Donor governance and financial management in prominent US art museums

Abstract

I study “donor governance,” which occurs when contributors to nonprofit firms place restrictions on their gifts to limit the discretion of managers. In a study of US art museums, I find that this practice has grown significantly in recent years, and it represents the largest source of permanent capital in the industry. When donor restrictions are strong, museums shift their cost structures away from administration and toward program services, and they exhibit very high savings rates, retaining in their endowments 45 cents of each incremental dollar donated. Retention rates are near zero for cash generated from other activities. Restricted donations appear to stabilize nonprofits and significantly influence their activities, but they reduce management flexibility and may contribute to lower profit margins. Rising donor governance in US art museums may represent a reaction by contributors to the industry’s high rates of financial distress, weak boards of trustees, and large private benefits of control enjoyed by managers.

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Fig. 1

Notes

  1. 1.

    A former assistant curator at the Metropolitan Museum of Art in New York estimated its collection’s fair market value at more than $100 billion in 2008, as recounted in Gross (2009). O’Hare (2015) reports an estimate of $26 billion to $43 billion for the collection of the Art Institute of Chicago.

  2. 2.

    Detroit’s flagship art museum was founded by the city in 1885 but spun off decades ago into a self-governing independent entity. However, the city retained title to the art collection in order to improve its position as a borrower in the municipal bond markets. The collection was appraised as high as $8 billion during the bankruptcy proceedings before a negotiated settlement extricated the art from the case. As discussed below, a handful of other museums have similar situations, with their art collections wholly or partly owned by the municipalities where they are located.

  3. 3.

    Principle 17 of the Professional Practices in Art Museums promulgated by the Association of Art Museum Directors states in its entirety that “Gifts and bequests should be unrestricted whenever possible. No work of art should be accepted or acquired with conditions that restrict or otherwise interfere with the museum’s obligation to apply the most reliable scholarly and scientific information available to questions of attribution, dating, iconography, provenance, conservation, and related matters.” While much of the language of this principle seems to apply to gifts of artwork as opposed to cash, the first sentence seems umambiguously to discourage restricted gifts of all types. See https://aamd.org/sites/default/files/document/2011ProfessionalPracitiesinArtMuseums.pdf.

  4. 4.

    A good account of recent art museum controversies over donor restrictions can be found at http://www.nytimes.com/2013/02/05/arts/design/museums–grapple–with–onerous–restrictions–on–donations.html. Examples in this story include one donor that required all pieces of his collection to be kept together by the Brooklyn Museum, which learned years later than some were fakes. In another case, the wife of American painter Clyfford Still bequeathed 2400 of his objects to a new museum on the condition that the trustees would build a collection dedicated solely to his work and would never sell or lend any of the art. In 2011 the museum successfully went to court for permission to sell four paintings in order to pay for conservation and other expenses.

  5. 5.

    See http://www.artnet.com/magazineus/news/artnetnews/china–the–worlds–top–art–and–antique–market.asp.

  6. 6.

    In one prominent recent example, the Albright-Knox Art Gallery in Buffalo, NY, in 2007 raised $28.6 million by auctioning a bronze sculpture from its collection. It complied with standard ethical guidelines by earmarking the proceeds for an acquisitions endowment fund, essentially exchanging one piece of art for the resources with which to purchase others and rebalance the span of the overall collection. However, the transaction caused considerable controversy in the city and in the museum industry.

  7. 7.

    Unfortunately the small group of excluded private foundation museums includes two of the best capitalized, the Getty Museum in Los Angeles, CA, and the Crystal Bridges Museum of American Art in Bentonville, AR.

  8. 8.

    See http://nccs.urban.org/statistics/quickfacts.cfm.

  9. 9.

    A number of museums appear to rely implicitly for protection from creditors upon the concept of a cultural trust, which asserts that creditors cannot seize assets that are held for the benefit of the public. See Tam (2012). This position was taken by the attorney general of the state of Michigan during the bankruptcy of Detroit. The U.S. bankruptcy judge did not appear to agree with this doctrine, as he oversaw a negotiated settlement in which donors to the Detroit Institute of Arts and the museum itself agreed to pay hundreds of millions of dollars to the city’s creditors in order to remove any encumbrance upon the museum’s collections.

  10. 10.

    See http://www.forbes.com/sites/kathryntully/2012/10/31/should–your–art–be–insured/. In the case of government owned museums, the decision not to insure artwork seems rational, since the government can act as its own insurer. For private museums, certain arguments seem less logical. For instance, some argue that the cost of insurance is simply too high due to the value of the artwork, an assertion that only seems to make the need for insurance more urgent. Others suggest that insuring art is problematic due to uncertainty about its fair market value, but the existence of a robust market for insuring private collections and traveling exhibits seems to undercut this contention, as does the ease with which donors obtain appraisals for tax purposes when making gifts to museums.

  11. 11.

    Nearly all prior endowment research uses survey data from the higher education industry compiled by the National Association of College and University Business Officers (NACUBO). While the completeness of this data has improved over time, it has been subject to survey self-selection effects, changing variable definitions, and a reliance on self-reporting by those universities that cooperate. A comprehensive evaluation of the NACUBO data’s quality appears in Brown et al. (2010).

  12. 12.

    The closest paper to running such a test appears to be Dimmock (2012), which establishes that the standard deviation of endowment returns for a sample of universities is inverse to the standard deviation of the non-investment revenue streams, so that the most stable universities tend to have the riskiest endowment investment policies and vice versa.

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Acknowledgements

I am grateful to Tumi Adebiyi and Siddharth Vij for excellent research assistance, and I thank Jianping Mei, Michael Moses, and Ashley Newton for graciously sharing their data with me. I appreciate helpful comments from Tumi Adebiyi, David Lesmond, Ashley Newton, Michael O’Hare, John Page, Johann Reindl, Gudrun Rolle, Siddharth Vij, Leonard Wolk, two anonymous referees, and seminar participants at the University of Adelaide, Baruch College, BI Norwegian Business School, University of Edinburgh, Erasmus University Rotterdam, Free University of Amsterdam, IESEG Paris, Melbourne University, Tulane University, the University of Western Australia, and students in my NYU doctoral seminar on corporate distress and restructuring. Part of this paper was completed, while I was a visiting professor at Erasmus University Rotterdam.

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Yermack, D. Donor governance and financial management in prominent US art museums. J Cult Econ 41, 215–235 (2017). https://doi.org/10.1007/s10824-017-9290-4

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Keywords

  • Nonprofit governance
  • Art museums
  • Endowment management
  • Restricted donations