Death of William A. Niskanen opens door for Koch takeover of Cato Institute

Bill Niskanen, one of the founding fathers of public choice, a trusted member of President Reagan’s Council of Economic Advisors, long-time Chairman of the Cato Institute, and one of the world’s leading classical liberal political economists, died in October 2011. His passing has been mourned by almost everyone who loves individual liberty, free markets, limited government, and the rule of law. I viewed Bill Niskanen as one of my closest friends and one of my most esteemed colleagues.

But Bill Niskanen’s passing is not mourned, however, by everyone with a passing claim to classical liberal philosophy.  For Charles and David Koch, Bill Niskanen’s gentle journey into that good night is perceived to be a major opportunity to seize complete control over one of the world’s most renowned libertarian organizations, the Cato Institute. If this hostile takeover turns out to be successful – as seems extremely likely – classical liberals will lose an important beacon of light in a rapidly metastasizing progressive world.

The Cato Institute was founded in San Francisco in 1974 by Ed. Crane – who still retains the presidency – and Charles Koch.  It was named after its billionaire co-founder as The Charles Koch Foundation, and it was incorporated in the State of Kansas, where Koch Industries is headquartered. Unusually for a non-profit organization, the Foundation is controlled by shareholders.  The shareholders can buy and sell their individual stakes for cash under an arrangement that is legal only in a handful of states, and that is frowned upon by the Internal Revenue Service. The idea behind the shareholder concept is to prevent organizations from drifting very far from the founders’ original intent. But founders’ views can change over time, just as can those of  Boards of Directors. In this case, the change may well prove to be dramatic.

The Charles Koch Foundation relocated from San Francisco to Washington, DC during the early 1980s, having already been renamed during the mid-1970s as the Cato Institute, under the dynamic libertarian leadership of Ed Crane. Crane proved to be a first-class fund-raiser and policy entrepreneur who has built the Institute into a powerhouse of libertarian thinking. For many years, the Koch brothers, Charles and David, have offered little more than token financial support, not least because they play a much more overtly political role, using their wealth much more directly to lobby in order to influence both the executive and the legislative branches of the federal government.

For a number of years, Cato was protected from excessive influence by the Koch brothers because of shareholder balance. Charles and David Koch each held 16  $1 shares in the institute. George Pearson, a former Koch employee, held 16 such shares, as did Ed. Crane and Bill Niskanen. With Pearson regularly voting with Crane and Niskanen, control remained in the hands of scholarship.  In 2007, George Pearson sold back his shares to Cato, and these were re-apportioned equally among the remaining shareholders. The balance thenceforth would be even, and the Kochs appointed 50 percent of the Directors to the Board pf the  Cato Institute.  The Koch appointees, by all accounts,are more focussed on political than on scholarly interests.

Under Kansas law, Bill Niskanen’s widow, who inherited his Cato Institute shares, must offer to sell her 16 shares back to Cato at $1 per share, before she can retain them or sell them elsewhere. So far, for reasons that are obvious, she has declined so to do.

So Charles and David Koch are now suing Kathryn Washburn under Kansas law – talk about stacking the odds in their own favor – to force such an offer. With those shares redistributed evenly across the remaining shareholders, they would then enjoy a two-third shareholder majority, and the Cato Institute would become yet another tentacle through which the Kochtopus could engage in overt political lobbying and in opaque lobbying through borderline tax-exempt foundations, centers and institutes.

My expectation is that the lawsuit will succeed and the world will mourn not only the passing of Bill Niskanen, but also the passing of the Cato Institute, at least in any form that is worthy of remembrance across the worldwide community of scholars.

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8 Responses to “Death of William A. Niskanen opens door for Koch takeover of Cato Institute”

  1. Bruce Majors Says:

    I was a student at a Cato summer seminar in 1979 housed at Northwestern University’s Medill school of journalism on free speech and censorship. It was already called Cato then and it was still in San Francisco. I suspect it was never publicly known as the Chales Koch Foundation. I know I never heard that name in 1977-1979 when I subscribed to reason magazine and many libertarian newsletters.

    When Crane et al finished with the LP presidential campaign in 1980 and moved Cato to their new hometown, Washington DC, it had already been called Cato for years.

  2. John Lott Says:

    Dear Charles:
    I don’t know enough about the Koch’s merits relative to Ed Crane’s regarding who should be in control, but I have read the supporting documents and the reason for the requirement that existing owners much have the right to purchase stock when one of the owners dies is pretty clear. While I have no problem with Kathryn, the principle behind this provision is to ensure that those who do not share the institution’s original purpose don’t inherent the stock. Surely you have seen enough institutions such as the Ford Foundation drift away from what the original donor wanted. Giving the original owners the right to buy the stock was put in to prevent that.
    I don’t know about Kansas law, but I have read the incorporation documents and they are quite clear. This ability to repurchase the stock by existing shareholders is contained in those documents.
    If you don’t like the outcome now, it should have been dealt with while Bill Niskanen was still alive or even better when he second of the Kochs were given approval to own CATO’s stock. Only one of the Koch brothers was an original shareholder.

    • Joe Strummer Says:

      Have you read the agreement? I dont think you did. Where does it say that the shares may not pass by operation of law? Or by inheritance? Restrictions on transfer are narrowly construed. The fact that the agreement says nothing about inheritance means that Crane probably wins.

      Did you teach at a law school? Sheesh. Sad.

      • John Lott Says:

        Dear Joe:
        I did read the agreement, and before you lash out at people you might want to read things yourself. The agreement states: “No stockholder of the corporation shall have the right or power to pledge, hypothecate, sell or otherwise dispose of, directly or indirectly, all or any part of his shares of stock without first offering to sell such shares as he desires to dispose of to the corporation for a price equivalent to the price paid by such shareholders . . . .”

        Click to access Cato.pdf

  3. charlesrowley Says:

    Both your comments are well taken. I shall adjust the details of the name change date to respond to Bruce. John, I do not doubt how the case will be decided. My concern is with the likely outcome for Cato, which I view as tragic. I have seen at close quarters what the Kochs have done with other scholarly institutes and I have been horrified. The Americans for Prosperity approach dominates their thinking.

  4. Bruce Majors Says:

    Bruce Majors I agree that the Kochs can do whatever they want with their money, including demanding proof that they are getting some bang for the buck. On the other hand it is true that Cato’s independence is a big part of it’s value, though th leftovers and the beltway msm may refuse to recognize that it is independent. It is also true that the current Cato staff could do what they do elsewhere while Cato becomes a tea party think tank. I don’t understand why the Kochs don’t just leave Cato as it is and start a tea party think tank separately, as opposed to eliminating Cato as it exists. Unless they think it has become insular and cave like so as to be ineffective. That isn’t my impression of them, though it does seem to me that reason magazine and reason TV may get a lot more media appearances with a smaller staff and probably less money.

  5. More Details on the Increasinly Bitter Koch/Cato Lawsuit and Feud - Hit & Run : Reason Magazine Says:

    […] sentiments have come from columnist Steve Chapman, Don Boudreaux, Ilya Somin, Charles Rowley, and many others. There has been a smattering of ambivalence or skepticism about Cato's legal/moral […]

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