May 17,2007

Grassley Questions Smithsonian Business Ventures’ Management, Performance; Welcomes Resignation


To: Reporters and EditorsRe: Resignation of head of Smithsonian Business VenturesDa: Thursday, May 17, 2007

Sen. Chuck Grassley, ranking member of the Committee on Finance, has been conductingoversight of the Smithsonian Institution as part of his broad review of tax-exempt groups, theiraccountability for their tax status, and the public service they perform. Inspector general andWashington Post reports have revealed executives’ spending excesses and management failures atthe Smithsonian, known as the nation’s premier museum and research complex. Earlier this week,Grassley wrote to the Smithsonian Board of Regents, outlining a series of concerns regardingSmithsonian Business Ventures. The chief executive officer of Smithsonian Business Ventures hassince resigned. Grassley made the following comment on the resignation.

“It looks like the leaders of Smithsonian Business Ventures were living like Thurston Howelland managing like Gilligan. I wrote to the Board of Regents about SBV’s management andperformance. A number of whistleblowers have described problems from out-of-control spendingto sweetheart promotions. The priority of those who manage the Smithsonian gift shops, restaurants,and the magazine ought to be bringing in the resources needed to make sure the Smithsonianremains a world-class institution, not grabbing up perks and padding their own pay. It’s good thatthe Smithsonian called a cab and sent a top manager packing. But I don't know how you justifykeeping someone with this record on the payroll until September.”

The text of Grassley’s letter follows.

May 15, 2007

Mr. Roger Sant, Chair

Executive CommitteeSmithsonian Board of RegentsThe Smithsonian Institution1000 Jefferson Drive, SWWashington, D.C. 20560

Dear Mr. Sant:

I am writing to you regarding Smithsonian Business Ventures (SBV), the entity that isresponsible for managing commercial activities at the Smithsonian, including the gift shops, foodvendors and the Smithsonian magazine. My office has received a significant number of phone callsand letters from whistleblowers about SBV alleging questionable management practices. Inaddition, the Smithsonian Inspector General (IG) has issued a report this January 19, 2007,“Executive Compensation At Smithsonian Business Ventures” and is completing an agreed uponprocedures review that includes the expenses of the CEO of SBV, Mr. Gary Beer. These contactsand reports raise serious questions in regards to SBV as well as the management and oversight ofSBV by the Board of Regents and senior management at the Smithsonian.

While many things trouble me at SBV, I am especially taken by the IG’s findings that whilereal net gain for SBV in 2007 was $20 million dollars (in 1999 dollars) as compared to $27.9 milliondollars in 1999, total executive compensation as a percentage of net gain has grown from 8 to 11percent since 2000. In addition, the IG found that SBV fell far short of projections and expectations.It seems that the executives took care of themselves at SBV but didn’t take care of the Smithsonian.With limited funds and resources, it is vital that the Smithsonian successfully manage its commercialactivities.

Meanwhile, the Smithsonian’s expenses are skyrocketing. The cost of mounting interestingnew exhibits to attract visitors is always before us. The Smithsonian’s building and facilitiesmaintenance and improvement needs alone are backlogged and soaring as each day passes withoutameliorative action. We’ve read media reports that Smithsonian employees have become skilledat draping plastic to protect landmark items from water damage. Just this week, The WashingtonPost reported the “bare-bones” cost of a new roof, windows, more security and fire protection, andmodernized heating and cooling systems at the Arts and Industries Building would be about $55million. A full renovation to use the building as a museum would cost at least $416 million. That’sjust a fraction of the Smithsonian’s capital needs. Everyone knows the Smithsonian’s fundingsources are very limited. Those sources include tax dollars, charitable donations, and proceeds fromcommercial ventures. Since tax dollars are limited and charitable donations are often of restrictedpurpose, the Smithsonian critically needs to successfully manage its commercial activities. That’swhy it’s worrisome that SBV executives apparently took care of themselves but not the Smithsonian.So that I can fully understand the situation at SBV, I request that you please provide me,since Mr. Beer’s hiring, the following information:

A. Personnel Issues

1. Please provide a copy of Mr. Beer’s original employment contract as well as all revisions as wellas any incentive plans. Please inform me who negotiated this contract and who drafted the contract.Please provide me all the comparables used to justify Mr. Beer’s salary at the time of hisemployment. Please provide all financial disclosures that Mr. Beer has filed while at theSmithsonian.

2. It is my understanding that an SBV executive, currently serving as Vice President of MediaServices, has received a number of promotions and bonuses in the last several years and has acurrent salary of over $140,000. Please provide the personnel file and any other material relevantto this executive’s promotions, bonuses as well as the individual’s original hiring. Please providea copy of all of this executive’s travel and expenditures, including travel records. Please indicatethe purpose of the travel and who approved the travel. Please provide a copy of actual and plannedtravel itinerary. Please provide a copy of this executive’s financial disclosure forms. Please providea copy of all emails and other communications between this executive and Mr. Beer.In addition, please provide documentation of the executive’s original starting date and the date inwhich this individual was vested. Please provide a breakdown for this individual’s base salary andbonuses for 2006 and previous years. For each position that this individual was given as apromotion, please answer the following: was this job posted; were there any other candidates; and,how long were the jobs posted before they were filled? Please provide all material human resourceshas regarding these positions, including emails and other communications. Who signed off on thecreation of each of these new positions? What is the justification for the creation of these positions?Who reviews the creation of new positions, what is the process, and who did it in each case here?Were regular Smithsonian procedures followed in each of these cases, if so, why not?

3. The IG reports that “SBV gave incentive awards even though executives and division managersdid not meet approved financial performance goals.” Please provide a copy of all incentive plansand inform us of the author(s) of the plans and all individuals who approved the plans and theawards under them. Please respond to this criticism.

4. Please list the number of executives at SBV who were hired and/or fired (for whatever reason)from January 1, 2004 to the present. Please provide the reason for the individual leaving and theirlast known employment. Please provide their severance.

5. Please provide a copy of all emails and memorandums between Mr. Beer and executive staff atSBV.

6. Please provide all SBV and Smithsonian regulations and guidance dealing with personal orintimate relationships between managers and subordinates and conflicts of interest.

B. Board Management and Oversight

1. Please provide a copy of all board minutes of the SBV Board and any subcommittees, particularlythe SBV Board of Directors’ Compensation Committee. Please provide copies of all materialprovided to the members of the SBV Board or any subcommittees. Please provide a copy of allmaterial that the SBV Board provided the Smithsonian Board of Regents or senior management ofthe Smithsonian. Please provide any reports or documents that evidence in any way the oversightof SBV by Mr. Small (and his staff), the Deputy Secretary, the Regents or any committee thereof.In particular, I want to understand the Smithsonian leadership’s reaction to the reality at SBV asshown by the IG – a reduction in net dollars (in 1999 dollars) going to the Smithsonian, with costsgoing up.

2. Please provide a list of all individuals who have served on the SBV Board since 1999. Pleasedetail what, if any, personal or business relationship board members have with Mr. Lawrence Smallor Mr. Beer. Please inform me how board members are selected. Please provide anycommunications from Mr. Small or Mr. Beer (or their staff) regarding the selection or nominationof board members.

3. Please provide all emails and other communications between Mr. Beer (and his immediate staff),as well as SBV executives and the Secretary (and his staff), Deputy Secretary, the SBV Board andthe Board of Regents.

4. The IG found that SBV did not approve operational goals in a timely fashion and set goals thatwere too vague to allow objective measurement of performance. If the Regents believe that this isnot accurate, please so inform me and provide any documents that the Regents believe support theirbelief. Please identify all individuals who were responsible for monitoring the establishment ofSBV’s operational goals.

5. I am disturbed by the reaction of the Smithsonian’s senior management to the IG report. Seniormanagement embraces the idea that the executives at SBV should be paid “market-based” salaries,but then proceeds to find excuses for why the SBV executives shouldn’t be held accountable to themarket. In particular, I focus on the point made by the IG that “national and local economies haveseen healthy tourism numbers and commercial profits.” Yet at the same time, the Smithsonian’sattendance is down from 1999, and down even from 2003. The senior management at the

Smithsonian in its response states:

It is clear the level of museum visitation is the dominant variable in the success of SBV’smuseum retail business. But SBV executives, in reality, have little to do with driving howmany people visit the Smithsonian’s museums, the latter being subject to Washingtontourism levels, new museum exhibits and the like.

Thus, we are giving “market-based” pay to SBV executives, while at the same time theSmithsonian senior management says SBV management can’t control the dominant determinant ofwhether they will be successful. This makes no sense. In addition, these facts raise an even moreserious question: why is it that the Smithsonian has seen a drop in attendance recently even whenother local tourist attractions are seeing an increase? This is even more surprising when we haveseen more museums and new exhibits open up at the Smithsonian. Who is responsible fordeveloping attendance at the Smithsonian? And if it’s not SBV, please have the Regents explainwhy. Please provide all details of plans, goals and accomplishments for increasing attendance tothe Smithsonian, as developed by SBV, the Regents, or any other party.

Additionally, it seems savvy marketing would target D.C.-area residents as customers ofSmithsonian gift shops. Most of the Smithsonian’s museums are located in the densely populatedWashington, D.C., metropolitan area. Some residents are likely to shop at the gift shops withoutvisiting the museums. Please provide plans, if any, for targeting D.C.-area residents as gift shopcustomers.

6. In addition to the compensation for executives at SBV, I am also troubled by the number ofexecutives at SBV. Please give me the position, title, salary of each executive and the number ofemployees that each executive manages at SBV. Please note if an executive manages anotherexecutive (give that title) and also if the individuals included in those managed for one executiveare also managed by other executives (give their titles). Please provide the justification for thesenumber of executives. Please provide me all reviews and memorandums, both internal and external,that consider the number of executives at SBV, that provide suggestions to reduce the number ofexecutives at SBV, or to otherwise save costs at SBV.7. Please provide me a copy of any reports or reviews (including those in draft) performed byoutside consultants regarding SBV, including the report by Berglass-Grayson on retail at SBV.

C. Expenses

1. Please provide all material that was provided to the IG in response to the current agreed uponprocedures review that includes the expenses of the CEO of SBV. Please provide a copy of all creditcard charges and statements and billings that were submitted by the CEO. Please identify thosereceipts that were created after-the-fact.

2. Please provide Mr. Beer’s calendar. Please provide a copy of all Mr. Beer’s travel records.Please provide his proposed and actual itinerary.

3. Please provide all costs of the SBV board and subcommittee, detailed by catering, travel, etc.

D. Museums

1. Please provide all emails, memorandums and other material between Mr. Beer and the directorsof the Smithsonian museums. Please provide all agreements or other memorandums that establishedthe revenue sharing between SBV and the museums. Please explain why the Freer, Sackler, Cooper-Hewitt and the Zoo are not managed by SBV. Please provide, for each of these four entities, thesalaries and expenses of each executive involved in commercial activities as well as the total numberof paid employees. In addition, please provide the gross and net numbers for each of these fourmuseums/zoo commercial activities. Please inform me if any of these museums transferred moniesto SBV, and, if so, for what purpose and the amount transferred.

2. Please provide all SBV documents, including but not limited to, correspondence, e-mail,documents, materials, spreadsheets, and Powerpoints regarding the so-called revenue-sharing planswith the museums. Please provide the net amount that each museum received from SBV, year-byyear.Please explain how actual cost allocations were changed during the period of January 1, 2004to the present. Why was the revenue sharing between the museums and SBV not agreed to as apercentage of revenue, which I understand is common practice in the private sector?

E. Independent Review Committee

I appreciate the Regents creation of the Independent Review Committee (IRC) chaired bythe Honorable Charles Bowsher. I have met with members of the IRC and my early impression isthat their work could significantly benefit efforts to improve the governance of the Smithsonian.I am concerned that the IRC’s important work not be limited or curtailed by an arbitrary deadlinefor completion or limit on its scope of work. The Board of Regents has announced that theCommittee on Governance may not finish its work for several months and I appreciate the need totake the appropriate amount of time for a proper review. Similarly, I think it vital that the IRC havethe time necessary to complete all of its work and there are several issues that I raise in this letterand in another letter I will be sending shortly that would best be answered by the IRC. On a relatednote, I encourage you to ensure that the Smithsonian IG has adequate funding and support toperform its critical work as Congress closely reviews the Smithsonian and is placing additionaldemands on the IG’s office.

I ask that you direct the IRC to respond to the following:

1. Provide their analysis and views on the current leadership and management of SBV and its boardas well as recommendations for the removal or discipline of any person(s) and any proposed reformsto SBV.

2. Provide their analysis and views on the leadership of the Board of Regents as well as seniormanagement of the Smithsonian Institution in regards to SBV as well as recommendations for anyremoval or discipline of any person(s) and any proposed reforms to oversight of SBV.

3. Provide their analysis and views on the appropriateness of the salaries (and all othercompensation and benefits) and employment contracts for all individuals listed in Appendix B ofthe IG report. I am troubled that the comparisons provided by the IG are inappropriate and not inkeeping with the intent of the law. For example, to compare the salary of the Director of theNational Gallery of Art to the CEO of SBV is highly questionable on its face. The duties andresponsibilities of the Director of the National Gallery of Art are far greater and wide-ranging –responsible for all aspects of a major museum – as compared to the CEO of SBV – responsible onlyfor a limited function within a major museum. In addition, as discussed above, the IRC needs toreview the fundamental rationale for “market-based” pay for SBV executives and the number ofexecutives.

F. Showtime

1. The creation and operation of the Showtime venture is memorialized primarily in four separateagreements. Please provide these agreements: 1) an agreement between the Smithsonian andShowtime to create a limited liability company that will, among other things, create a new digitalon-demand television channel called Smithsonian on Demand; 2) a licensing agreement from theSmithsonian to the new venture for the use of Smithsonian content and Smithsonian trademarks; 3)an agreement between the Smithsonian and the new venture that governs the new venture’s accessto Smithsonian content; and, 4) a management agreement between Showtime and the new venturefor the management of the new venture.

2. It is my understanding that while Mr. Beer was negotiating with Showtime, he received cashfrom the sale of shares to Showtime by Sundance TV. Further, I understand that Mr. Beer told theGAO he owned his shares of Sundance Channel through Sundance TV, one of the three owners ofthe cable channel. When Sundance TV sold shares, did Mr. Beer receive any of those proceeds?If so, how much? Finally, when did Mr. Beer receive his payout from the sale of those shares?Thank you for your time and assistance. I will also be making a request for FinanceCommittee counsel to question under oath, in private, executives of SBV. I appreciate your helpin facilitating this action. I request a full and complete response within 30 days provided onsearchable cd-rom. I look forward to working with you and other Smithsonian leaders to help ensurethat SBV reaches its maximum potential to contribute to the financial success of the Smithsonian.

Cordially yours,

Charles E. GrassleyRanking Member

cc: Smithsonian Board of RegentsChairman BaucusChairman FeinsteinActing Secretary SamperInspector General RyanThe Honorable Charles Bowsher-30-