Author Archives: Jerry Taylor

Blundell Comes Out in Favor of An Independent Cato

John Blundell is one of the most successful and highly respected libertarian executives in the world. From 1993-2009, he was the CEO of London’s highly influential Institute for Economic Affairs (IEA).

In a recent email to my colleague David Boaz (excerpted here with Blundell’s permission), Blundell had this to say about the Kochs’ attempt to take over the Cato Institute:

I grew up above a shop and my mom used to say there are three secrets to success, namely location, location, location.

My elder son is now Director of Golf Operations at a major resort and he tells me that there are three secrets to success, namely drainage, drainage, drainage.

And in the time I worked with the late Sir Antony Fisher – that great think tank pioneer – he used to tell me that there are three secrets to success, namely independence, independence, independence.

Blundell’s long-standing ties to the Koch brothers and their various political operations does not blind him to what should be perfectly obvious to everyone: a think tank that is the personal property of two men is not a recipe for success no matter how well intentioned said men might be.

Koch Dissembling about the Board Vote that Started the War

Back in February, you may remember, the Koch brothers nominated 12 new members to the Cato board of directors in advance of a shareholders meeting that was, in point of fact, required by the stipulations of the shareholder agreement. They only had the votes, however, to put four of those nominees on the board. So at the March 1 meeting, they rammed through Charles Koch, Preston Marshall, Andrew Napolitano, and Ted Olson, and in the course of doing so, displaced four long-standing members of the Cato board; John Malone, Don Smith, Bill Dunn, and Lew Randall. Hence, a fair description of what happened is that the Kochs had four incumbent board members removed, two of whom happened to be the largest donors to the Cato Institute.

But wait – the Kochs now say nothing of the kind happened!

Melissa Cohlmia, director of corporate communication at Koch Companies Public Sector, responded that the Washington Post was incorrect in saying that Charles Koch and David Koch had four members “removed.” She said the Kochs requested that the vote on the board members be delayed. When that didn’t happen, the Kochs voted to retain two of the four board members

They did? Well, yes and no … but mostly, no. The Kochs’ support for two of the four ousted board members is a convenient fiction.

First, a little background: from the inception of the Cato Institute through 2010, board members were chosen by board members. Cato was, functionally, governed by a self-perpetuating board like almost all other non-profits. But Cato’s shareholder agreement gave the shareholders the power to elect board members if they chose. Prior to 2010, the shareholders had only met once (in 1981 to buy-out Murray Rothbard) and had never exercised their power to elect board members. In 2010, however, the Koch brothers insisted on exercising their long-dormant shareholder power and imposed two new members onto the Cato Board (Koch employees Kevin Gentry and Nancy Pfotenhauer). In 2012, they did so again, but this time, they went all-in and put four new members onto the Cato board.

The Cato shareholder arrangement allows for cumulative voting. Crane and Washburn hold 50 percent of the shares, so they got to fill half of the board seats up for the vote. Charles and David Koch hold the other 50 percent of the shares, so they got to elect the other half.  When the shareholder meeting convened on March 1, there were eight seats up for grabs. Each of the four shareholders owned 16 shares, so each shareholder was afforded 128 votes (16 [shares] x 8 [board vacancies] = 128 votes) and those votes could be allocated any way the shareholder wished.  The total number of votes cast on March 1 was thus 512; 256 by Crane-Washburn and 256 by Koch-Koch.

To be assured of election on March 1, a candidate for the board needed 57 votes (8 seats x 57 votes = 456 total votes, so the 9th highest candidate would have 512 – 456 = 56 votes; not enough to get into the top eight).  Thus, to elect their four candidates, Koch-Koch gave each of them (Charles Koch, Marshall, Napolitano, and Olson) 57 votes, or 228 of their 256 total votes.  Crane-Washburn did the same, electing Washburn, Jeff Yass, Howie Rich, and Fred Young with 228 of their 256 total votes.

The point here is that it did not matter who received the “extra” 28 votes from each side. Even if Crane-Washburn and Koch-Koch voted for the same 9th candidate, he would only have received 56 votes; not enough to be elected.

The Kochs apparently chose to use their meaningless 28 votes on Malone and Smith so that they could say “Hey, don’t blame us for displacing Cato’s two largest donors; we voted for them!” Their lack of enthusiasm for Malone and Smith, however, was made abundantly clear when the newly-constituted Cato board met on March 22 and voted to expand its membership from 16 to 20 so as to put Malone and Smith (along with Dunn and Randall) back on the board. The Kochs responded with yet another lawsuit on April 9, claiming that there was “no compelling justification” for expanding the board so as to include Malone and Smith. That tells you all you need to know about how genuine their support for Malone and Smith was at that March 1 shareholders meeting.

Merriam-Webster’s Online Dictionary defines “dissemble” as “to put on a false appearance: conceal facts, intentions, or feelings under some pretense.” There’s been a heck of a lot of that going on (most recently here, here, here, and here) from the Kochs of late.

A Tale of Two Kochs

The most recent rationale the Kochs offer for their campaign to takeover Cato is that the institute is nowhere near as effective as it could be.  Why is that?  David Koch offered an answer in his public statement on March 22.  Cato’s ineffectiveness;

[I]s, in large part, due to the behavior and management practices of its CEO – behavior that would have resulted in his termination from most corporations, let alone one that is supposed to exemplify the values of a free society, including integrity, value creation, creative destruction, humility, intellectual honesty, and treating others with dignity and respect.  The fact that the current Cato board has allowed this behavior convinces us that a change is needed if Cato is to be more effective.”

Now, put aside for the moment Koch’s dubious contention that there is a correlation between the congeniality of the CEO and the success of his company (how, oh how, did Apple manage to survive with that horrible Steve Jobs running the place?).  It’s worth noting that David Koch has been on the Cato board for 25 years and never once expressed any such concerns about Cato’s president or board of directors.

In fact, last year (on March 31, 2011 to be exact), David Koch wrote a memo to the board of directors and had this to say about Cato’s management:

It [Cato] has become to be viewed as one of the nation’s foremost upholders of advancing the idea of liberty.  I am proud of and believe Cato’s success has been due to its outstanding leadership, including various groups of accomplished board members who have brought a diverse set of views and experiences to advance Cato’s vision.

Today, of course, the Kochs propose to machine-gun those very board members.

What, exactly, occurred over the course of the past year to change David Koch’s mind about Ed Crane and the Cato board?  David Koch only offers one grievance from the date of that memo to the date in which his initial lawsuit was filed; the supposedly rude treatment that his two employees (Nancy Pfotenhauer and Kevin Gentry) received from Crane during board events in 2011.

Hence, if we take these Koch statements at face value, we can’t help but conclude that the Kochs have launched this takeover campaign because Ed Crane wasn’t nice to the Koch functionaries that were put on our board against our will.  And since the board won’t fire Crane over it, the Kochs will fire the board.

Now, to be fair, Koch’s 2011 statement lauding Cato’s “outstanding leadership” follows by attributing it to a shareholder arrangement which, he says “has kept Cato ‘on mission’ – advancing liberty – for more than three decades.  This has all been done without compromising Cato’s independence or non-partisanship.”

Really?  What exactly have the shareholders done over the course of Cato’s long history to produce this success?  Koch doesn’t say.

Let the record show that the shareholders have only met twice over the 35 year history of the Cato Institute.  The first meeting was in 1981 when the shareholders bought-out Murray Rothbard’s shares and removed him from the board of directors.  The second meeting was in 2010 when the Kochs rammed Nancy Pfotenhauer and Kevin Gentry onto the board of directors.

Hence, calling the shareholders “passive” – at least in regards to their duties as shareholders – would be generous.  The shareholders qua shareholders have had next to nothing to do with Cato over the entire history of the institute.

Koch hints, however, that it’s not so much what the shareholders have done but what the shareholders have prevented from being done.  Earlier in that memo, he argues:

We all know of countless examples of organizations steering way off course from their founders’ intentions and vision (e.g., Ford Foundation, Pew Charitable Trusts, MacArthur Foundation, etc.) primarily because no mechanism existed to prevent a self-perpetuating board of directors from taking actions that were wholly inconsistent with the founder’s intention.

Well, what exactly were the “intentions and visions” of the Institute’s founders?  The Kochs never say.  But two of the three living founders of the Cato Institute – Crane and Pearson – believe that it’s Charles Koch who’s “steered way off course” from what they understood to be Cato’s founding vision.  He’s the one who wants non-libertarians on Cato’s board.  He’s the one who wants Cato integrated with right wing, grassroots activists who are frequently hostile to our non-economic agenda.  And he’s the one who’s investing heavily in hotly partisan political campaigns.

David Koch was right to congratulate Cato’s management in 2011.  But he was wrong to take credit for it as a shareholder.

More Koch Misinformation about Kevin Gentry

Is Koch Vice President Kevin Gentry a valuable asset to the Cato board of directors or little more than a reliable vote for Koch Industries in their campaign to takeover the place?  In his March 22 public statement, David Koch argues the former:

… his [Gentry’s] expertise in fundraising has been utilized repeatedly by Cato, its directors, and its donors.  In fact, Ed offered Kevin a job at Cato in 2003 because of his fundraising skills. Kevin was a desirable potential employee in 2003 and a unanimously elected director in 2010. Kevin’s generous agreement to help Cato for a time has been repaid by insults in the board meetings by Ed.

Nonsense.

  • Gentry has not raised one single dime for the Cato institute either before becoming a board member or after.  Nor, to anyone’s knowledge, has he even bothered to try.  If I’m mistaken, donor and dates please.
  • Crane never offered Gentry a job.  If Gentry has evidence that an offer was extended, let’s see it.

Be that as it may, there is a world of difference between someone who is qualified for a job here and someone who is qualified to run the place.  And this “unanimously elected” nonsense is blatantly disingenuous, as I discussed here.

I understand the Kochs’ desire to come to the defense of their employees.  But let’s not engage in make-believe.

Pyrotechnics about Partisanship

There is an increasing correlation between how seriously the Kochs take one of our arguments and how likely they are to mislead the public about the same.  Take our fear that the Kochs, were they to gain control of the place, would align Cato more closely with the right wing partisan activists they traffic with.  In his March 22 public statement, David Koch responded to this fear by saying, in effect, Crane’s even worse:

Ironically, just within the past few weeks, Ed has asked an outstanding individual, who is a self-admitted partisan Republican, to join the board.  This person, who actively partners with us on many initiatives, has often disagreed with us on projects because we would not offer blanket support to Republican candidates or the Republican Party.

Without details, who knows what he’s talking about?  I suspect, however, that David Koch is referring to a telephone conversation Ed Crane recently had with a Arthur Pope, a friend of Crane’s who’s a co-founder of the John Locke Foundation and chairman of the John William Pope Foundation.  Pope is, however, a member of several Koch-affiliated boards and a friend and ally of the Koch brothers.  Crane told Pope that if the Kochs were going to pack the Cato board with Koch loyalists, he’d rather they pack the board with people like Pope because he at least was a reasonable man who had independent stature and credibility (unlike, say, Pfotenhauer and Gentry).

That off-hand comment is a far cry from asking Pope to join the board.  But it was apparently enough to serve Koch’s purpose of muddying the waters.

Koch Suzerainty at Cato – a Long Standing Affair?

One of the strongest arguments against what the Kochs are doing was forwarded by Case Western Law Professor Jonathan Adler only days after the Koch lawsuit was filed.  In short, he argues – as many have argued since – that an institute that is, legally speaking, the private property of Charles and David Koch would have zero credibility outside of the libertarian community.  Hence, their suit, if successful, can only have one outcome; the utter destruction of the Cato Institute.

David Koch’s statement on March 22, on the other hand, argues that Cato has long been the private property of the Kochs and Cato has thrived nonetheless:

For most of its existence, Cato has been controlled (as Bob’s talking points describe it) in whole or large part, by the Kochs.  In fact, between 1991 and 2008, Cato had five shareholders – Charles; Ed; Bill Niskanen; a long-time Koch Industries employee (then still employed by Koch); and me.  During those 17 years, Koch-affiliated individuals had the ability to elect the majority of the board and the ability to acquire the stock of Ed and Bill, but we did not, and there was never any outcry over a “negative impact” during that time.

Every one of those three sentences is factually incorrect.

  • The implicit claim that George Pearson – the unnamed “long-time Koch Industries employee” - was a Koch employee between 1991 and 2008 is false.
  • Pearson was an independent actor and by no means a person “controlled” (as David Koch so bluntly put it) by the Koch brothers.
  • Even if the Kochs did control Pearson’s vote as long as he worked at Koch Industries, that would have afforded them a majority among the shareholder group for only five of Cato’s 35 years; 1981-1985 and 1991-1992.  If we consider Pearson an independent vote, Kochs’ majority existed only from 1981 through 1985.

As you will see below, there’s probably a very good reason why David Koch chose not identify Pearson by name; he doesn’t want Pearson talking to reporters given what he’s likely to say.

From the founding of the Cato Institute in 1977 through 1981, there were four shareholders; Charles Koch (12 shares), George Pearson (12 shares), Murray Rothbard (12 shares), and Ed Crane (12 shares).  After Rothbard was bought-out in 1981 by Koch, Pearson, and Crane, there were three shareholders, each of whom received four of Rothbard’s 12 original shares.  In 1985, those three agreed to make Bill Niskanen a shareholder and disbursed to him 16 “new” shares, which brought the group back up to four (Koch, Pearson, Crane, and Niskanen) and increased the total number of shares from 48 to 64 (16 shares apiece).  In July 1991, those four agreed to make David Koch a shareholder and disbursed to him 16 new shares, bringing the number of shareholders to five and the number of outstanding shares to 80 (16 shares apiece).

Now here’s where it starts to get interesting.  In September 1991, Koch Industries’ then-attorney H. Allen Caldwell informed Crane in a letter that “Mr. Charles Koch has requested, and George Pearson has agreed to the transfer of George’s stock in Cato to Richard Fink.”  Caldwell then claimed that “a waiver by each existing share-holder is required to effect the transfer.”  Crane, however, refused to sign the waiver and threatened to resign were Fink given any role in the Cato Institute.  In any event, the matter was accordingly dropped.

The following year, Pearson left Koch Industries but he retained his stock out of concern that Charles Koch was on a collision course with Crane and that the latter might some day need his support.  In 2008, however, he sent his shares back to the corporation with the following letter:

Enclosed are my shares of Cato stock.  I wish to surrender these to Cato.  I understand that Cato’s Governance Committee wishes to convert Cato from a stock corporation to a membership corporation.  That makes a great deal of sense to me.  With your vision and leadership Cato has grown to become a strong, effective voice for freedom, stronger and more effective than we ever dreamed of during those early years when Cato was so fragile.  With its current broad base of support I don’t see any reason for Cato to continue as a stock corporation.  I hope that the other stock holders will decide to make Cato a membership corporation.

As an aside, the Kochs have made a great deal out of the need to maintain the shareholder arrangement in order to ensure that the founders’ intent is honored as the years go by.  Only three of those founders are today alive and two of them – Crane and Pearson – favor the elimination of that shareholder arrangement.  So from now on, when you hear the Kochs go on about “founder intent,” substitute “Charles Koch’s intent” so that you understand what’s really being said.

In any event, let’s put to rest this argument that “For most of its existence, Cato has been controlled … in whole or large part, by the Kochs.”  It’s simply not true.

About Those “Unanimously Elected” Koch Operatives

There’s a great deal of disingenuousness characterizing Koch rhetoric of late, and much of it has to do with two of our recently-added board members; Kevin Gentry (Vice President of Strategic Development for the Charles G. Koch Charitable Foundation) and Nancy Pfotenhauer (spokesperson for Koch Industries).  To parry arguments that the two were foisted upon us by the Kochs, David Koch wrote on March 22:

 It is worth noting that Kevin and Nancy were unanimously elected to the board in 2010 … Nancy and her communication expertise were well known and valued by the board when she was unanimously elected as a board member in 2010.

The most recent piece up at Breitbart repeats the argument; “Most tellingly, in December 2010, Pfotenhauer and Gentry had both been unanimously elected to Cato’s board and received Crane’s vote (as well as the Chairman’s).”  And just for good measure, Kevin Gentry today echoed the same “unanimously elected” line over at CNN.

But stop right there:  Pfotenhauer and Gentry were unanimously voted onto the board by the shareholders (Charles Koch, David Koch, Ed Crane, and Bill Niskanen), not by the board of directors (the first time, incidentally, that had occurred in the history of the Cato Institute).  Crane and Niskanen did indeed vote for Pfotenhauer and Gentry at that shareholder’s meeting, but not because, as Gentry implies, either or both were anxious to have them on the Cato board.  In fact, both Crane and Niskanen understood full well that they lacked the power to block those two Koch nominees given the complexities of the shareholder voting arrangements.  So rather than make a pointless vote of protest, Crane and Niskanen decided to vote with the Kochs in the hope that they might thereby appease Charles and David, both who were up-in-arms over Crane’s comments in the celebrated Jane Mayer article a few months earlier.

The implicit suggestion here – that Pfotenhauer and Gentry were wanted on the board not just by the Kochs, but by everyone else – is simply not true.  On the contrary, every member of the Cato board at the time – save for David Koch – opposed their nomination (just ask them).  Didn’t matter though; it wasn’t up to them.