected concerns about complying with the laws passed
by Congress and instead described financial penalties for violating federal law as “de minimis.”
Comments that suggest that federal laws should be disregarded because penalties are “de minimis’
are stunning when I hear them from members of for-profit corporate boards; they are shocking when
they come from board members of a tax-exempt university. Do you believe this is the appropriate
message AU should send to students – it is all right to violate the law if the penalty is de minimis?
Please provide a complete explanation of these events and your views of them, as well as all related

The issue of whistleblower protection at non-profit institutions has also been of great concern to me
in the course of the Committee’s work. Whistleblowers in certain situations are protected from
retaliation under state and federal law. A series of aggressive emails to other AU board members by
one AU board member appear to attack whistleblowers trying to do the right thing regarding the
situation at AU. They include the following language: “You are right in citing a Nixon era example.
People do not tolerate leaks any more. No one is so naive anymore to think that unidentified
‘whistleblowers’ are public servants. You are right in saying there always must be a process for
people to report wrongdoing but this is not the way.”

As a champion of whistleblowers in Congress for years, I can state categorically that not only are
whistleblowers public servants, they are often heroes – saving lives and taxpayers billions. I
commend you, Mr. Gottschalk, and former board chair Ms. Bains, for taking a strong line against
any effort to bring the Salem witchcraft trials to northwest D.C. But again, that a board member
might propose retribution against whistleblowers, as appears from some of these emails, is
inexcusable. I would appreciate your general views on the benefit of whistleblower protection at taxexempt
organizations, as well as your specific views on the series of emails appearing to support
aggressive efforts to search, find, and punish those who try to speak out against what is wrong. In
particular, do you believe such efforts send the appropriate message to AU students – especially
given that a large number of AU graduates will be employed in public service?

Finally, let me return to the overall issue of governance. In meetings with my staff, AU
representatives have given assurances that AU will have in place governance reforms that will
provide students and faculty a meaningful and substantive voice at AU. I view this as a vital part of
AU governance reforms coupled with greater sunshine and transparency that I mentioned at the
beginning of my letter. Please inform me in detail what the governance reforms are as to students
and faculty.

Given that Congress is currently considering reforms to provisions of the tax code affecting charities
as part of the conference on the pension bill, I ask that you provide answers to this letter within 10
working days. Thank you for your time and courtesy.

Cordially yours,

Charles E. Grassley

cc: Senator Baucus
Chairman Thomas
Delegate Norton
Commissioner Everson