Smithsonian Officials Serve On Board Of Its Insurer

Chubb Group Compensated Ex-Secretary and Deputy With Cash and Stock Options

11 Apr 2007 // The Smithsonian Institution last year renewed a contract giving the Chubb Group more than a half-million dollars of insurance business annually while Lawrence M. Small, then the Smithsonian secretary, and Sheila P. Burke, the deputy secretary, held highly paid seats on Chubb's board of directors.

Small received cash and stock valued at $169,675 from Chubb last year, according to proxy statements filed with the Securities and Exchange Commission. He also received options to purchase 105,943 shares.

Burke received cash and stock valued at $194,676 from Chubb and options to purchase 56,000 shares, according to the SEC. Small and Burke sit on Chubb's compensation committee. Burke is also a member of Chubb's finance committee and pension and profit-sharing committee.

Small, who resigned late last month after seven years at the helm of the Smithsonian in the wake of questions about his salary and expenses, was set to receive $915,698 from the museum complex this year. Burke received $400,000 last year. A Senate committee holds hearings on Smithsonian compensation practices today. And another Senate committee investigation has raised questions about the Chubb-Smithsonian relationship.

Chubb, which provides just over half of the Smithsonian's insurance, is one of the world's largest insurance companies. It has sold policies to the Smithsonian since 1992, before Small and Burke came to the institution. Small has been a Chubb director since 1989 and Burke since 1997.

The Smithsonian reviews its insurance policies every five to seven years, according to the institution. The insurers are selected through a broker and a bidding process run by the Smithsonian risk management director.

"There is no consultation between that office and the deputy secretary or former secretary on this matter," said Linda St. Thomas, director of media relations for the Smithsonian. The Smithsonian has increased the amount of business it does with Chubb in recent years, mainly because some other insurers did not renew their policies after the Sept. 11, 2001, attacks, she said.

In a selection process conducted after the attacks of 2001, the year after Small became secretary, Chubb was renewed as a carrier. In the current fiscal year, which ends Sept. 30, the Smithsonian will pay Chubb $548,341. The Smithsonian will pay a total of about $1 million for insurance this year, less than a private company of similar size might pay because the federal government insures the buildings.

The institution's second-largest insurer is XL Specialty Insurance, which holds about 20 percent of the Smithsonian's business.

The propriety of Small and Burke's service on corporate boards has been questioned by Sen. Charles Grassley (R-Iowa), the ranking minority member of the Senate Committee on Finance and a leader in reform of nonprofit organizations. "This is a significant departure from standard practice in the government," Grassley said of the officials' seats on corporate boards and their outside income.

St. Thomas said government rules allow employees to sit on private boards if there is no conflict of interest.

"I do think it is a major conflict of interest for both Small and Burke to sit on the Chubb board, given the insurance policies of the Smithsonian," said Pablo Eisenberg, senior fellow at the Georgetown Public Policy Institute. "The Board of Regents should have not permitted this, but the regents have demonstrated their lack of responsibility in overseeing the affairs of the institution."

Charles M. Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware, said having two people from the same organization on a major board can be problematic, particularly if the two organizations do business with each other.

"This commercial relationship is frankly to be avoided," Elson said, "and cosmetically the question is of all the insurance companies out there, why are they doing business with Chubb? Why are there two people on the board from the same organization?"

A spokeswoman for Chubb declined to talk about the Smithsonian or the two directors. Roger Sant, chairman of the executive committee of the Smithsonian's Board of Regents, did not return calls yesterday.

Acting secretary Cristián Samper, who took over for Small last month, will answer questions at today's hearing before the Senate Rules and Administration Committee, chaired by Dianne Feinstein (D-Calif.). The agenda includes the Smithsonian's management practices as well as executive compensation.

The institution's employment agreement with Small, signed by the regents in 1999, permitted him to serve on outside boards. It stated, "it is understood that the Secretary may continue to accept income from service on as many as two corporate boards as long as such service does not interfere with the effective performance of his official duties and does not conflict with the interests of the Institution."

Burke does not have a written employment agreement but was told by Small she could continue to be a director at Chubb as well as Wellpoint Inc., a health benefits network, said a Smithsonian spokeswoman.

All Smithsonian employees are governed by the institution's official standards of conduct. "In conducting an outside activity, employees must ensure that the activity will not create a conflict of interest or the appearance of a conflict of interest for the employee," the rules state.

Chubb has pledged $800,000 to the National Zoo, part of the Smithsonian's complex of 18 museums and research centers.

Elson, director of the corporate governance center in Delaware, said, "Typically you want to avoid substantial contributions to the director's charity."

Chubb is one of the most important insurers of museums and their collections, but its policies with the Smithsonian cover business auto liability, break-ins and lawsuits. When the artifacts from the museum travel to other places, they are insured by the Arts and Artifacts Indemnity Act, a federal program.

Chubb is not the only board Small and Burke serve on.

Small sits on the board of Marriott International and received $208,697 in compensation last year. He is a member of its audit committee.

Burke, who has had a seat on the Wellpoint board since November 2004 and serves on its compensation committee, received $395,381 in director's fees from the company last year. Neither Marriott or Wellpoint has business contracts with the Smithsonian.

The salaries of Smithsonian officials have come under scrutiny by Congress. Some members have suggested a salary cap and others have tried to take away some federal money as a protest against executives' salaries and recently publicized expenses.

Small was not given any additional payments or severance pay after his resignation March 24.

At today's hearing the Smithsonian will also be represented by board chairman Sant and another member, Patricia Stonesifer, as well as by Inspector General A. Sprightley Ryan, who uncovered undocumented expenses of $90,000 that were first reported in The Washington Post in February. The expenses in question were retroactively approved by the regents.

Mark Goldstein, an investigator for the Government Accountability Office, is also scheduled to testify.