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The Battle for the Cato Institute
Comments () | Published May 30, 2012

In December 2010, Charles Koch called the first meeting of Cato’s shareholders since 1981. Cato now had four shareholders: Charles and David Koch, Ed Crane, and William Niskanen, Cato’s aging chairman emeritus. The Kochs used their shares to appoint two new directors to Cato’s board: Nancy Pfotenhauer and Kevin Gentry.

Crane and Niskanen were stunned. Pfotenhauer was a former spokesperson for Republican John McCain’s presidential campaign. She had supported the Iraq War and the Army’s “don’t ask, don’t tell” policy—positions that run counter to libertarian ideals. Kevin Gentry was vice chairman of the Virginia Republican Party and a top executive at the Charles Koch Foundation.

“Whatever they are, they are not libertarians,” says Bob Levy, Cato’s board chairman.

Gentry has asked other board members why they tolerate Crane’s behavior. “The response is a shrug of the shoulders and a ‘That’s just Ed,’ ” Gentry says. “Some have even said that’s part of his charm.”

Crane seethed over the appointments. At a dinner on March 31, 2011, he couldn’t contain his anger. While Cato directors and scholars finished dinner, the new board members were asked to speak. The evening included a discussion of a Cato fundraising campaign, which would eventually rake in $47 million to expand the institute’s Washington operations. Pfotenhauer asked about the long-term vision for Cato’s policy staff.

Crane believed Fink had told Pfotenhauer to raise the issue in public to suggest that Crane was mismanaging donor funds. Crane stood up; his face was red with anger, Gentry says. “I just want to say something about these Koch people,” Crane said. “Kevin Gentry sitting over there has never once—never once!—invited me to one of the Koch donor events that he organizes for Charles! Nor has he invited anyone from Cato!”

He turned to Pfotenhauer. “What would you know about policy at the Cato Institute?” Crane shouted.

Crane stormed out. Pfotenhauer stayed and accepted apologies from other directors.

At a subsequent board meeting, Crane refused to acknowledge Pfotenhauer or Gentry even though they were the only other directors in the room, Gentry says. (The rest of the board participated by phone.)

Gentry has asked other board members why they tolerate Crane’s behavior. “The response is a shrug of the shoulders and a ‘That’s just Ed,’ ” Gentry says. “Some have even said that’s part of his charm.”

Says a former Cato employee: “So much of this dispute is about Ed’s ego and his desire to maintain his power at Cato.”

Neither Charles nor David Koch donated to Cato in 2010 or thereafter.

Niskanen’s health faded in the fall of 2011. After undergoing heart surgery in September, he was recovering at home when he suffered a massive stroke. He died the next day, October 26, with his wife at his side.

Within days of the funeral, the Kochs made a play for Niskanen’s shares, Crane says. They insisted that under the terms of the underlying agreement, Niskanen’s stock must be offered to Cato’s remaining three shareholders for purchase, giving the Kochs two-thirds control over Cato’s board. Crane and Levy argued that Niskanen’s widow, Kathryn Washburn, should inherit his shares.

In November, Levy agreed to meet David Koch and Richard Fink at Dulles Airport, in a conference room adjacent to a hangar where Koch’s jet was parked.

Koch told Levy that Crane’s treatment of board members—presumably Pfotenhauer and Gentry—was unacceptable and asked that Crane be fired within eight weeks.

Levy had long contemplated Cato’s succession plan and even put out feelers for candidates should the 67-year-old Crane step down. But he considered eight weeks far too short a timetable.

Levy made an offer: If the Kochs agreed to dissolve the shareholder agreement, Levy would launch a search for Crane’s successor and give the Kochs veto power over the selection. The Kochs later turned down the deal.

David Koch also said Cato should do more to turn “esoteric concepts” into “concrete deliverables.” He suggested that Cato “serve as a source of intellectual ammunition” for the conservative activist group Americans for Prosperity, Levy says.

Koch’s recollection of the conversation is more nuanced. He says he told Levy only that Cato should be supportive of organizations such as AFP. “I never asserted that Cato should be directed by, or at the whim of, any other organization, or that they should aspire to advocate the way AFP does,” Koch said in a statement. The Kochs have pledged to maintain Cato’s independence from the Republican Party should they take control.

Both sides agreed to postpone a previously scheduled December 1 shareholder meeting while trying to work out a solution. During negotiations, the Kochs proposed a standstill agreement—delaying official discussion of the shareholder agreement for one year—as well as a nonbinding third-party mediation. Levy rejected both offers.

Although the Kochs repeatedly asked for more time, Crane rescheduled the shareholder meeting for March 1. The Kochs say they were forced to file their suit in advance of the meeting rather than recognize Niskanen’s widow as a shareholder. “They thought we would back down,” Charles Koch said in a statement. “They thought wrong.”

At the March 1 shareholder meeting—held just hours after the Kochs filed their lawsuit—the Kochs appointed four new directors to Cato’s board, including Charles Koch; Republican lawyer Ted Olson, who represents Koch Industries; and former judge Andrew Napolitano, a libertarian Fox News commentator.

The appointments split Cato’s board into two factions: nine directors aligning with Crane, seven supporting Koch. But at a March 22 board meeting, Levy moved to expand the board by adding four Crane-aligned directors. With its two-vote advantage over the Koch faction, Crane’s supporters passed the motion.

The gambit enraged the Kochs. On April 9, they filed a second lawsuit demanding that the March 22 vote be invalidated. The Kochs called Levy’s move a “board-packing scheme.”

The battle isn’t likely to end soon.

Levy says that even if the court rules in Cato’s favor on the fate of Niskanen’s shares, the think tank’s management will continue to fight until it’s free from Koch control. Meanwhile, the Kochs have accused Crane of organizing a “public smear campaign” in an effort to “rule or ruin” Cato.

But as Crane and the Kochs dig in, Cato’s extended family is beginning to wonder if everyone hasn’t lost sight of what’s best for the institute.

“I’m appalled by the damage we’re all doing to Koch interests, Cato interests, and the broader goals we share,” Levy said in a March 23 e-mail to the Kochs. “Reasonable people should be able to resolve this situation.”

This article appears in the June 2012 issue of The Washingtonian.

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  • If the Koch faction takes over Cato then -- major prediction -- absolutely nothing will change. For all of its high-minded talk of "independence," Cato and libertarians in general will always push for the Republican position on any issue with the limited exception of drug legalization.

    Still, it's adorable to see them eating each other alive.

  • frosty

    With the exception of drug legalization, same-sex marriage, war, privacy, etc.

  • Oh please, with the exception of someone like Radley Balko glibertarians are 95% ideologically aligned with the GOP and act (and vote) accordingly.

    Legalizing gay marriage is nothing to them compared to protecting mega-companies from having to pay any taxes, let along protecting the rights of individual workers.

  • Ben Vernia

    So, Ed Crane parlays a $12 investment into a $454,000/year sinecure at Cato, and now he's complaining about the Kochs exercising the power of their shares? It seems that he's already established what he is, and now he's just trying haggle about the price.

  • Nancy Carolyn Wood-Phillips

    Several facts and dates are incorrect; did you run this article by Ed Crane III, prior to publishing it? Some of the 'facts' are not actual reality. The most I can take from this article is that the 'Koch as Academic,' and the 'Koch as Legacy,' attitudes are the root of all divides: clay feet one and all. On the other hand I am amazed at the stamina evidenced by Ed Crane III: Yes, he professes to have been immature from time to time, but look at the amount of pressure that he operates under, "thirty second" lag time, at a packed conference, and consider the progress that he has made for America toward freedom. Astounding isn't it! Cato needs to go on and on under his leadership. The Kochs should be endowing Cato as their legacy, not running it aground. What is the long term plan for Cato? (I'm not surprised that the Kochs have no focus there.) I'm so sorry that what should have been the proudest finale to the Koch empire is being dashed against the rocks: however with Ed Crane's helmsmanship to save (the titanic) painstakingly crafted Cato Institute that has become the insignia of freedom in America, not to worry, people, the best of all possible outcomes is assured: it's in Ed's hands. I admire a man who can term himself immature rather than casting that aspersion more appropriately on others: Ed Crane seems humble and introspective to me, yet he is the embodiment of devotion to purpose, and power, I worked at Cato once, in the art Department, I chased Ed, as I am sure all of his female employees do, he seemed then to be a rock of composure and reserve, I'm elated to see that he still possesses that strength.

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Posted at 11:05 AM/ET, 05/30/2012 RSS | Print | Permalink | Comments () | Washingtonian.com Articles