1. Donor Governance and Risk Management in Prominent U.S. Art Museums David Yermack NYU Stern School

2. What’s interesting about art museums? They seem very wealthy But they are always in financial trouble Private benefits of control are very high

3. Balance sheet of the Metropolitan Museum of Art, 2014 Liabilities –Current liabilities - $123 m –Retirement obligations - $157 m –Long-term debt - $172 m Net assets - $3,279 m Unrestricted: 28% Temporarily restricted: 45% Permanently restricted: 27% Assets –Fixed assets - $452 m –Working capital - $260 m –Investments - $3,109 m –Art - $1 –Art - $100,000 m

4. Art museums in trouble: American Folk Art Museum, 2010-11 Forced to sell building and downsize after bond default

5. Risk-taking by museums Museums with tax-exempt bonds issued to finance expansion 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 0 10 20 30 40 50 Number of museums (out of sample of 129)

6. Thomas Campbell CEO and Director of the Metropolitan Museum of Art $840,000 salary (fiscal year 2014) $110,683 benefits $308,500 apartment on Central Park $36,104 pension contribution constant media visibility gatekeeper for New York donor society

7. Where do art museums get their money? Unrestricted assets have fallen from 45% to 30%

8. “Donor governance” Restricted gifts are analogous to raising equity with covenants Restrictions can be temporary or permanent, and they often outlive the donor All restrictions become obsolete eventually, so sometimes courts get involved

9. When does donor governance make sense? Information asymmetry between management and outside monitors High potential private benefits of control for managers Weak boards of trustees and weak monitoring by lenders

10. Other contractual restrictions that reduce agency costs in museums Rules against “deaccessioning” art Rules against spending principal from endowment Rules against investing tax-exempt bond issues in endowment Matching requirements for government grants

11. Sample of 129 major U.S. museums AAMD members organized as public charities, 1999-2013 No university or government-owned museums; no non-collecting institutions Donations greatly exceed program service revenue, but together they do not cover costs

12. Risk-taking by museums Living without insurance Fire Cuming Museum, London, 2013 Theft Gardner Museum, Boston, 1990 Deterioration The Last Supper, Milan

13. Museums’ sources of funds

14. Restricted capital and museums’ cost structures

15. Restricted capital and museums’ profit margins and stability

16. Investment – cash flow relations

17. Conclusions Restricted gifts are a huge and increasing source of non-profit capital They create a type of “donor governance” that appears to have strong impact –Rearrangement of cost structure –Retention of funds in endowments –More stability, lower margins Much more to learn about the form, effectiveness and duration of these restrictions