The Smithsonian Institution is a unique and complex organization. Congress created the Smithsonian in 1846 as an independent trust establishment of the United States. Congress did not establish the Smithsonian within any branch of the federal government, and it is not a federal agency unless Congress designates it as such for purposes of a particular law or a federal court determines it to be. The Smithsonian Act provided that the business of the Smithsonian be conducted by a board of regents, and that the Board be drawn from all three branches of government and the private sector. The Act delineates the structure and composition of the Board. Table 1 provides more information on the structure and current membership of the Board. The Board traditionally has elected the Chief Justice of the United States to be the Chancellor of the Board. The Chancellor presides over Board meetings and selected ceremonial occasions, and until recent changes to the role of the Chancellor, had several other leadership responsibilities. The Board is vested with governing authorities over the Smithsonian and considers matters such as the Smithsonian’s budgets and planning documents, new programs and construction proposals, appointments to Smithsonian advisory boards, and a variety of other issues facing the Smithsonian. The Board also has stewardship responsibilities, including ensuring that the Smithsonian’s facilities and collections are maintained, and ensuring that the Smithsonian has a funding strategy that provides sufficient funds to support these activities. In recent years, the National Academy of Public Administration, the Smithsonian, and we have reported on the deterioration of the Smithsonian’s facilities and the threat posed by this deterioration. For example, in September 2007, we reported that funding challenges at the Smithsonian were affecting facilities’ conditions and security, and endangering collections, and that the Smithsonian’s cost estimate for facilities projects had increased to $2.5 billion from $2.3 billion in April 2005. In that report, we recommended that the Board perform a comprehensive analysis of alternative funding strategies beyond principally using federal funds to support facilities and submit a report to Congress and the Office of Management and Budget describing a funding strategy for current and future facilities needs. The Smithsonian manages two different types of funds—federal appropriations and trust funds—which include revenue from donations, grants, revenue-generating activities, interest on investments, and other sources. In some cases, the Smithsonian’s policies related to activities involving the expenditure of federal funds has differed from its policies related to the expenditure of trust funds. For example, in 2006, we reported that the Smithsonian had elected to follow the Federal Acquisition Regulation (FAR) provisions for contracts involving the expenditure of federal funds, while for business contracts that involved neither the expenditure nor receipt of federal funds and for which the FAR is inapplicable, the Smithsonian had elected to follow commercial business practices. About two-thirds of Smithsonian employees, including executives, are paid with federal funds, while other employees are paid with trust funds. Federal employees are subject to the laws, regulations, and policies for federal employment, while trust employees are covered by Smithsonian policies for trust fund employment. Adding to the complexity of the organization, in 1998, the Board authorized the Secretary of the Smithsonian to reorganize the various business activities within the Smithsonian into a centralized business entity, Smithsonian Business Ventures (SBV). SBV’s mission is to generate revenue from business activities to support the Smithsonian’s mission. The Smithsonian’s business activities include a magazine and museum retail operations. The governance reform currently under way at the Smithsonian is not unique among nonprofit organizations, or among other major arts and educational institutions. In light of the Sarbanes-Oxley Act of 2002 and governance reform in the corporate world, awareness has grown regarding the need for improving governance practices in the nonprofit sector. Several major nonprofit organizations, such as the American Red Cross, the J. Paul Getty Trust, and the United Way of America, have recently undergone major governance reform. These efforts were initiated in response to similar problems that were identified at the Smithsonian regarding controls over executive compensation and expenses, and insufficient oversight and leadership by the boards of those institutions. For example, the J. Paul Getty Trust initiated its governance reform in response to similar criticism regarding executive compensation and expenses, limited board oversight of those expenses, and similar issues regarding weaknesses in conflicts-of-interest policies. We have found that governance and accountability breakdowns can result in a lack of trust from donors, grantors, and appropriators, which could ultimately put funding and the organization’s credibility at risk. Both the Smithsonian’s Governance Committee report, and the IRC’s report highlighted several issues and areas of concern related to governance of the Smithsonian and oversight of Smithsonian management. While the Board accepted the IRC’s report, it did not concur with all of the report’s findings. Both reports laid out recommendations to improve governance which were adopted by the Board in June 2007. Specifically, these reports highlighted: inadequate policies in place and insufficient oversight of and knowledge among regents concerning executive compensation, trust and federal pay systems, leave for senior executives, conflicts of interest regarding service on for-profit boards, travel expenses, event expenses, activities of SBV, and internal financial controls; a lack of critical information and relationships necessary to bring forward important issues and concerns and to support vigorous deliberation and well-reasoned decision making on the part of the Board, such as lack of access for senior management to the Board, too much control within the Secretary’s office regarding the information available to the Board and the Board’s agenda, and a lack of transparency and connection to stakeholders within the Smithsonian (such as museum directors and advisory boards) and to the public at large; and IRC’s finding that there was insufficient action on the part of the Board to demand critical information needed to conduct adequate oversight of the Smithsonian, which was linked to a number of issues, such as unclear roles and expectations for citizen, congressional, and ex-officio regents; a lack of engagement and participation by some regents; unclear responsibilities of Board committees and a lack of critical committees; a lack of diversity of skills and expertise needed to conduct adequate oversight; inflexible size and structure of the Board; and a lack of accountability of regents with regard to their performance and to fulfilling their fiduciary duties. The Board has implemented several executive reforms to address concerns about executive compensation, benefits, and expenses, and has established an overarching code of ethics applicable to everyone associated with the Smithsonian, but development of policies and internal controls for broader operational matters such as travel, event expenses, and contracting is still under way. Training and establishing accountability remain challenges. The recommendations covered in this section are shown in figure 1. Appendix II provides information on the status of all of the Governance Committee’s report recommendations. The Board has implemented reforms related to the Secretary’s compensation, executives’ compensation, executive leave policies, and conflict-of-interest policies. Regarding the Secretary’s compensation, the Board revised the process it used to establish compensation for the Secretary-elect (scheduled to assume office in July 2008). This reform was implemented to address concerns about the former Secretary’s compensation. According to the IRC, the former Secretary’s total compensation equaled $915,698 in 2007 and was troubling for two reasons. First, it included a housing allowance that reached $193,000 in 2007, which the IRC concluded did not in fact serve as a housing allowance but as a “packaging device” to provide the Secretary with additional salary. Second, the former Secretary’s starting base salary of $330,000 in 2000 was increased significantly in 2001—and reached $617,672 in 2007—based in part on compensation studies that the IRC concluded were not objective and were used primarily as a method of justifying substantial compensation increases. On March 15, 2008, the Board announced that it had selected a new Secretary of the Smithsonian. According to Smithsonian officials, the Secretary-elect’s base salary will be $490,000 as compared to the former Secretary’s 2007 base salary of $617,672. The Secretary-elect’s total compensation, including base salary and employer pension contributions, will be $524,000, considerably lower than the former Secretary’s 2007 total compensation of $915,698. According to a Smithsonian official, the new Secretary will not receive a housing allowance or any additional benefits beyond those provided to all senior trust Smithsonian employees. In setting this salary, the Board was guided by a compensation study that used a methodology that addressed many of the concerns the IRC had had about the previous compensation studies used to set the former Secretary’s salary. The Board also has reformed the Smithsonian’s executive compensation system by implementing what it refers to as a unified compensation philosophy. This effort involved establishing clear criteria to determine whether the compensation of each trust executive is market based or equivalent to the federal system. This reform grew out of concerns that the Smithsonian had separate employment systems governing its federal, trust, and SBV employees, and that the trust salaries for some positions—in areas such as finance and administration—were unnecessarily higher than those paid in much larger federal agencies. The Board determined that the Smithsonian should follow the federal guidelines for pay for senior-level positions except for limited instances where the job functions do not exist in the federal sector or there is not a candidate pool in the federal sector—in which case, compensation for the position should be market based. The Board also approved a plan to address the effects of applying the criteria. After applying the criteria, the Smithsonian determined that 38 of its executives were in positions that should follow a federal compensation approach. Of those 38, 19 had salaries above the federal pay cap.