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Madoff losses tied to board size, makeup

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Most of the foundations that lost large portions of their assets in the Bernard Madoff investing scandal had small, homogeneous boards, a new report says.

For the 105 foundations that lost 30 percent and to 100 percent of their assets in Madoff’s fraudulent investing scheme, the median board size was three, says a report from the National Committee for Responsive Philanthropy.

Only 16 of those 105 funders had five or more board members, the number recommended by the committee, while 38 had only one or two trustees, and 46 had only three or four.

And an analysis of those with five or more trustees shows “notable homogeneity,” the report says.

The 105 foundations that lost the most were “poorer” family foundation with median assets of about $3.2 million.

In a review of other studies, the committee concluded “reputational reference and reputational trust trumped due diligence in this situation.”

While trustees did not execute their duties well, the committee says, they did not act in bad faith, nor were they aware of Madoff’s scheme, and should not be held liable for the losses their foundations incurred.

To prevent future losses, the committee recommends foundations have at least five trustees, and says those people should have diverse perspectives and backgrounds.

Boards also should have in place policies and processes that encourage ethical behavior, including conflict-of-interest policies, codes of ethical conduct and sharing of demographic information on foundation board members and employees.

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