Report of the Trustee Compensation Committee Regarding a ...Committee and its determination ofthe sole issue before it is designed to complywith the Intermediate Sanctions Law. Compliance

TRUSTEE COMPENSATION COMMIITEEMICHAEL E. RAWLINSDOUGLAS M. GOTOROSANNE K. GOO126 QUEEN STREET, STE. 303Honolulu, Hawaii 96813-4415

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CLERK'

IN THE CIRCUIT COURT OF THE FIRST CIRCUIT

STATE OF HAWAII

OF

DECEASED.

BERNICE P. BISHOP,

IN THE MADER OF THE ESTATE ) EQUITY NO. 2048)) REPORT OF THE TRUSTEE) COMPENSATION COMMITTEE) REGARDING A REASONABLE) ANNUAL AMOUNT OF) COMPENSATION TO BE PAID TO) THE TRUSTEES OF THE) KAMEHAMEHA SCHOOLS; EXHIBITS) "A" - "L"; CERTIFICATE OF SERVICE))

-------------- )

REPORT OF THE TRUSTEE COMPENSATIONCOMMITIEE REGARDING A REASONABLE ANNUAL AMOUNT OF

COMPENSATION TO BE PAID TO THE TRUSTEES OF THE KAMEHAMEHA SCHOOLS

TO THE HONORABLE PRESIDING JUDGE OF THE ABOVE-ENTITLED COURT:

Comes now, Michael E. Rawlins, Douglas M. Goto, and Rosanne K. Goo, the

members of the duly appointed Trustee Compensation Committee (hereinafter referred

to as "the Committee") to determine the compensation of the Trustees of the

Kamehameha Schools pursuant to that Order of the Court filed herein on August 2,

2007, and reports to the Court on the sole issue to be determined by the Committee:

"What is a reasonable annual amount of compensation to be paid to each of the

trustees of the Kamehameha Schools Bernice Pauahi Bishop Estate?" A copy of the

Order filed herein on August 2, 2007 is attached hereto as Exhibit "A" and incorporated

herein by reference.

A First Stipulation to Extend Deadline for Compensation Committee to Render

Its Decision in Accordance with the Plan wasfiled herein on December 12, 2007 and

the Court granted an extension to the deadline for the Compensation Committee to

render its decision to June 2, 2008. A copy of the First Stipulation to Extend Deadline

for Compensation Committee to Render its Decision in Accordance with the Plan is

attached hereto as Exhibit "B" and incorporated herein by reference.

A Second Stipulation to Extend Deadline for Compensation Committee to

Render its Decision in Accordance with the Plan was filed herein on May 21,2008 and

the Court granted an extension to the deadline for the Compensation Committee to

render its decision from June 2, 2008 to August 4, 2008. A copy of the Second

Stipulation to Extend Deadline for Compensation Committee to Render its Decision in

Accordance with the Plan is attached hereto as Exhibit "C" and incorporated herein by

reference.

A Third Stipulation to Continue Hearing on Petition to Appoint a Compensation

Committee and to Determine the Compensation of the Trustees of the Kamehameha

Schools and Order was flied herein on May 21,2008. A copy of the Third Stipulation to

Continue Hearing on Petition to Appoint a Compensation Committee and to Determine

the Compensation of the Trustees of the Kamehameha Schools and Order is attached

hereto as Exhibit "0" and incorporated herein by reference.

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Pursuant to the Third Stipulation, the hearing on the Petition to Appoint a

Compensation Committee and To Determine the Compensation of the Trustees of the

Kamehameha Schools was rescheduled from June 27,2008 to August 29,2008 at

10:00 a.m. to give the Compensation Committee time to render its determination.

Having now had sufficient time to address the sole issue before it, the

Committee respectfully reports to the Court about what is a reasonable annual amount

of compensation.

I. HISTORICAL BACKGROUND: TRUSTEE COMPENSATION PLAN

The Committee found it helpful to review the historical background relating to the

Plan for Determining Trustee Compensation (hereinafter referred to as "the Plan"). A copy

of the Plan is attached hereto as Exhibit "E" and incorporated by reference.

This Court approved the Plan when it entered the Order Granting Petition for

Approval of a Plan for Determining Trustee Compensation Pursuant to Stipulation No.

15 and for Creation of a Compensation Committee in Accordance with the Plan filed

herein on May 10, 1999 (hereinafter referred to as the "May 10, 1999 Order"). A copy

of the May 10, 1999 Order is attached hereto as Exhibit "F" and incorporated by

reference.

The Plan includes a discussion of the procedural background relevant to the

formulation of the Plan and its components.

The Plan, states in part:

Stipulation No. 15 of those certain Stipulations ConcerningMaster's Recommendations (10th

, 11oth, and 11th AnnualAccounts) and Order entered herein on October 2, 1998,provides that ... Trustees under the Will and of the Estate of

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Bernice Pauahi Bishop, Deceased, (the "Trustees) shallsubmit to this Court for its review and approval a plan fordetermining trustee compensation that is in compliance withand satisfies applicable requirements of state and federallaw, including without exception, federal IntermediateSanctions legislation and Treasury regulations incidentthereto, and H.R.S. Section 607-20, as amended by Act 310of the 1998 Hawaii State Legislature.

The Plan also referenced the State Law background relevant to compensation of

charitable trustees. During the 1998 legislative session, Act 310 was enacted to amend

the method of determining the compensation to be paid to trustees of charities which,

prior to January 1, 1999, was based on a schedule of percentages that were applied to

the annual income of the charitable entity.

The amended section, Hawaii Revised Statutes Section 607-20, states, as

follows:

(a) Notwithstanding any other provisions, in the case of acharitable trust, the compensation of the trustees shall belimited to an amount that is reasonable under thecircumstances.

(b) This section shall apply to existing and new charitabletrusts established after the effective date of this Act;provided that any provisions in existing trust agreementsregarding trustee compensation shall supersede thissection.

The Plan goes on to reference the preamble to Act 310 in which the Legislature

stated:

The legislature finds that there is a long-standing tradition,whereby trusteesof most charitable trusts serve withoutcompensation. While the legislature considers suchvoluntary service to be admirable, it believes that trustees ofcharitable trusts should not be prohibited by statute fromreceiving compensation. However, trustees who receive

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compensation from a charitable trust have a fiduciary duty tomake sure such compensation is not in excess of what isreasonable under the circumstances. In addition to thiscommon law duty, such trustees are subject to penaltyunder federal intermediate sanctions law if they allow theircompensation to exceed what is reasonable under thecircumstances. Knowledgeable and well-intentioned peoplecan differ on what is reasonable compensation in anyparticular situation, but such controversies are best resolvedby a judge who can take into account all relevantcircumstances as presented by parties on both sides of theissue. Thus, the purpose of this Act is to codify the duty oftrustees not to accept compensation above what isreasonable under the circumstances.

In terms of federal law background, Section 4958 of the Internal Revenue Code

provides for the imposition of penalties on excess benefit transactions (hereinafter

referred to as the "Intermediate Sanctions Law").

A transaction is an excess benefit transaction if an economic benefit is provided

by an exempt organization directly or indirectly to or for the use of any disqualified

person, if the value of the economic benefit conferred upon the disqualified person

exceeds the value of the consideration received by the entity.

In the instant situation, members of the Board of Trustees of the Kamehameha

Schools are considered disqualified persons under the Internal Revenue Code.

Accordingly, as a tax exempt entity with a paid Board of Trustees, the Kamehameha

Schools is subject to scrutiny regarding the reasonableness of the compensation it pays

to its Trustees.

II. THE PLAN'S REQUIREMENTS.

Upon review of the federal and state law backgrounds and the specific

requirements of the Plan, it becomes readily apparent that the appointment of the

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Committee and its determination of the sole issue before it is designed to comply with

the Intermediate Sanctions Law. Compliance necessitates a determination of what is

reasonable. Accordingly, the sole issue before the Committee is 'iWhat is a reasonable

annual amount of compensation to be paid to each of the trustees of the Kamehameha

Schools Bernice Pauahi Bishop Estate?"

The Plan sets forth a procedure for determining what is a reasonable annual amount

of compensation.

As the Committee executed its responsibilities pursuant to the Plan, the following

items became the criteria that informed the Committee's discussions and guided its

decisions related to who to speak with and how to approach those discussions.

In other words, the Plan's requirements were significant guideposts as the

Committee proceeded to have discussions with Master David L. Fairbanks, the

Trustees of the Kamehameha Schools, CEO Dee Jay Mailer, and Hugh R. Jones, Deputy

Attorney General.

The Plan, provides, in part, for the following procedures and requirements:

1. That a committee shall be appointed for the purpose ofdetermining the compensation of the Trustees of theKamehameha Schools;

2. The Committee shall be comprised of 3 to 5 persons asdetermined by the Court;

3. The Court shall constitute the Committee upon thepetition of the Trustees, the Attorney General, or the Court'smaster;

4. The Committee shall be constituted not less often thanevery 3 years;

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5. The Committee shall consist of knowledgeable andinformed persons, each of whom the Court finds to possess theintegrity, probity, competence and disinterested statusnecessary to be qualified and serve as an independent andunconflicted Committee member under applicable IRSregulations;

6. The Court designates the members of the Committee;

7. The sole issue to be determined by the Committee shallbe "What is a reasonable annual amount of compensation tobe paid to each of the Trustees of the Kamehameha Schools";

8. The Committee shall commission an independentcompensation survey from a national, independent,professional consulting firm active in the field of executive andtrustee compensation;

9. The firm commissioned by the Committee to make acompensation survey shall do the following: a) studycompensation levels paid by similarly situated organizations,both taxable and tax-exempt, for functionally comparablepositions; b) review and report the availability of similarservices in Hawaii; c) interview the Trustees and their staff andthe Attorney General, as parens patriae; d) compi Ieindependent compensation surveys for review by theCommittee; and e) render its report to the Committeeestablishing a range of trustee compensation that iscomparable, reasonable and consistent with applicable lawregulations. In addition to the factors enumerated above, theCommittee shall have authority to require the consideration ofother relevant factors by the firm or firms, the cost of suchsurveys and reports to be borne out of the Trust Estate;

10. The Trustees and the Attorney General shall be entitledto submit such evidence, testimony and independentprofessional studies for the Committee's review andconsideration as may be pertinent and material to theCommittee's deliberations;

11. The Committee's deliberations shall not be publicproceedings and the Committee shall not be obliged to receiveany public testimony unless the Committee by simple majority

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vote shall determine to do so;

12. The Trustee or their representative, the AttorneyGeneral or a deputy, and the incumbent master shall beentitled to audit and observe but not participate in theproceedings of the Committee and any testimony received bythe Committee shall be in writing and shall be subject toinspection and copying by the Trustees, Attorney General, andmaster;

13. The Committee shall file with the Court and deliver tothe Trustees, the Attorney General and the master allprofessional compensation studies commissioned or receivedby it, together with statements of credentials of the firmpreparing the study;

14. The study or studies shall be accompanied by a reportof the Committee's determination of reasonable trusteecompensation. The Committee's determination shall beconsistent with the studies and with any other appropriatecomparability data received by the Committee. TheCommittee's determination of reasonable trustee compensationmay be expressed as a range of appropriate annualcompensation or a limit upon annual compensation. TheCommittee's determination may provide for differing levels ofcompensation for individual trustees based uponconsiderations appropriate under state and federal law andregulations. The Committee's report of its determination shallinclude a clear, concise and concurrent exposition of the basisof its determination and shall be accompanied by true andcorrect copies of any and all documents specifically referred totherein;

15. The Committee's determination shall be determined bya simple majority of the Committee. Dissenting Committeemembers shall be entitled to file with the Court a statement oftheir dissent and the reasons therefor;

16. Upon receipt of the Committee's report, the Court shallschedule a hearing at which the Trustees, the Attorney Generaland the master shall be afforded an opportunity to be heard;and

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17. The Committee's determination shall be entitled to apresumption of reasonableness.

As seen by the foregoing, the Plan provides specific guidance for the Committee in

terms of how to address the question of what is a reasonable annual amount of

compensation to be paid to the Trustees of the Kamehameha Schools.

III. APPOINTMENT OF TRUSTEE COMPENSATION COMMITTEE

As a matter of procedure, the Trustees of the Kamehameha Schools are charged with

filing a petition to appoint a trustee compensation committee if the Attorney General or

incumbent Master does not do so, at least every third year after entry of the May 10, 1999

Order.

In the instant case, the Trustees filed their Petition to Appoint a Compensation

Committee and to Determine the Compensation of the Trustees of the Kamehameha

Schools on May 4, 2007. A copy of the Petition is attached hereto as Exhibit "G" and

incorporated herei n by reference.

Thereafter, said Petition was approved and the Committee was appointed by Order

of the Court filed herein on August 2, 2007.

Committee member Michael E. Rawlins served as a member of the previous Trustee

Compensation Committee. Members Douglas M. Goto and Rosanne K. Goo have not

previously served in this capacity.

IV. SUMMARY OF THE PROCESS EMPLOYED BY THE COMMITTEE

The Committee attempted to follow a process that would result in identifying the

factors and issues the Committee felt should be considered in answering the sole issue

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before it: What is a reasonable annual amount of compensation to be paid to the Trustees?

As stated above, the Committee informed itself of the procedural background

related to the formulation of the Plan and then focused on the Plan itself.

After having completed those reviews, the Committee discussed how best to

proceed with its work.

For the purpose of having meaningful discussions with the interested parties and

gathering relevant information, the Committee kept in mind that at some point it would be

retaining a national, independent, professional consulting firm active in the field of

executive and trustee compensation.

The Committee also noted that in addition to the items and factors prescribed in the

Plan for consideration by the professional consulting firm the Committee was authorized to

require the consideration of other relevant factors by the firm.

The Committee discussed having meetings with the Master, the Trustees, the CEO

and the Attorney General to gain insight into and an understanding of the role of the

Trustees, the work of the Trustees, the status of the CEO-based management system, and

the implementation of the prescribed Governance Policy.

As the Committee discussed a tentative schedule for meetings, consideration was

given to how the Committee could best prepare itself to pose relevant questions that would

assist the Committee in identifying any additional relevant factors that should receive

consideration by the Committee and the professional consulting firm it would hire.

Because David L. Fairbanks, in his role as Master, performs a significant oversight

function in terms of the workings of the Kamehameha Schools, the Committee determined

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that it would make sense to begin the process with Mr. Fairbanks.

In addition, the Committee believed that input from Mr. Fairbanks would be

important in helping the Committee to better understand: 1) what items, if any, the Master

felt should receive consideration by the Committee-in terms of addressing the sole issue

before it; and 2) the Master's opinion of how the Trustees of the Kamehameha Schools are

doing under the prescribed Governance Policy. A copy of the Governance Policy is

attached hereto as Exhibit "H" and incorporated herein by reference.

Additionally, the Committee felt it would be productive to seek the comment of and

enter into a dialogue with the Department of the Attorney General, as parens patriae,

through its Deputy Attorney General, Hugh R. Jones. Accordingly, the Committee has

endeavored to remain in contact with Mr. Jones throughout the process of pursuing an

answer to the question of what is a reasonable annual amount of compensation to be paid

to the Trustees of the Kamehameha Schools.

After speaking with the Master, the Committee believed that it would be in an

informed position to meet with the Trustees of the Kamehameha Schools. And the

Committee sought to meet with the Trustees before meeting with Mr. Jones since the

Committee believed it would be of value to discuss with Mr. Jones the substance of its

discussion with the Trustees.

The Committee also knew that it would want to meet with Dee Jay Mailer, CEO of

the Kamehameha Schools, to understand her perspective regarding the Trustees' role and

their work as it relates to the implementation of the Governance Policy, including the

CEO-based management system.

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As stated above, the Committee further understood that it was charged with

commissioning an independent professional study from a professional consulting firm

active in the field of executive and trustee compensation.

As stated above and pursuant to the Plan, the Committee contemplated that the

consulting firm would perform the following in preparation of the study: 1) study

compensation levels paid by similarly situated organizations, both taxable and tax-exempt,

for functionally comparable positions; 2) review and report the availability of similar

services in Hawaii; 3) interview the Trustees of the Kamehameha Schools and their staff

and the Attorney General as parens patriae to the trust; 4) compile independent

compensation surveys for review by the Committee; and 5) render its report to the

Committee that would establish a range of trustee compensation that is comparable,

reasonable and consistent with applicable law and regulations.

In addition, throughout the process, the Committee discussed what, if any, other

relevant factors should be considered by the consulting firm.

In addition, the Committee members read numerous pleadings filed in Equity No.

2048 to inform themselves of the Master's Reports and responses to said Reports,

documents filed in relation to the work of the previous Trustee Compensation Committee,

the Kamehameha Schools' Governance Policy, Strategic Plan, Education Strategic Plan,

Annual Reports, and Calendars, and the documents provided to Mercer, LLC related to the

Kamehameha Schools.

After reviewing the above-referenced information and conducting many meetings

and discussions, the Committee feels confident that this report accurately addresses the

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requirements of the Plan and provides a meaningful basis for the determination of what is a

reasonable annual amount of compensation to be paid to the Trustees of the Kamehameha

Schools.

The Committee is also optimistic that this report reflects a meaningful effort to

pursue dialogue and discussion prior to the determination of what is a reasonable annual

amount of compensation. To that end, it was critical and significant to the process that all

interested parties made themselves available for discussion and were open and

forthcoming with their comments and responses. Additionally, the professional consulting

firm, Mercer, LLC, made a significant effort to remain focused on the sole issue before the

Committee in preparation of the study which resulted in a well reasoned and thoughtfully

supported survey and evaluation.

V. CHRONOLOGICAL OVERVIEW OF COMMITTEE PROCESS

The Committee held its first meeting on August 28, 2007 at which time the

Committee members introduced themselves to each other and formulated a tentative plan

to meet with various parties, including the Master, the Attorney General, the Trustees of

the Kamehameha Schools and the CEO of the Kamehameha Schools.

After thoughtful discussion, the Committee decided to meet with the interested

parties in the following chronological order:

1. Master David L. Fairbanks on September 18, 2007 (& December 3, 2007);

2. The Trustees of the Kamehameha Schools on October 16, 2007;

3. The Department of the Attorney General, State of Hawaii, through its DeputyAttorney General, Hugh R. Jones on December 3, 2007; and

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4. The CEO of the Kamehameha Schools Dee Jay Mailer on December 4, 2007.

In addition, the Committee also met to discuss its work on the following dates:

November 16, 2007; December 12, 2007, April 14, 2008, May 12, 2008, May 29, 2008,

and July 1,2008. The full Committee was present at each of these meetings.

VI. CHRONOLOGICAL REVIEW OF DISCUSSIONS WITH INTERESTED PARTIES.

A. CURRENT MASTER, DAVID L FAIRBANKS.

1. September 18, 2007.

On September 18, 2007, the Committee had its first meeting with the

Master, David L. Fairbanks. Hugh R. Jones joined the full Committee at this meeting.

Mr. Fairbanks encouraged the Committee to ask a lot of questions of

the Trustees and other persons with which the Committee would be meeting.

The Committee came away from that September 18 meeting with the

understanding that Mr. Fairbanks feels the Trustees are doing a good job.

2. December 3, 2007.

The Committee met for a second time with Mr. Fairbanks on

December 3, 2007. This meeting followed the Committee's meeting with the Trustees.

Hugh R. Jones joined the full Committee at this meeting.

At the December 3 meeting, the Committee discussed with the Master

the Committee's impression that the Trustees were each committed to the mission of the

Kamehameha Schools and focused on strengthening the Trust so that it might serve as a

source of hope, as they look to the future. It is the Committee's belief that both Mr.

Fairbanks and Mr. Jones agreed with the Committee's assessment regarding the

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commitment of the Trustees.

The Master also made it clear that he did not wish to influence the

Committee and, therefore, did not provide an opinion of a reasonable annual amount of

compensation or direct the Committee to consider any specific concerns.

B. THE TRUSTEES Of THE KAMEHAMEHA SCHOOLS.

The Committee met with the Trustees of the Kamehameha Schools on

October 16, 2007. The full Committee was present at this meeting.

At the October 16 meeting, the Committee was provided with an overview

of the programs currently being pursued and strategically planned by the Kamehameha

Schools. Christopher Pating, the VP for Strategic Planning and Implementation gave a

Power Point presentation to identify for the Committee the current programs and future

plans being pursued by the Kamehameha Schools.

Thereafter, Trustee lng, the then Chair of the Board, provided the Committee

with an overview of the Board's schedule and general practices.

During the Committee's discussion with the Trustees, each of the Trustees

took the time to provide responses to the Committee members' questions and it was an

opportunity to enter into a dialogue about the Committee's work in determining what is a

reasonable annual amount of compensation and the issues the Trustees felt were important

to this process of determining what is reasonable.

Among other things, the Committee was informed that there had been a

complete integration of the CEO-based management system.

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The Trustees further informed the Committee of the Kamehameha Schools

adherence to and implementation of the Governance Policy.

As the Trustees explained, with the elimination of certain legal issues that

previously required considerable Board attention, the Trustees are currently able to focus

on, among other things: providing leadership to the management team; being informed

about and supportive of the values that underlie the mission of the Kamehameha Schools;

staying disciplined to that mission as they plan for and look to the future; and working to

support and create a vision for the future.

The Trustees' willingness to freely discuss their feelings about attention to

and respect for the mission of the Kamehameha Schools made it possible for the

Committee to gain an understanding of how the Kamehameha Schools as an institution is

attempting to fulfill its mission and how the Trustees, as stewards of the institution, are

committed to strengthening the Kamehameha Schools so that it can in fact pursue its

mission in perpetuity.

1. Governance Policy: Role of Trustees.

The Governance Policy was developed to provide a framework to

guide the Board of Trustees of the Kamehameha Schools in executing their fiduciary duties

to administer and oversee the estate of Bernice Pauahi Bishop and to fulfill the educational

purposes of the Kamehameha Schools under the Will of Bernice Pauahi Bishop.

Governance Policy, page 3.

With respect to the governance of the Kamehameha Schools, the

Governance Policy sets forth a clear policy directive that the Kamehameha Schools shall be

16

governed in conformance with a CEO-based management system. Governance Policy,

page 3.

Regarding the role of the Trustees of the Kamehameha Schools, the

Governance Policy states that the role of the Trustees is to provide the strategic direction

and focus necessary to fulfill and to sustain the vision, mission and values of the

Kamehameha Schools, as they are embodied in the Will of Bernice Pauahi Bishop and the

Strategic Plan. Governance Policy, page 3.

Specifically, the Governance Policy states:

In particular, the Trustees shall:

1. Ensure that the KS mission is appropriate, relevant andvital to the intended beneficiaries under the Will and thevision of Ke Ali' I Pauahi, and monitor the success of KS infulfilling its mission.

2. Oversee the development of and approve all strategicpolicies affecting the administration of KS, especially itseducational and financial objectives.

3. Ensure that KS and its assets are managed prudently andexclusively for KS' charitable educational purposes consistentwith the terms of the Will, orders of the Hawaii Probate Court,Strategic Plan and resulting implementation plans, KS' taxexempt status and applicable laws.

4. Monitor and review financial reports and projectionsand be accountable for KS' financial well-being, including itsendowment, as it relates to carrying out financialresponsibilities.

5. Review and approve the annual budget and ensure thateffective fiscal controls are established.

6. Hire, support, and provide guidance to the CEO; setgoals and objectives for the CEO; evaluate and monitor the

17

CEO's performance; and, where appropriate, remove andreplace the CEO.

7. Consult with the CEO to ensure that managementdevelopment, compensation and succession plans are in placefor executive management positions.

8. Approve plans for any major organizational or programchange.

Governance Policy, pages 3 and 4.

In addition, the Kamehameha Schools Strategic Plan 2000 - 2015

references a Governance Commitment that is articulated as follows:

The Board, on behalf of the persons intended to benefit fromthe purposes expressed in the Will, will govern the Trust Estatewith a strategic perspective through a continually improvedcommitment to its vision, mission and values.

Kamehameha Schools Strategic Plan 2000 - 2015, page 27. A copy of the Kamehameha

Schools Strategic Plan 2000 - 2015 is attached hereto as Exhibit "I" and incorporated by

reference.

2. Vision, Mission and Values of the Kamehameha Schools.

The Vision is set forth in the Strategic Plan and states as follows:

Kamehameha Schools is a dynamic and nurturing learningcommunity committed to educational excellence. We assistpeople of Hawaiian ancestry to achieve their highest potentialas "good and industrious men and women." We do so bycontributing to their development as people who are:

* grounded in spiritual and Christian values;

* intellectually, emotionally, and socially self-reliant;* resourcefu I, resiIient, Iife-Iong learners;

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* equipped with the skills they need to succeed inendeavors of their choosing;

* responsible, ethical, contributing members of theirmulti-cultural and diverse communities; and

* prepared to practice and perpetuate the Hawaiianvalues and traditions of Ke Ali' I Pauahi.

Kamehameha Schools Strategic Plan 2000 - 2015, page 19.

The Mission is also set forth in the Strategic Plan and reads as follows:

Kamehameha Schools' mission is to fulfill Pauahi's desire to create educational

opportunities in perpetuity to improve the capability and well-being of people of Hawaiian

ancestry. Kamehameha Schools Strategic Plan 2000 - 2015, page 19.

With respect to values, the Strategic Plan states that the Kamehameha

Schools is grounded in the Christian and Hawaiian values embraced by Ke Ali' I Pauahi.


Those values are articulated, as follows:

Aloha, Love and respect for the Lord, our natural world, andone another, is our foundation. 'Imi rie' aauao, the quest forknowledge and enlightenment, is essential for an educationalinstitution such as Kamehameha. Malama, caring for oneanother and all aspects of Pauahi's legacy, will enable ourinstitution to flourish. 'Ike pono urges us to integrate ourintellect and our intuition. Kuleana denotes theresponsibilities, which accompany our blessings. Let usho' omau, persevere, with hs: aha' a, humility, in all that wedo.


The Committee believes that the Trustees' sense of duty to

Kamehameha Schools and the people it serves is manifested by adherence to the mission,

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vision and values of the Kamehameha Schools.

The Kamehameha Schools Trustee Compensation Evaluation prepared

by Mercer, LLC (hereinafter referred to as "the Mercer Evaluation"), discussions with

Master David L. Fairbanks and Deputy Attorney General Hugh R. Jones, and discussions

with the Trustees and CEO Dee Jay Mailer served to confirm this belief.

At a minimum, that sense of duty requires each Trustee to be

informed and educated about all of the issues that affect Kamehameha Schools and its

beneficiaries.

In addition, on a practical level, the Trustees must prepare for and be

able to meaningfully participate in the discussions that take place at each of their regularly

scheduled meetings of the Board.

Further, as the Mercer Evaluation confirms, the Trustees conduct

retreats and foundation meetings to prepare for and to participate in on a regular basis.

Accordingly, there is additional preparation time involved to review materials prior to such

meetings and discussions.

As explained to the Committee by the Trustees, this sense of duty

remains with the Trustees around the clock. And as one of the Trustees explained, that

sense of duty necessitates a commitment to being connected to the community that the

Kamehameha Schools serves.

The Committee also believes that the Trustees of the Kamehameha

Schools share a desire to set a course for the Kamehameha Schools that will enable it to

solidify its ability to remain a significant source of hope for future generations.

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After meeting with the Trustees, the Committee made it a point to

note the items above as well as the following item for discussion with the professional

consulting firm that would be engaged, Mercer, LLC.

3. Appearances by Trustees at Community Events.

Of particular importance to the Committee was the recognition of

time spent by the Trustees of the Kamehameha Schools when they participate in

community building activities or attend community events.

The Committee is aware of the significance of the time commitment

made by the Trustees to not only perform their fiduciary obligations but to remain focused

on the vision, mission and values of the Kamehameha Schools by extending that

commitment around the clock to be available for various community events and activities.

The Committee recognizes the benefit to the Kamehameha Schools

and its beneficiaries of having such committed Trustees. At the same time, the

Committee's charge necessitated that the Committee ask Mercer, LLC to acknowledge, but

not to include as a factor in the determination of reasonable compensation, the time that

the Trustees spend at community events and activities.

Under the Governance Policy the Kamehameha Schools employs a

Vice President for Community Relations and Communications, who is charged with

building and maintaining strong relationships between the Kamehameha Schools and the

community. Accordingly, the Committee believes that it would not be appropriate for the

Trustees' time in attending community events to be included in the determination of what

is a reasonable annual amount of compensation.

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In general, the Committee finds the commitment of the Trustees to

serving the beneficiaries of the Kamehameha Schools, through adherence to the vision,

mission and values of the Kamehameha Schools, to be admirable and of very significant

and substantial benefit to the Kamehameha Schools and its beneficiaries.

However, in light of the Governance Policy and the delegation of

routine management duties by the Trustees (such as those charged to the V.P. for

Community Relations and Communications), the Trustees' time spent on fostering and

maintaining relationships within the community is time that should not be compensated.

The Mercer Evaluation is consistent with the Committee's position on this point.

In summary, the Committee believes that the Trustees of the

Kamehameha Schools are engaged in a process that is entirely appropriate in light of the

stated Governance Policy. In addition, the Committee further believes that the current

course being charted by the Trustees is in furtherance of the vision, mission and values of

the Kamehameha Schools. Accordingly, the Committee shared this belief with Mercer,

LLC.

C. CEO OF THE KAMEHAMEHA SCHOOLS, DEE JAY MAILER

The Committee met with the CEO of the Kamehameha Schools, Dee Jay

Mailer, on December 4, 2007. The full Committee was present at this meeting.

Consistent with the Master's comments to the Committee and the Mercer

Evaluation, Dee Jay Mailer confirmed that she and her management team are very ably

managing the day to day operations of the Kamehameha Schools in accordance with

the Governance Policy.

As new Trustees come on board to replace the current five (5) acting

Trustees, Dee Jay Mailer confirmed her belief that the time she spends meeting with

the Trustees (1x per week for approximately 4-6 hours) will remain about the same

going forward because these new Trustees will require briefings in the same way that

the current Trustees are briefed.

With a current focus on young children, who do not yet attend school, the

Kamehameha Schools has taken on significant responsibility to address the needs of

its beneficiaries. Appropriately, Dee Jay Mailer's perspective is that the Trustees of the

Kamehameha Schools face a reality that requires a level of involvement and sensitivity

that is not required of other trusts.

Your Committee is in agreement with Ms. Mailer's assessment and would

like to note that the Kamehameha Schools Trustee Compensation Evaluation

(hereinafter referred to as "the Mercer Evaluation") also sets forth the understanding

that the Kamehameha Schools is a truly unique organization. The Mercer Evaluation,

p.20. A copy of the Mercer Evaluation is attached hereto as Exhibit "J" and

incorporated by reference.

In addition, Dee Jay Mailer explained that the Kamehameha School's

huge land base is viewed as being more than just an investment in lands and further

added that the land is part of the culture of the people, who are the beneficiaries of the

Kamehameha Schools.

Further, Ms. Mailer articulated that decisions affecting land owned by the

Kamehameha Schools (or its related entities) are decisions that will affect a people and,

therefore, must be carefully weighed. Importantly, she explained that decisions

23

concerning land owned by the Kamehameha Schools are not simply economic

decisions. They are decisions that will affect not only the Hawaiian community but

society-at-Iarge.

Further, Dee Jay Mailer explained that how the Kamehameha Schools

stewards its lands in the State of Hawaii has significant implications for the well-being of

the State of Hawaii in general.

Additionally, the Committee found Ms. Mailer's comments regarding the

Milton Hershey School to be very insightful, as she explained that the Milton Hershey

School is in the business of helping children and in the process they remove many

children from their homes and home States, consolidating them at the Milton Hershey

School in Hershey, PA.

As Dee Jay Mailer explained, the Kamehameha Schools is not just in the

business of educating children. As Dee Jay Mailer explained it, this removal of children

from their environments is in conflict with the concept of generational change that

Kamehameha is pursuing. Accordingly, the Committee shared this perspective with

Mercer, LLC and asked Mercer to include an opinion of the relative comparability of the

Milton Hershey School in its study.

Dee Jay Mailer further commented that the Trustees must exhibit a level

of sensitivity to numerous issues that arise simply because the Kamehameha Schools

serves a people for which culture will always remain at the forefront of its strategic plans

and vision for the children and the future of the Kamehameha Schools.

In the Committee's opinion, the Milton Hershey School's practice of

removing children from their homes and home States provides a counterpoint to the

24

approach that it appears the Kamehameha Schools would take to educating and caring

for its beneficiaries simply because removal of a child from his or her home is counter

to the goal of inter-generational change and success.

The Committee's discussion with Dee Jay Mailer was very helpful and

insightful and provided the Committee with a better understanding of the challenges

faced by the Trustees as they remain true to the vision, mission and values of the

Kamehameha Schools and plan for a future that includes being a significant source of

hope for future generations.

As stated above, the Committee shared Dee Jay Mailer's comments with

Mercer, LLC, through its Worldwide Partner, Martin L. Katz. Importantly, the Committee

shared with Mercer, LLC its understanding that the CEO-based management system

had matured in a manner that now allows the Trustees to be more focused on strategic

issues. It is your Committee's belief that neither Mr. Fairbanks or Mr. Jones would

object to this position.

D. HUGH R. JONES, DEPUTY ATTORNEY GENERAL.

On October 1,2007, Committee member Goo had a telephone

conversation with Mr. Jones. In anticipation of the Committee's meeting with the

Trustees of the Kamehameha Schools, the phone call was made to Mr. Jones. Based

on their telephone conversation, it was Ms. Goo's understanding that Mr. Jones

generally felt that the Kamehameha Schools benefits from the appointment of Trustees

who are deeply committed to the mission of the Kamehameha Schools.

On December 6, 2007 after meeting with the Trustees and Dee Jay

25

Mailer, the Committee met with Mr. Jones to gain some insight into the Attorney

General's position regarding a reasonable annual amount of compensation. The full

Comniittee attended this meeting with Mr. Jones.

The Committee shared with Mr. Jones the substance of their discussions

with the Trustees and CEO Dee Jay Mailer. The Committee conveyed to Mr. Jones

that the Trustees were quite open and forthcoming regarding their work and their

personal opinions of what it means to be a Trustee.

The Committee also attempted to share with Mr. Jones its members'

perception that the Trustees are focused on oversight and safe-guarding the mission of

the Kamehameha Schools and that there did not appear to be any reason to conclude

that the Trustees are meddling in operational issues that are the kuleana of the CEO

pursuant to the stated Governance Policy.

The Committee further discussed with Mr. Jones the comments of Dee

Jay Mailer regarding her belief that what the Kamehameha Schools does in the State of

Hawaii has a significant impact on the well-being of the State in terms of the

environment, culture, the public school system and its people regardless of ethnic

origin.

The Committee also shared with Mr. Jones Dee Jay Mailer's belief that

the Trustees have an awesome responsibility, as trustees of a trust, and not simply

trustees of a corporate board, to make sure that all decisions remain true to the mission

of the Kamehameha Schools and are appropriate in light of the potential impact in each

of the areas referenced above.

26

The Committee found Mr. Jones receptive to the comments of the :

Trustees and the CEO.

The Committee also noted Mr. Jones' comment that the Committee and

the professional consulting firm do not work for the Trustees of the Kamehameha

Schools but for the First Circuit Court of the State of Hawaii.

At our December 6 meeting, Mr. Jones commented on the realistic need

to address the question of how to attract future trustees, who are qualified and willing to

serve.

Importantly, the Committee also noted Mr. Jones statement of the need to

focus not so much on what the Trustees are doing but on what the Trustees should be

doing.

The Committee would like to note that Mr. Jones has allowed the

Committee to do its work in determining a reasonable annual amount of compensation

and has been receptive to questions from the Committee.

The Committee shared with Mercer, LLC the substance of its discussions with

Mr. Jones, including the reference to focusing on what the Trustees should be doing versus

simply accounting for what they are doing and Mr. Jones' perspective that the Milton

Hershey School should be given some consideration as a comparitor for inclusion in the

independent compensation study.

VII. KAMEHAMEHA SCHOOLS TRUSTEE COMPENSATIONEVALUATION: THE MERCER EVALUATION.

Pursuant to the Plan, the Committee set about preparing a Request for

Proposals (hereinafter referred to as "the RFP") to be sent to national, independent,

27

professional consulting firms active in the field of executive and trustee compensation. A

copy of the Committee's RFP is attached hereto as Exhibit "K" and incorporated herein by

reference.

The RFP was sent to Towers and Perrin, Watson Wyatt Worldwide,

Guidestar and Mercer, LLC. Towers Perrin advised the Committee that their schedule was

full during the period that the Committee would need their services. Guidestar and

Watson Wyatt did not send proposals in response to the RFP. Mercer, LLC, through its

Worldwide Partner, Martin L. Katz, sent a proposal to the Committee.

The Committee met to discuss the proposal and a decision was made to

proceed with Mercer, LLC. Michael E. Rawlins, on behalf of the Committee, executed an

engagement letter with Mercer, LLC dated January 11, 2008. A copy of the Mercer

engagement letter is attached hereto as Exhibit "L" and incorporated herein by reference.

Through the RFP and as confirmed in Mercer, LLC's engagement letter, the

Committee directed Mercer, LLC to prepare an independent compensation survey for the

purspose of assisting the Committee in determining a reasonable annual amount of

compensation.

Through dialogue with Mr. Katz, the Committee was able to insure that

Mercer, LLC was focused on the sole issue before the Committee and the process that the

Committee was using to meet its charge. Accordingly, the findings in the Mercer

Evaluation and the recommendations of the Committee are consistent.

In its discussions with Mr. Katz, the Committee was able to make it clear to

Mercer, LLC that the Committee was attempting to take an approach that reflected a very

28

conscious effort to understand the reasons for the appointment of the Committee and the

need for the Committee to be focused on the sole issue before it. In turn, Mercer focused

on its charge.

The Committee was of the belief that if the process it employed was

appropriate and thoughtful that the Mercer Evaluation and the recommendations of the

Committee would necessarily support a finding of what is a reasonable annual amount of

compensation.

Through discussions with the Trustees, the Master, and the CEO, the

Committee has come to the conclusion that the Kamehameha Schools is truly a unique

organization for which there are no comparable organizations. The Mercer Evaluation

makes this point as well. Accordingly, the Mercer Evaluation reflects the effort of Mercer,

LLC to provide a solid foundation of data and analysis for determining what is a reasonable

annual amount of compensation despite the fact that there are no truly comparable

organ izations.

The Committee wishes that everyone interested in the issue of what is a

reasonable annual amount of compensation could have joined the Committee during this

process. Having met with Master David L. Fairbanks, the Trustees of the Kamehameha

Schools, CEO Dee Jay Mailer, and Hugh R. Jones on behalf of the Attorney General, the

Committee feels it is on solid ground in stating its position that without reasonable

compensation it will be difficult to recruit and engage future Trustees given the immense

responsibility and commitment required in serving as a Trustee of the Kamehameha

Schools.

29

The Committee has discussed on several occasions the very real possibility

that there are some very qualified individuals, who could be of benefit to the Kamehameha

Schools in serving the institution, that would decline to serve simply because no amount of

money could entice them to take on the significant responsibilities required of a Trustee of

the Kamehameha Schools.

The Kamehameha Schools is under such critically aimed scrutiny because it

is unique in its vision, mission, and values and because the decisions it makes truly do

affect a people, the Hawaiian people, and the community in general.

As stated above and so eloquently expressed by Dee Jay Mailer to the

Committee members, the level of sensitivity that is required of a Kamehameha Trustee is

simply not to be found in any other context.

It is the Committee's belief that having guided Mercer, LLC to address the

necessary items for consideration, analysis and inclusion in its evaluation (based on the

May 10, 1999 Order and the Plan), that the Mercer Evaluation makes an appropriate, well

documented, and well-reasoned finding of what is a reasonable annual amount of

compensation.

VIII. THE COMMITTEE'S RECOMMENDATION

On July 1,2008, the full Committee met to discuss preparation of a draft Committee

report and to conference call with Marti n L. Katz of Mercer, LLC.

At the July 1 meeting, the Committee unanimously agreed that the findings in the

Mercer Evaluation were acceptable to the Committee. Accordingly, the following is

respectfully submitted to the Court and forms the basis for the Committee's determination.

30

This report is accompanied by true and correct copies of any and all documents

specifically referred to herein.

The Committee would also like to note that in accordance with the provisions of the

Plan, this report is consistent with the study prepared by Mercer, LLC (the Mercer

Evaluation).

A. Mercer, ne's Findings.

The Mercer Evaluation provides findings in the Executive Summary portion

of the evaluation, beginning at page 6 of the evaluation.

Specifically, at page 7, the Mercer Evaluation states:

Our market research and evaluation of the TrusteeCompensation Policy, and related supporting information,results in several key findings:

1. The Governance Policy is operating as it wasintended in that the CEO and her management team aremanaging day-to-day operations, and the Trustees areeffectively serving in a governance, policy-making andoversight role.

2. Based on our interviews with the Trustees and theCEO, and review of the Trustee calendar of meetings andevents for 2006 and 2007, we find that the Trustees spendat least 2 % - 3 days per week on Trust activities including:regular board meetings, audit committee meetings,consideration of management proposals and fundingrequests, meeting preparation, management reports oncurrent projects and activities, and quarterly retreats todiscuss long-range vision and strategy, but excludingpublic appearances [emphasis added].

3. Based on our interviews of the Trustees and the CEOregarding Trustees activities, described in the Summary ofInterviews section of this report, Mercer believes that thetime spent on Trust activities is appropriate and necessary toeffectively execute the role and responsibilities of Trustee

31

under the Governance Policy.

4. Further, we find that the amount of time required ofthe Trustees, 2 % - 3 days per week on average, is asignificant factor in determining reasonable Trusteecompensation. The issues regularly confronted by theTrustees from expansion of the Schools under the newEducation Strategic Plan, to improving the quality anddiversification of the endowment, land use andenvironmental issues, and litigation concerning admissionspolicies are highly significant, complex and time consumingmatters that require a substantial commitment of time aboveand beyond that which is required of a typical corporateboard.

5. KS is not a typical charitable organization or schooland it is therefore reasonable that the actual timecommitment required to discharge the varied and complexresponsibilities be considered rather than a typical corporateor charitable organization model.

6. By taking into account the actual time commitmentand nature and complexity of the Trustees' role indetermining reasonable compensation, Mercer believes thatKS will be better positioned to attract the caliber and qualityof Trustee that KS requires today, and must recruit in thenear future.

7. In applying the market data with respect to thegovernance, policy, and oversight role, we believe anappropriate adjustment is to weight the data at two times itsstated value (three times in the case of foundations andother nonprofit organizations) even though the Trusteesspend far more than double the amount of time spent bycorporate directors and trustees of larger foundationsrepresented by the data reported herein. It is Mercer'sopinion that this is an appropriate yet conservative,adjustment that takes into account the difference betweenthe role of a typical corporate director or exemptorganization trustee, and that of a KS Trustee.

The Mercer Evaluation, pages 7 and 8.

32

The Mercer Evaluation further sets forth a formula for use in determining a

reasonable annual amount of compensation, as follows:

a. Trustee retainer of $75,000.00 per year, paidmonthly;

b. Supplemental Chairman of the Board retainer of$30,000.00 per year, paid monthly;

c. A meeting fee of $1,500.00 per meeting, includingthe meeting fee for the Chairman;

d. A cap on the number of compensable meetings of75 meetings per year, which representsapproximately 1.5 meetings per week on average.

The Mercer Evaluation, page 10.

The above-referenced terms result in a maximum annual amount of

compensation of $217,500.00 for the Chairman of the Board and a maximum annual

amount of compensation of $187,500.00 for the other Trustees. It should be noted that

the number of actual meetings may result in a decrease of the actual amounts paid out

to the Trustees. The Mercer Evaluation, p. 10.

B. Mercer, LLC's Approach to Market Evaluation.

Focusing on the governance, policy-making and oversight functions,

Mercer, LLC evaluated available market data for market comparables that would best

represent these functions.

In addition, Mercer, LLC tested the market comparables against additional

screening criteria, meaning that all selected market comparables needed to meet two

(2) or more of the following criteria by being or having:

33

a. a tax-exempt organization with a charitablepurpose;

b. a large and complex financial endowment;

c. a large organization involving complex and diverseoperations; or

d. a large and diverse real estate portfolio, includingcommercial, residential and agriculturalinvestments.

The Mercer Evaluation, p. 27.

The selected market sectors, meeting the above-referenced criteria,

include:

a. large private or operating foundations withsignificant endowments;

b. corporate boards among real estate investmenttrusts (REITs);

c. published surveys for director compensationrepresenting both taxable "corporate" and nonprofitboards; and

d. other local organizations in Hawaii, representing apotential labor market for recruiting futureTrustees.


Mercer, LLC considered use of other market sectors but did not include

them for the following reasons:

a. executive staff positions, as these roles arecovered by the KS management team;

34

b. real-estate development companies, as this is onlyone aspect of the Trustees role and the REITboards cover this adequately; and

c. tax-exempt public or private universities, as theTrustee role is quite different and requiressubstantially more time than that of a universitytrustee.


Importantly, given the unique nature, size and scope of the Kamehameha

Schools' operations, Mercer, LLC considered additional factors that it felt were most

relevant to a determination of what is a reasonable annual amount of compensation.


These additional factors are as follows:

a. Charitable Purpose. Mercer, LLCnotes that because the Kamehameha Schools is acharitable trust, its Trustees have a duty to maximize thefunds available for charitable purpose in perpetuity. Mercer,LLC believes that the presence of such a duty suggests thatthe compensation for a Trustee of the KamehamehaSchools should be competitive but conservative. TheMercer Evaluation, page 34.

b. Trustee Qualifications. Mercer,LLC notes that a determination of reasonableness requires afinding that the recipient of the compensation be qualified forthe role and performing in a manner that meets or exceedsthe expectations of the role. After interviews with theTrustees of the Kamehameha Schools, a review of theirbiographies, and discussions with CEO Dee Jay Mailer,Master David L. Fairbanks, and Deputy Attorney GeneralHugh R. Jones, Mercer, LLC believes that the Trustees havethe required experience, background and competencies toserve effectively in their role. In addition, after reviewing theMaster's reports and interviews with the CEO, Mercer, LLCfurther believes the Trustees are performing their roleeffectively. Accordingly, Mercer, LLC made no adjustment,

35

premium or discount, based on qualifications. The MercerEvaluation, page 34.

c. Organizational Character andCondition. Mercer, LLC notes that because theKamehameha Schools is a highly complex organization witha significant endowment, complex real estate investments,multi-campus schools, and a significant requirement forpublic awareness and interaction with a broad based ofconstituents, the role of a Kamehameha Schools' Trustee isat least as complex as the governance role associated withcorporate boards and far more complex than the trustee roleamong large grant-making foundations. Mercer, LLCbelieves this organizational character suggests that apremium would be appropriately applied to thecompensation of a Trustee of the Kamehameha Schools.However, Mercer, LLC made no such adjustment to accountfor this complexity. The Mercer Evaluation, page 34.

d. Fiduciary Responsibility. Mercer,LLC notes that trustees are held to a higher fiduciarystandard than the typical director of a corporate board. Asfiduciaries, trustees take title to the organization's assetsand can be held personally liable for losses. The MercerEvaluation, pages 34 and 35.

The Committee is in agreement with Mercer, LLC's determination that

reasonable annual compensation should be competitive but conservative. Accordingly,

the Committee has no objection to Mercer, LLC's decision not to make upward

adjustments in calculating a reasonable annual amount of compensation based on the

above-referenced additional factors.

The Committee is comfortable with the methodology employed by Mercer,

LLC and notes that each market sector was selected according to a set of criteria. The

data from each market sector was evaluated according to Mercer, LLC's professional

standards and presented in a straightforward manner. The adjustments applied to each

market comparable are supported by the data. Accordingly, the Committee believes

36

the analysis performed by Mercer, LLC in selecting the market sectors used in the

Mercer Evaluation provide strong support for the finding of what is reasonable.

C. Market Evaluation by Market Sector.

The following provides a summary of the market evaluation by market

sector that is contained in the Mercer Evaluation and which forms the basis for Mercer,

LLC's reasonableness finding:

1. Large Foundations.

Mercer, LLC selected foundations based on asset size. The range

was $1.2 billion to $12.3 billion with a median endowment of $6.3 billion. The J. Paul

Getty Trust, the Battelle Memorial Institute and the American Legacy Foundation are

operating foundations. The remaining 11 large foundations used in the Mercer

Evaluation are grant-making foundations that are comparable in size of endowment to

the Kamehameha Schools. The Mercer Evaluation, page 28.

However, Mercer, LLC notes that each foundation lacks the

complexity of the Kamehameha Schools' operations and real estate portfolio. The

Mercer Evaluation, page 28.

Mercer, LLC notes that the Battelle Memorial Institute provides a

particularly interesting comparison because, while it operates a different business than

the Kamehameha Schools in the form of technology research and development, the

Battelle Memorial Institute is a charitable trust. It is equally large and complex in its

operations and the Board requires directors with significant skills and experience (as is

true for the Kamehameha Schools). And significantly, the Battelle Memorial Institute

37

also works within the framework of a charitable mission. The Mercer Evaluation, page

28.

Mercer, LLC states its belief that the seventy-fifth (75th) percentile is

the appropriate reference point for the Kamehameha Schools when compared to grant

making foundations because of the Kamehameha Schools' complexity. With respect to

large foundations, the Mercer Evaluation notes that compensation ranges from zero (0)

per year at five (5) organizations to a high of $90,000.00 per year at the Battelle

Memorial Institute. The Mercer Evaluation, page 28.

At the Battelle Memorial Institute, ten (10) trustees work on

average three (3) hours per week. Because of the Battelle Memorial Institute's size,

breadth, and complexity, Mercer, LLC finds Battelle to be a significant and highly

relevant comparator for the Kamehameha Schools. The Mercer Evaluation, page 28.

The Mercer Evaluation further notes that the average number of

trustees among the large foundations is twelve (12). The average amount of time

committed is three (3) hours per week. The Mercer Evaluation, page 28.

Further, although Mercer, LLC believes it would be reasonable to

consider an adjustment for the fact that the five (5) Trustees of the Kamehameha

Schools perform the work that ten (10) to twelve (12) trustees perform in the typical

large foundation, no such adjustment was made in the Mercer Evaluation. The Mercer

Evaluation, page 28.

According to the Mercer Evaluation, the value of the governance

role among large foundations is at least $67,500.00 to $124,500.00 which is three (3)

times the seventy-fifth (75th) percentile value range of $22,500.00 to $41,500.00. The

38

average value of the governance role among large foundations is $88,500.00 which is

three (3) times the average seventy-fifth (75th) percentile value of $29,500.00. The


2. Real Estate Investment Trusts (REITs).

Mercer, LLC believes comparison to corporate directors of public

companies is generally relevant because the Trustees of the Kamehameha Schools'

duties are of a governance and oversight nature. The Mercer Evaluation, page 29.

With respect to the real estate portfolio of the Kamehameha

Schools, Real Estate Investment Trusts (hereinafter referred to as "REITs") provide an

organization structure (governing board, management staff and complexity of

operations) that is similar to the Kamehameha Schools. And while REITs would not

have schools in their portfolios or a larger endowment, Mercer, LLC notes that REITs

do have multiple properties requiring oversight of complex operations such as shopping

centers, office buildinqs, and other commercial real estate. The Mercer Evaluation,

page 29.

Mercer, LLC looked at the total direct compensation reported for

REIT board members of REITs of similar size to the Kamehameha Schools, in terms of

assets. That total direct compensation ranges from $100,000.00 at the twenty-fifth

(25 th) percentile to $175,000.00 at the seventy-fifth (75th

) percentile. The median value

of such direct compensation is reported at $130,000.00. The Mercer Evaluation, page

29.

In the case of REITs, the data indicates that the average board

meets eight (8) times per year. On average, Audit, Compensation, and Nominating &

39

Governance committees meet eight (8), five (5), and three (3) times per year,

respectively. The Mercer Evaluation, page 29.

Mercer, LLC assumed that the typical REIT director sits on one (1)

board committee and chairs one (1) additional committee. Accordingly, the typical

director would, on average, attend twenty-one (21) board and committee meetings per

year, each generally one-half (:h) day or less in length. This equates to less than one

(1) day per week of time which amounts to a time commitment of one-third (1/3) or less

than that of a Trustee of the Kamehameha Schools. The Mercer Evaluation, page 29.

For purposes of comparability, Mercer, LLC adjusted for additional

time spent by a Trustee of the Kamehameha Schools by weighting the REIT directors'

total direct compensation at two (2) times its actual value which Mercer, LLC believes is

a conservative adjustment. The adjustment results in comparable compensation of

$200,000.00 to $350,000.00 (two (2) times the actual range of $100,000.00 to

$175,000.00, see above) and a median value of $260,000.00 (or two (2) times

$130,000.00). The Mercer Evaluation, page 29.

3. Corporate Boards (Public Companies).

Mercer, LLC believes that the governance and oversight

responsibilities of corporate boards of directors in general industry is relevant.

Corporate boards of directors in general industry represents the broadest market

segment, but since most boards of larger organizations are compensated similarly,

Mercer, LLC believes a broad market comparison is acceptable. Further, Mercer, LLG

believes this comparison is also relevant because several of the past and current

Trustees of the Kamehameha Schools (as well as potential trustees of the

40

Kamehameha Schools) serve on corporate boards. The Mercer Evaluation, page 30.

The data for corporate boards similar in size to the Kamehameha

Schools indicates a range of value for compensation from $94,000.00 at the twenty-fifth

(25th) percentile to $160,000.00 at the seventy-fifth (75th

) percentile. The median value

of compensation is $125,000.00 per year. The Mercer Evaluation, page 30.

The data further indicates that general industry corporate boards

typically hold six (6) to eighty (8) board meetings and ten (10) to fourteen (14)

committee meetings per year (a total of sixteen (16) to twenty-two (22) total meetings

per year). Assuming each meeting is typically one-half (12) day, the average director of

a general industry corporate board spends less than one (1) day per week in actual

time serving as a director. The Mercer Evaluation, page 30.

To adjust for the additional time commitment of a Trustee of the

Kamehameha Schools, Mercer, LLC adjusted the corporate board compensation at two

(2) times its actual rate. Mercer, LLC believes this is a conservative adjustment, since it

tends to understate the value of the time spent by the Trustees of the Kamehameha

Schools.

With respect to corporate boards, the data suggests a range of

total compensation of $188,000.00 to $320,000.00. The median value of such total

compensation being $250,000.00. The Mercer Evaluation, p. 30.

4. Local Corporate Boards.

Lastly, Mercer, LLC examined a group of local public company

boards, including: the Bank of Hawaii, Hawaiian Electric, Central Pacific Financial, and

Alexander & Baldwin, Inc. Mercer, LLC believes these organizations are relevant

41

because they establish a rate of compensation for the governance, policy, and

oversight role of corporate directors in the local geography. The Mercer Evaluation,

page 31.

Mercer, tLC further notes that several current and past Trustees of

the Kamehameha Schools have served or currently serve on local corporate boards.


The data indicates that in aggregate, the directors of these

companies earn a median total direct compensation of $96,000.00. In addition, on

average, twelve (12) directors serve these organizations. The Mercer Evaluation, page

31.

The local corporations report that on average they hold ten (10)

board meetings per year. Further, Audit, Compensation, and Nominating &

Governance committees meet, on average, nine (9), seven (7), and six (6) times per

year, respectively. The Mercer Evaluation, page 31.

Mercer, LLC goes on to reason that assuming that the typical

director of a local corporate board sits on one (1) committee and chairs another, the

director would, on average, attend up to twenty-six (26) board and committee meetings

per year, each being generally one-half (%) day. Based on these assumptions, a

director of a local corporate board has a time commitment of less than one (1) day per

week (Which is a commitment of far less time than that of a Trustee of the

Kamehameha Schools, who spends an average of 2 % to 3 days per week). The


42

For purposes of comparability, Mercer, LLC made an adjustment to

weight the local corporate board director's total direct compensation at two (2) times the

actual value. This adjustment results in comparable compensation of $192,00.00 which

is two (2) times the market value of $96,000.00. The Mercer Evaluation, page 31.

The Mercer Evaluation notes that while the role of the Trustee of

the Kamehameha Schools is more complex and more time consuming than that of a

typical local corporate director, the data represents the value of the governance role in

the local marketplace. Mercer, LLC believes the role is relevant for the governance

function and represents a true market for highly qualified business leaders, who may be

recruited to serve in the future as a Trustee of the Kamehameha Schools. The Mercer


D. Organizations Considered But Ultimately NotIncluded in the Market Evaluation.

Mercer, LLC considered using data from nonprofit boards and other

organizations located within the State of Hawaii. However, after consideration, Mercer,

LLC decided not to include the data from these organizations due to a lack of

comparability.

1. Nonprofit Boards.

According to Mercer, LLC, few, if any, boards in the nonprofit

market segment are truly comparable to the Kamehameha Schools in terms of size,

scope of operations, and organizational complexity. The majority of these

organizations have "advisory" boards, whose primary purpose is organization visibility

and fund-raising. Most of these board members are compensated with a small stipend

43

or are not compensated at all. The Mercer Evaluation, page 32.

Typically those that do compensate their boards are private

foundations. The market data indicates that the total compensation of a sample of

nonprofit boards ranges from $9,000.00 at the twenty-fifth (25th) percentile to

approximately $35,000.00 at the seventy-fifth (75th) percentile. The median

compensation is $25,000.00. The Mercer Evaluation, page 32.

At the median, nonprofit boards hold an average of six (6) board

meetings per year and attend an average of four (4) additional committee meetings.

Assuming each member sits on two (2) committees and attends fourteen (14) total

meetings per year that are one-half (:Iz) day in length, the average director of nonprofit

board invests less than one (1) day per week in actual time serving on such boards.


Mercer, LLC adjusted for the additional time commitment of a

Trustee of the Kamehameha Schools. By weighting the total compensation of

$9,000.00 at the twenty-fifth (25 th) percentile and $35,000.00 at the seventy-fifth (75th

)

percentile at three (3) times the stated value, the value of total compensation for this

market segment is $27,000.00 at the twenty-fifth (25th) percentile and $105,000.00 at

the seventy-fifth (75th) percentile. The median value is $75,000.00. The Mercer


Mercer, LLC concluded that this data is essentially the same as the

data for large foundations. It was presented to the Committee for informational

purposes but was not otherwise included in Mercer, LLC's market analysis. The Mercer


44

2. Other Organizations Considered.

Mercer, LLC also considered a group of local organizations,

including: Alu Like, Inc.; the Lili'uokalani Trust; Lunalilo Home Trust; and the Queen's

Medical Center. The Mercer Evaluation, page 33.

Mercer, LLC also considered one organization on the Mainland: the

Milton Hershey School and Trust. The Mercer Evaluation, page 33.

Mercer, LLC is of the opinion that the Milton Hershey School and

Trust and the Queen's Medical Center are more comparable than the other

organizations but are not fully comparable. The Mercer Evaluation, page 33.

a. The Milton Hershey School and Trust.

Mercer, LLC makes the point that while the Milton Hershey

School and Trust is similar to the Kamehameha Schools because it operates a school it

is less complex at the trustee level because the Milton Hershey School and Trust's

endowment is managed by a separate trust company and not by the Milton Hershey

School Board of Managers. The Mercer Evaluation, page 33.

In addition, Mercer, LLC points out that the Milton Hershey

School and Trust does not have the vast commercial, residential and agricultural

holdings that the Kamehameha Schools has in its portfolio. The Mercer Evaluation,

page 33.

Further, Mercer, LLC notes that while the Milton Hershey

School Board of Managers is not compensated, the trustees of the trust company are

well compensated. Apparently, there is also some indication that some of the trustees

45

of the trust company may also be members of the Milton Hershey School Board of

Managers. The Mercer Evaluation, page 33.

Unfortunately, because the compensation information for

trustees of the trust company is not publicly available, Mercer, LLC is not able to report

the actual compensation of the trustees of the Milton Hershey School and Trust for

purposes of this study. The Mercer Evaluation, page 33.

Given the lack of comparability in terms of organization

complexity and trustee role, the Committee believes that the Milton Hershey School and

Trust is not as appropriate a comparable as can be found in the four (4) market sectors

referenced above. Accordingly, the Committee had no objection to Mercer, LLC's

position regarding the Milton Hershey School and Trust.

b. The Queen's Medical Center.

Mercer, LLC reports that the trustees of the Queen's Medical

Center are not compensated. In addition, Mercer, LLC notes that while it is common for

the board of a regional medical center to serve without compensation, the role of such a

trustee is very different than that of a Trustee of the Kamehameha Schools. The


Mercer, LLC notes that a hospital board member may meet

for approximately one-half (;;z) day, five (5) or six (6) times per year. And Mercer, LLC

also notes that such boards are more likely advisory boards. The Mercer Evaluation,

page 33.

46

c. Alu Like. Inc. and Lunalilo Home Trust.

Mercer, LLC looked at both Alu Like, Inc. and Lunalilo Home

Trust but did not include these organizations in the market evaluation because they do

not provide an appropriate comparison given the significant differences in size and

complexity of the organizations. The Mercer Evaluation, page 33.

The total compensation reported in the Annual Reports for these

organizations varied widely: $0.00 to $94,000.00. As stated above, because the

organizations were not appropriately comparable to the Kamehameha Schools, Mercer,

LLC did not include the data for these organizations in the market evaluation. The


The Committee believes it was informative and beneficial to the

Committee's dialogue to have the above-referenced data presented to the Committee.

However, given the lack of comparability the Committee has no objection to Mercer,

LLC's position that such data should not be consolidated into the market evaluation.

IX. SUMMARY OF COMMITTEE'S RECOMMENDATION.

As seen by the foregoing, the Committee attempted to employ dialogue and

thoughtful deliberation in reaching a determination of what is a reasonable annual

amount of compensation to be paid to the Trustees of the Kamehameha Schools.

The Committee believes the Mercer Evaluation provides a range of trustee

compensation that is comparable and reasonable.

The Committee, therefore, reiterates its determination that the following formula

provides the necessary terms for establishing a reasonable annual amount of

47

compensation to be paid to the Trustees of the Kamehameha Schools:

a. Trustee retainer of $75,000.00 per year, paidmonthly;

b. Supplemental Chairman of the Board retainer of$30,000.00 per year, paid monthly;

c. A meeting fee of $1,500.00 per meeting, includingthe meeting fee for the Chairman;

d. A cap on the number of compensable meetings of75 meetings per year, which representsapproximately 1.5 meetings per week on average.

The above-referenced terms result in a maximum annual amount of

compensation of $217,500.00 for the Chairman of the Board and a maximum annual

amount of compensation of $187,500.00 for the other Trustees.

48

The Committee acknowledges that its determination will only be appropriate until

such time that a future Kamehameha Schools Compensation Committee is appointed

to make a future determination of what is reasonable.

Dated: Honolulu, Hawaii, July 28,2008.

TRUSTEE COMPENSATION COMMITIEE

k~,~41--'-----

DOUGLAS M. GOTO

ROSANNE K. GOO

49

DECEASED.

IN THE MATTER OF THE ESTATE

OF

BERNICE P. BISHOP,


STATE OF HAWAII

) EQUITY NO. 2048)) CERTIFICATE OF SERVICE)))))))))

--------------)

CERTIFICATE OF SERVICE

We hereby certify a copy of the foregoing was duly served upon the following by

hand delivering or mailing said copy upon filing, in the United States mail, postage

prepaid, addressed as shown below:

Mark J. Bennett, Esq.Hugh R. Jones, Esq.Department of the Attorney General,

State of Hawaii425 Queen StreetHonolulu, Hawaii 96813Parens Patriae

Colleen I. Wong, Esq.Eric H. Sonnenberg, Esq.Kamehameha Schools567 South King Street, Ste. 310Honolulu, Hawaii 96813Attorneys for the Trustees Under the

Will and of the Estate of BernicePauahi Bishop, Deceased

David L. Fairbanks, Esq.Cronin Fried Sekiya Kekina &

FairbanksDavies Pacific Center841 Bishop Street, Ste. 600Honolulu, Hawaii 96813Master

Dated: Honolulu, Hawaii, July 28, 2008.

TRUSTEE COMPENSATION COMMITIEE

~L1~-_.~---

DOUGLAS M. GOTO

ROSANNE K. GOO

2

COLLEEN 1. WONG 3270-0ERlC H. SONNENBERG 4024-0Kamehameha Schools567 South King Street, Suite 310Honolulu, Hawaii 96813Telephone No. (808) 523-6364

Attorneys for The Trustees Under the Willand of the Estate of Bernice Pauahi Bishop,.Deceased

FIRSTGIRCUIT COUfr,STATE OF HAWt\ if

FP.ED

ZOD7 AUG -2 AM II: 0I

F. PAGAYCLERK


STATE OF HAWAll

In the Matter of the Estate

Of

BERNICE P. BISHOP,

Deceased.

) EQUITY NO. 2048)) ORDER APPOINTING) COMPENSATION COMMITTEE) PURSUANT TO PETITION TO) APPOINT A COMPENSATION) COMMITTEE AND TO) DETERMINE THE) COMPENSATION OF THE) TRUSTEES OF THE) KAMEHAl\1EHA SCHOOLS~\Il"

Ex:IIIDIT 1-

ORDER APPOINTING COMPENSATION COMMITTEE PURSUANT TOPETITION TO APPOINT A COMPENSATION COMMITTEE AND TO DETERMINETHE COMPENSATION OF THE TRUSTEES OF THE KAMEHAMEHA SCHOOLS

The Trustees filed that Petition to Appoint a Compensation Committee and to Determine

the Compensation ofthe Trustees ofthe Kamehameha Schools as required pursuant to that Order

Granting Petition for Approval of a Plan for Determining Trustee Compensation Pursuant to

Stipulation No. 15 and for Creation ofa Compensation Committee in Accordance with the Plan

filed in this court on May 10, 1999 (the "May 10, 1999 Order"), the court approved that "Plan

g:\shares\clo\oclo\es\petitions&stips\compcomnr-order appoint committee.doc

EXHIBIT "A"

Ido 1Iefdlr' Ihis isa lUll. true, andofthe Origina,\ on file in this office.

• urt, Firsl CircuilSlate 01 Hawaii

",

for Determining Trustee Compensation" (the "Plan"), which was attached as Exhibit A to thei1I fV)e. Pe.-h'tJ' () t1 ltV"

May 10, 1999 Order. A copy of the May 10, 1999 Order and Plan is attached..,as Exhibit 1.

Pursuant to the May 10, 1999 Order, the court shall appoint a compensation committee

(the "Committee") of three to five qualified persons to determine the Trustees' reasonable annual

compensation. The court hereby ORDERS as follows:

1. That the following persons are appointed to serve as the members of the

Committee created pursuant to the Plan for the purpose of determining the reasonable annual

compensation of the Trustees:

MICHAEL E. RAWLINS

ROSANNE K. GOO

DOUGLAS M. GOTO

2. That the court finds the foregoing persons are knowledgeable and informed

persons each of whom possesses the integrity, probity, competence and disinterested status

necessary to be qualified and serve as an independent and unconflicted Committee member.

2

+tJ thv f'e-h"tJoVl .......

3. That the Committee shall conduct itself according to the Plan attached.aeeess as

Exhibit 1 and shall render its decision in accordance with the Plan on or before close of business

DATED: Honolulu, Hawai'i, ---",~~~----

~~ CA. eu-fd A I I J 0 0 Ii'~unless the time is extended by the court.

AUG 2001

Equity No. 2048, In The Matter of The Estate of Bernice P. Bishop, Deceased; Order AppointingCompensation Committee Pursuant To Petition To Appoint A Compensation Committee And ToDetermine The Compensation Of The Trustees Of The Kamehameha Schools; Exhibit IIJ.V

3

COLLEEN 1. WONG 3270-0ERIC H. SONNENBERG 4024-0Kamehameha Schools567 South King Street, Suite 310Honolulu, Hawaii 96813Telephone No. (808) 523-6364

Attorneys for The Trustees Under the Willand of the Estate of Bernice Pauahi Bishop,Deceased

2001 P.UG I0 f~H 8: 3I

K.OPEDALCLERK


STATE OF HAWAII


Of

BERNICE P. BISHOP,

Deceased.

)))))))

EQUITY NO. 2048



I HEREBY CERTIFY that a true and correct copy of the Order Appointing

Compensation Committee Pursuant To Petition To Appoint A Compensation Committee And To

Determine The Compensation Of The Trustees Of The Kamehameha Schools, filed on August 2,

2007, was duly served upon the following parties in the manner stated as follows:

EARL 1. ANZAI, ESQ.HUGH R. JONES, ESQ.Department of the Attorney General425 Queen StreetHonolulu, Hawaii 96813Parens Patriae

DAVrD L. FAIRBANKS, ESQ.Cronin Fried Sekiya Kekina & FairbanksDavies Pacific Center841 Bishop Street, Suite 600Honolulu, Hawai'i 96813Master

Hand Delivery

August 10, 2007

I FURTHER CERTIFY that a courtesy copy of the Order was duly served upon the

following parties by first class mail with postage prepaid on the date hereof:

Michael E. Rawlins4208 Diamond Head RoadHonolulu, Hawaii 96816Compensation Committee Member

Rosanne K. GooAttorney at Law126 Queen Street, Suite 303Honolulu, Hawaii 96813Compensation Committee Member

Douglas M. GotoPacific Guardian Life Insurance Company1440 Kapio1ani Boulevard, Suite 1700Honolulu, Hawaii 96814

Compensation Committee Member

DATED: Honolulu, Hawai'i,--------------------~

COLLEE L WONGERIC H. SONNENBERAttorneys for the Trustees Under the Will and of theEstate ofBernice Pauahi Bishop, Deceased

Equity No. 2048; In the Matter of the Estate of Bernice P. Bishop, Deceased; Certificate of Service

2


Attorneys for The Trustees Under the Willand of the Estate ofBernice Pauahi Bishop,Deceased

?n07 .JUN 2! Ml 9: 20

CLr-:-RK


STATE OF HAWAII


Of

BERNICE P. BISHOP,

Deceased.

) EQUITY NO. 2048)) FIRST STIPULATION TO) CONTINUING HEARlNG ON) PETITION TO APPOINT A) COMPENSATION COMMITTEE AND) TO DETERMINE THE) COMPENSATION OF THE TRUSTEES) OF THE KAMEHAMEHA SCHOOLS) ANDORDER)))) Old Hearing:) Date: June 22,2007) Time: 10:00 a.m.) Judge: Presiding Judge)) New Hearing:) Date: DEC 14 2007) Time: 10:00am) Judge: Presiding Judge))

EXHIBIT "B"

FIRST STIPULATION TO CONTINUING HEARING ON PETITIONTO APPOINT A COMPENSATION COMMITTEE AND TO DETERMINE THE .,{'

COMPENSATION OF THE TRUSTEES OF THE KAMEHAMEHA SCHOOLS AND ORDER

IT IS HEREBY STIPULATED AND AGREED by and among JAMES DOUGLAS

KEAUHOU ING (Chairman of the Board of Trustees), CORBETT AARON

KAMOHAIKlOKALANI KALAMA, ROBERT KALANI UICHI KIHUNE, DIANE JOYCE

PLOTTS and CHARLES NAINOA THOMPSON, the duly appointed, qualified and acting

Trustees Under the Will and of the Estate of Bernice Pauahi Bishop, Deceased, acting in their

fiduciary and not in their individual capacities, MARK J. BENNETT, Attorney General of the

State of Hawaii, as parens patriae, and DAVID L. FAIRBANKS, the incumbent Court-

appointed Master, that the date and time of hearing as to the Petition To Appoint A

Compensation Committee And To Determine The Compensation Of The Trustees Of The

Kamehameha Schools filed in this Court on May 4, 2007, previously scheduled for FRIDAY,

FRIDAYJUNE 22,2007, at 10:00 a.m., be and is hereby rescheduled for -'

DEC 14 2007 10:00

Judge in his or her Courtroom in Ka'ahumanu Hale, Honolulu, Hawaii, in order to give the Court

time to select members of the committee and to allow the committee time to make their

deterrnination.

,2007DATED: Honolulu, Hawai'i, this 19th day of June

c~~--------ERIC H. SONNENBERGAttorneys for the Trustees Under the Will and ofthe Estate ofBernice Pauahi Bishop, Deceased

2

MARK J. BENNETTAttorney General, as Parens Patriae

l

DAVID L. FAIRBANKSMaster

Equity No. 2048; In the Matter of the Estate ofBernice P. Bishop. Deceased; First Stipulation ToContinuing Hearing On Petition To Appoint A Compensation Committee And To Determine TheCompensation Of The Trustees Of The Kamehameha Schools And Order

3


Attorneys for The Trustees Under the Willand of the Estate of Bernice Pauahi Bishop,Deceased

fiRST CiRCUIT COURT"STATE OF HAWAii

r- 11 ~r1- r! \

'- _~.J

ZOOS MAY 21 Pt1 I: 21

F.PAGA.Y _CLERK


STATE OF HAWAII


Of

BERNICE P. BISHOP,

Deceased.

) EQUITY NO. 2048)) SECOND STIPULATION TO EXTEND) DEADLINE FOR COMPENSATION) COMMITTEE TO RENDER ITS) DECISION IN ACCORDANCE WITH) THE PLAN AND ORDER)

SECOND STIPULATION TO EXTEND DEADLINE FOR COMPENSATIONCOMMITTEE TO RENDER ITS DECISION IN ACCORDANCE WITH THE PLAN


KEAUHOU ING (Chair of the Board of Trustees), CORBETT AARON

KAMOHAIKIOKALANI KALAMA, ROBERT KALANI UICHI KIHUNE, DIANE JOYCE



fiduciary and not in their individual capacities, MARK 1. BENNETT, Attorney General of the

State ofHawaii, as parens patriae, and DAVID 1. FAIRBANKS, Master.

EXHIBIT "e"1

16, 2008

f '

1. By that certain Order Appointing Compensation Committee Pursuant To Petition

To Appoint A Compensation Committee And To Determine The Compensation Of The Trustees

Of The Kamehameha Schools filed in this Court on August 2, 2007, the Court appointed a

Compensation Committee for the purpose of determining the reasonable compensation of the

Trustees of the Kamehameha Schools pursuant to the Plan attached to the Petition.

2. By that First Stipulation to Extend Deadline for Compensation Committee to

~Render Its Decision in Accordance with the Plan Emd Oriler filed in this Court on December 12,

2007, the Court granted an extension to the deadline for the Compensation Committee to render

its decision to June 2, 2008.

3. The Compensation Committee has requested that the June 2, 2008, deadline for

rendering its decision be extended for another two (2) months to August 4, 2008. Such extension

is requested to allow the Compensation Committee to complete its report for the Court.

4. The Trustees, Attorney General and Master do not object to granting the

requested extension to the Compensation Committee.

NOW THEREFORE, IT IS HEREBY STIPULATED AND AGREED BY AND

AMONG the Trustees, the Attorney General, and the Master that the June 2, 2008, deadline for

the Compensation Committee to render its decision in accordance with the Plan is hereby

UU4extended to I\(,((j /..is/- LJ. • .2 00 ~

DATED: Honolulu, Hawai'i, ----------------------

(J .'\/ .ctiE1;;hotiJ~f-------ERIC H. SONNENBERG \--Attorneys for the Trustees Under the Will and ofthe Estate of Bernice Pauahi Bishop, Deceased

2

Judge of the Above-Entit

1{A}U(J.BE~TT

Attorney General, as ParensPtu___

By: ~~~p:!_\~_I__+V~I__------HUGHR.JONEDeputy Attorney General,


Equity No. 2048; In the Matter of the Estate of Bernice P. Bishop, Deceased; Second Stipulation To ExtendDeadline For Compensation Committee To Render Its Decision in Accordance with the Plan and Order

3


Attorneys for The Trustees Under the Willand of the Estate of Bemice Pauahi Bishop,Deceased

FIRSi CIRCUIT COURTSTATE OF HAWAII

FILED

2008 HAY 21 PH 1= 21

F.PAGAYCLERK

IN THE CIRCUIT COURT OF THEFIRST CIRCUIT

STATE OF HAWAII

EQUITY NO. 2048

New HeariJij'Date: LJG 2 9 2008Time: 10:00amJudge: Presiding Judge

THIRD STIPULAnON TO CONTINUEHEARING ON PETITION TO APPOINTA COMPENSATION CO:rvr.tv1ITTEEAND TO DETERMINE THECOMPENSATION OF THE TRUSTEE~

OF THE KAMEHAMEHA SCHOOLSAND ORDER


Of

BERNICE P. BISHOP,

Deceased.

))))))))))))) Old Hearing:) Date: June 27, 2008) Time: 10:00 a.m.) Judge: Presiding Judge))))))))

EXHIBIT "D" ~"Ci~~:.~5:..~~';~I~rl,-FiisiGirc~Sfc:te ofHav,iili

THIRD STIPULATION TO CONTINUE HEARING ON PETITIONTO APPOINT A COMPENSATION CO:M:MITTEE AND TO DETERMINE THECOMPENSATION OF THE TRUSTEES OF THE KAMEHAMEHA SCHOOLS


KEAUHOU ING (Chairman of the Board of Trustees), CORBETT AARON

KAMOHAIKIOKALANI KALAMA, ROBERT KALANI UICHI KlHUNE, DIANE JOYCE



fiduciary and not in their individual capacities, MARK 1. BENNETT, Attorney General of the

State of Hawaii, as parens patriae, and DAVID L. FAIRBANKS, the incumbent Court-

appointed Master, that the date and time of hearing as to the Petition To Appoint A

Compensation Committee And To Determine The Compensation Of The Trustees Of The

Kamehameha Schools filed in this Court on May 4, 2007, previously scheduled for FRIDAY,

FRIDAYJUNE 27, 2008, at 10:00 a.m., be and is hereby rescheduled for -'- _

AUG 2 9 2008- 10;00

Judge in his or her Courtroom in Ka'ahumanu Hale, Honolulu, Hawaii, in order to give the

Compensation Committee time to render its decision in accordance with the Plan.

Mayday of 2008.DATED: Honolulu, Hawai'i, this 16th

COLLEEN I. WONGERIC H. SONNENBERGAttorneys for the Trustees Under the Will and ofthe Estate of Bernice Pauahi Bishop, Deceased

2

MARK J. BENNETTAttorney General, as Parens Patriae

\By:-----"---.\-.>.<:.:-"rl"'--'lL-.1--f---\'->"--'\r-------HUGH R. JONESDeputy Attorney General,


APPROVED AND SO ORDERED:

Equity No. 2048; In the Matter ofthe Estate of Bernice P. Bishop, Deceased; Third Stipulation ToContinue Hearing On Petition To Appoint A Compensation Committee And To Determine TheCompensation Of The Trustees Of The Kamehameha Schools And Order

3

EXHIBIT "A"

PLAN FOR.DETERMINING TRUSTEE COM.PENSATION

This is the Plan for determining the compensation of the trustees of the Kamehameha

Schools Bernice Pauabi Bishop approved by the Circuit Court of the First Circuit, State ofHawai'i

(the "Court").

PROCEDURAL BACKGROUND

Stipulation No. 15 of those certain Stipulations Concernine: Master's Recommendations

CI09th, HO th

, and 111th Annual Accounts) and Order entered herein on October 2, 1998: provides

that Richard Sung Hong Wong, Oswald Kofoad Stender, Marion Mae Lokelani Lindsey, Gerard

Aulama Jervis, and Henry Haalilio Peters, Trustees Under the Will and of the Estate of Bernice

Pauahi Bishop, Deceased, (the "Trustees") shall submit to this Court for its review and approval a

plan for determining trustee compensation that is in compliance with and satisfies applicable

requirements' of state and federal law, including without exception, federal Intermediate

Sanctions legislation and Treasury regulations incident thereto, and H.R.S. Section 607-20, as

amended by Act 310 of the 1998 Hawai'i State Legislature.

Stipulation No. 1~ further provides that the plan shall include proVISIOn for the

preparation of an independent professional study concerning reasonable trustee compensation

which utilizes relevant and appropriate criteria, and that the study shall be comrnissioned under

the auspices of the Court, by the Court's master or by such other person or entity as the Court

shall order, consistent with requirements of applicable law and regulations.

Stipulation No. 15 also provides that the cost of any independent professional study shall

be borne as an expense of the Trust Estate and that, should the Trustees or others wish to contest,

rebut or supplement the study by commissioning another study, they shall do so at their own

RBG/229126.04

EXHIBIT "E"

l

expense unless the Court first shall have approved the additional study as an expense of the Trust

Estate.

THETRUSTEES' RESPONSE

The Trustees filed herein on November 13, 1998, their Trustees' Response Concerning A

Plan For Determ.ll:ring Trustee Compensation (the "Trustees' Response"). In the Trustees'

Response, the Trustees set forth the following federal and state law backgrounds against which

they proposed their plan:

Federal Background

As a tax-exempt educational organization, the Kamehameha Schools Bernice Pauahi

Bishop Estate (''KSBE'') may have its exempt status revoked if its net earnings "inure" in whole or

in part to the benefit of individuals. It is well established, however, that the payment of reasonable

compensation to individuals does not result in "private inurement" or private benefit. Under Section

4958 of the Internal Revenue Code, penalties are imposed, however, on "excess benefit

transactions." A transaction is an excess benefit transaction if an economic benefit is provided by

an exempt organization directly or indirectly to or for the use of any "disqualified person," such as a

member of the entity's governing board, if the value of the economic benefit provided the

disqualified person exceeds the value of the consideration received by the entity. Permitted

consideration includes the performance ofpersonal services.

In other words, while tax exempt entities are permitted to pay reasonable compensation for

services rendered to them by members of their governing boards and other senior staff members,

these persons are, generally speaking, "disqualified persons" for purposes of the Internal Revenue

Code and Regulations, and their compensation is subject to federal scrutiny for reasonableness.

RBG/236144 2

Proposed Internal Revenue Service (''IRS'') regulations implementing Section 4958 were

:filed on July 30, 1998 in the Federal Recister. They state that compensation ofdisqualified persons

may not exceed "what is reasonable under all the circumstances." The proposed regulations also

provide that "[cjompensation for the performance ofservices is reasonable if it is only such amount

as would ordinarily be paid for like services under like circumstances." Proposed Regulation

§ 53.4958-4(b)(3).

This standard is similar to the general rule of deductibility of compensation under existing

IRS regulations. To be deductible as a business expense, compensation must be "reasonable." The

applicable regulation, Reg. §1.162-7(b)(3), states in part as follows:

... the allowance [ofa deduction] for the compensation paid may not exceed what isreasonable under all the circumstances. It is, in general, just to assume thatreasonable and true compensation is only such amount as would ordinarily be paidfor like services by like enterprises under like circumstances.

Congressional reports describing proposed Section 4958 contain several statements that the

standards developed under existing Reg. Section 162 are applicable in determining whether

compensation is reasonable. The same reports state clearly that an individual is not required to

accept reduced compensation merely because he or she renders services to a tax-exempt

organization instead of a taxable entity.

The Congressional reports also state that the tax-writing committees expected the lRS to

promulgate regulations under which a rebuttable presumption could be invoked if a tax-exempt

organization followed a prescribed procedure for setting the compensation of its disqualified

persons. Thus, the proposed Section 4958 regulations include such a rebuttable presumption

procedure.

RBG/236144 3

Under the proposed regulations, payments under a compensation arrangement between a

tax-exempt educational organization and disqualified persons will be presumed to be reasonable if

the following procedures are satisfied:

1. The compensation arrangement is approved by the organization's governing body or

a committee of the governing body composed entirely of individuals who do not

have a conflict of interestwith respect to the arrangement;

2. The governing body, or a committee thereof, obtains and relies upon appropriate

data as to comparability before making its determination; and

3. . The governing body or committee adequately documents the basis for its

determination concurrently with making that determination.

For a member of a committee or a governing body to be considered not to have a conflict of

interest, the proposed regulations state that a member must not:

1. be related to (i.e., be a member of the family of) any disqualified person whose

compensation is being determined;

2. be in an employment relationship subject to the direction or control of any such

disqualified person;

3. be receiving compensation or other payments subject to the approval of such a


4. have any material financial interest that would be affected by the compensation

arrangement; and

5.

RBG/236144

approve any arrangement with respect to a disqualified person who has approved or

will approve a transaction providing economic benefits to the member.

4

In describing what data is appropriate as to comparability, the proposed regulations state that

relevant information and appropriate data as to comparability would include, but not be limited to:

1. compensation levels paid by similarly situated organizations, both taxable and tax-

exempt for functionally comparable positions;

2. the availability of similar services in the geographic area of the applicable tax-

exempt organization;

3. independent compensation surveys compiled by independent firms; and

4. actual written offers from similar institutions competing for the services of the

disqualified person.

State Law Background

Act 310 of the 1998 Hawai'i State Legislature amended the long-established method of

. determining the compensation of charitable trustees. Prior to January 1, 1999, trustee

compensation was based upon a schedule of percentages applied to the annual income of the

Trust Estate and certain other amounts. Effective January 1, 1999, the existing schedule is

abolished as to the trustees of charitable trusts, although it remains in effect for trustees of other

trusts.

As amended, § 607-20 ofthe Hawaii Revised Statutes provides in full as follows:

(a) Notwithstanding any other provisions, in the case of a charitable trust, thecompensation of the trustees shall be limited to an amount that is reasonableunder the circumstances.

(b) 171is section shall apply to existing and new charitable trusts established afterthe effective date of this Act; provided that any provisions in existing trusta$1"eements regarding trustee compensation' shall supersede this section.

The preamble to Act 310 reads as follows:

The legislature finds that there is a long-standing tradition, wherebytrustees of most charitable trusts serve without compen~ation. While the

RBG/236144 5

legislature considers such voluntary service to be admirable, it believes thattrustees of charitable. trusts should not be prohibited by statute from receivingcompensation. However, trustees who receive compensation from a charitabletrust have a fiduciary duty to make sure such compensation is not in excess ofwhat is reasonable under the circumstances. In addition to this common lawduty, such trustees are subject to penalty underfederal intermediate sanctions lawif they allow their compensation to exceed what is reasonable under thecircumstances. Knowledgeable and well-intentioned people can differ on what isreasonable compensation in any particular situation, but such controversies arebest resolved by a judge who can take into account all relevant circumstances aspresented by parties on both sides ofthe issue. Thus, the purpose ofthis Act is tocodify the duty of trustees not to accept compensation above what is reasonableunder the circumstances.

THE PLAN

1. The Court shall periodically appoint a committee (hereinafter, the "Committee") for

the purpose of determining the compensation of the trustees of the Kamehameha Schools Bernice

Pauahi Bishop Estate (hereinafter, the ''KSBE Trustees").

2. The Committee shall be comprised of three (3) to five (5) persons as determined by

the Court from time to time.

3. The Court shall constitute the Committee upon the petition of the KSBE Trustees,

the Attorney General as parens patriae to the Trust Estate, or the Court's then-incumbent master.

4. Initially, the Committee shall be constituted by the Court within thirty (30) days of

the entry of an order approving this Stipulation. Thereafter, the Committee shall be constituted not

less often than once every three (3) years and, failing petition by the Attorney General or the

incumbent master, it shall be the responsibility of the KSBE Trustees to cause the filing of a petition

at least every third year.

5. The Committee shall consist of knowledgeable and informed persons, each of

whom the Court finds to possess the integrity, probity, competence and disinterested status

RBG/236144 6

necessary to be qualified and serve as an independent and unconflicted Committee member

under applicable IRS regulations.

6. The Court shall designate the members of the Committee.

7. The sole issue to be determined by the Committee shall be "What is a reasonable

annual amount of compensation to be paid to each of the trustees of the Kamehameha Schools

Bernice Pauahi Bishop Estate? "

8. The Committee shall commission an independent compensation survey from a

national, independent, professional consulting :firm active in the field of executive and trustee

compensation. The Committee shall be authorized to commission additional independent

compensation surveys if, by simple majority vote of its members, it shall determine that one or more

additional surveys are reasonably necessary or appropriate.

9. The fum or firms commissioned by the Committee to make a compensation survey

shall (i) study compensation levels paid by similarly situated organizations, both taxable and tax

exempt, for functionally comparable positions; (ii) review and report the availability of similar

services in Hawai'i; (iii) interview the KSBE Trustees and their staff and the Attorney General as

parens patriae to the Trust Estate; (iv) compile independent compensation surveys for review by

the Committee; and (v) render its report to the Committee establishing a range of trustee

compensation that is comparable, reasonable and consistent with applicable law and regulations. In

addition to the factors enumerated above, the Committee shall have authority to require the

consideration of other relevant factors by the firm or firms. The cost of any compensation surveys

and reports commissioned by the Committee shall be borne out of the Trust Estate.

10: The KSBE Trustees and the Attorney General as parens patriae to the Trust Estate

shall be entitled to submit such evidence, testimony and independent professional studies for the

RBGf236144 7

Committee's review and consideration as may be pertinent and material to the Committee's

deliberations.

11. The KSBE Trustees' reasonable costs and expenses may be paid out of the Trust

Estate only upon the express approval of the Court.

12. The Attorney General's reasonable costs and expenses may be reimbursed out of the

Trust Estate only in accordance with the provisions ofH.R.S. Section 554-8.

13. The Committee's deliberations shall not be public proceedings and the Committee

shall not be obliged to receive any public testimony unless the Committee by simple majority vote

shall determine to do so. Without limiting the generality of the foregoing, the Committee shall not

be obliged to receive any public testimony unless the same is responsible, probative, pertinent and

material.

14. The KSBE Trustees or their representative, the Attorney General or a deputy, and

the incumbent master shall be entitled to audit and observe but not participate in the proceedings of

the Committee. Any testimony received by the Committee shall be in writing and shall be subject

to inspection and copying by the KSBE Trustees, the Attorney General and incumbent master.

15. The Committee shall render its decision within six (6) months unless the time is

extended by the Court for good cause.

16. No Committee shall be compensated, except for reimbursement of its reasonable out

ofpocket expenses, until its decision has been filed or as otherwise ordered by the Court.

17. If the Committee fails or is unable to render a timely decision, the Court, upon

petition of the KSBE Trustees, the Attorney General, or the incumbent master, shall constitute a

new Committee.

RBG/236144 8

18. Ifa vacancy arises on a Committee, the Court, upon petition of the KSBE Trustees,

the Attorney General, or the incumbent master, shall fill the vacancy.

19. The Committee shall file with the Court and deliver to the KSBE Trustees, the

Attorney General and the incumbent master all professional compensation studies commissioned or

received by it, together with statements of the credentials of the fumspreparing the studies.

20. The studies shall be accompanied by a report of the Committee's determination of

reasonable trustee compensation. The Committee's determination shall be consistent with the

studies and with any other appropriate comparability data received by the Committee. The

Committee's determination of reasonable trustee compensation may be expressed as a range of

appropriate annual compensation or a limit upon annual compensation. It may provide for differing

levels ofcompensation for individual trustees based upon considerations appropriate under state and

federal law and regulations. The Committee's report of its determination shall include a clear,

concise and concurrent exposition of the basis for its determination and shall be accompanied by

true and correct copies ofany and all documents specificallyreferred to therein.

21. The Committeemay but shall not be required to file with the Court any other written

evidence or submissions received, gathered or considered by it. Any such additional filings shall be

delivered to the KSBE Trustees, the Attorney General and the incumbent master.

22. The Committee's determination shall be determined by a simple majority of the

Committee. Dissenting Committee members shall be entitled to file with the Court a statement

of their dissent and the reasons therefor.

23. Upon receipt ofthe report of the Committee, the Court shall schedule a hearing at

which the KSBE Trustees, the Attorney General and the incumbent master shall be afforded an

opportunity to be heard.

RBGf236144 9

24. The Committee's determination shall be entitled to a presumption of

reasonableness. The Court may approve, disapprove or modify the determination of the

Committee. If approved by the Court, the determination of the Committee shall be final,

conclusive and binding, subject only to appeal as provided in the rules of court. If the Court

finds the Committee's determination to be clearly erroneous or the Committee to have abused its

discretion, the Court may disapprove the determination, which then shall be null and void, and

the Court shall either recommit the matter to the Committee or promptly constitute a new

Committee.'

25.· If the determination of the Committee is modified by the Court, any such

modification shall be made in manner consistent with applicable provisions of state and federal

law and regulations with the object of assuring that the compensation paid the KSBE Trustees is

reasonable within the meaning ofboth state and federal law and regulations.

26. The Court shall disapprove the Committee's determination in the following

circumstances: (a) where the decision was procured by corruption, fraud or undue means; or

(b) where there was evident partiality or corruption in the' Committee or any of its members; or

(c) where the Committee members or any of them were guilty of misconduct, in refusing or

neglecting to obtain the required independent studies, or in refusing to hear evidence pertinent and

material to the issue of compensation proffered by the KSBE Trustees or the Attorney General as

parens patriae to the Trust Estate, or of any other misbehavior, by which the interests of KSBE or

its trustees have been prejudiced; or (d) where the Committee exceeded its powers or so

imperfectly executed them that a determination consistentwith applicable law, court orders and IRS

regulations, was not made.

RBG/236I44 .10

27. The foregoing shall not be deemed or construed to limit the Court's authority to

modify or disapprove the Committee's determinationfor other cause.

28. The Committee shall be reasonably compensated out of the Trust Estate for its

services and its compensation shall be fixed by the Court.

29. The Committee, but not individualmembers, shall be authorized to retain competent

tax counsel to advise it c-oncerning its procedures and to assist it in its mandated activities. Any

such retention shall be subject to the prior approval of the Court. Counsel's reasonable and

approved fees shall be paid out of the Trust Estateupon approval by the Court.

30. Committee members shall not by reason of their service be deemed to be state

officers nor officers of the Court and their actionshall not constitute state action for any purpose.

31. The Committee's records and files shall be retained for the period under review and

for seven (7) years thereafter at the offices of the Trust Estate. The Committee's records and files,

except such as shall have been filed with the Court by the Committee, shall remairi. under seal of the

Court, available for inspection only by the Court, future masters, the Attorney General as parens

patriae to the Trust Estate, future Committees, and the Internal Revenue Service of the United

States.

RBGf236144 11

ROBERT l3RUCE GRAHAM, JR. 1305-0ASHFORD & WRISTONAlii Place, Suite 14001099 Alakea StreetHonolulu, Hawaii 96813Telephone No.: 539-0400

~ttorney for Petitioners,Richard Sung Hong Wong, Oswald KofoadStender, Marion Mae Lokelani Lindsey,Gerard Aulama Jervis and Henry Haalilio PetersTrustees under the Will and of theEstate ofBernice Pauahi Bishop, Deceased

f~ : ".. .:. ..-

r ..-e,


STATE OF HAWAIl

EQUITY NO. 2048

ORDER GRANTING PETITION FORAPPROVAL OF A PLAN FORDETERM:INmG TRUSTEECOMPENSATION PURSUANT TOSTIPULATIONNO. 15 AND FORCREATION OF A COMPENSATIONCOMMITTEE IN ACCORDANCE WITHTHEPLAN; EXHIBIT "A"


Of

BERNICE P. BISHOP,

Deceased.

)))))))))))))

Hearing:Time:Judge:

April 30, 199910:00 a.m.Hon. Kevin S. C. Chang

ORDER GRANTING PETITIONFOR APPROVAL OF A PLAN FOR DETERMINING TRUSTEE COMPENSATION

PURSUANT TO STIPULATION NO. 15 AND FOR CREATION OF ACOMPENSATION COMMITTEE IN ACCORDANCE WITH THE PLAN

This matter came on regularly for hearing on Friday, April 30, 1999, at 10:00 a.m. before

the Honorable Kevin S. C. Chang in his courtroom in Ka'ahumanu Hale, Honolulu, Hawaii.

Deputies Attorney General Dorothy Sellers and Hugh R. Jones appeared for Margery S. Bronster,

RBG/229126.04

EXHIBIT "F"

Attorney General, State of Hawaii, parens patriae to the Trust Estate. Robert Bruce Graham, Jr.,

appeared for Petitioners, the Trustees Under 'the Will and of the Estate of Bernice Pauahi Bishop,

Deceased (the "Petitioners" or the "Trustees"). Also appearing was the Master, Colbert M.

Matsumoto. Also present were David 1. Gierlach for Trustee Marion Mae Lokelani Lindsey,

Crystal K. Rose for Trustee Oswald Kofoad Stender, Ronald R. Sakamoto for Trustee Gerard

Aulama Jervis, Kenneth M. Nakasone for Trustee Richard Sung Hong Wong, and Renee M. L.

Yuen for Trustee Henry Haalilio Peters.

The Court has read and considered 1) the Trustees' Petition For Approval Of A Plan For

Determining Trustee Compensation Pursuant To Stipulation No. 15 And For Creation Of A

Compensation Committee In Accordance With The Plan and exhibits thereto filed herein on March

29, 1999 (the "Petition"); 2) the Objections Of Attorney General To Petition For Approval Of A

Plan For Determining Trustee Compensation Pursuant To Stipulation No. 15 and exhibits thereto

filed herein on April 27, 1999; 3) the Master's Report Regarding Trustees' Petition For Aporoval Of

A Plan For Detennining Trustee Compensation Pursuant To Stipulation No. 15 And For Creation

Of A Compensation Committee In Accordance With The Plan Filed On March 29, 1999 and

exhibits thereto filed herein on April 27, 1999 (the "Master's Report"); and 4) the records and files

herein. All parties had an opportunity to be heard.

The Court accepts and approves the Master's Report.

NOW THEREFORE, good cause appearing and the Court being fully advised in the

premises, IT IS HEREBY ORDERED, ADJUDGED AND DECREED as follows:

A. That the Trustees' Petition filed herein on March 29, 1999 be and is hereby

GRANTED, subject to the following terms and conditions:

RBG/236144 2

1. First, the Trustees' proposed plan shall be modified in accordance with the

comments ofthe Master presented at pages 5 and 6 of the Master's Report; and

2. Second, by May 5, 1999, the Trustees shall provide complete, detailed

answers to the Master' letter dated April 21, 1999, and produce all requested documents.

Since Petitioners have apparently provided some information and documents to the Master

on April 29, 1999; they are directed to review their production and., ifnecessary, supplement

their answers and production to comply with the Court's order.

3. Third, while the proposed plan allows the Court-appointed committee up to

six months to submit its determination of a reasonable compensation, the deadline for the

initial committee to submit the determination shall be July 30, 1999, unless otherwise

extended by the Court.

B. That attached hereto as Exhibit"A" and incorporated herein by this reference is the

approved text of the Plan For Determining Trustee Compensation, which text includes the

modifications made in accordance with the Master's comments (the "Plan").

C. That the following three (3) persons are appointed to serve as the initial members of

the Committee created pursuant to the Plan for the purpose of determining the compensation of the

trustees ofthe Kamehameha Schools Bernice Pauahi Bishop Estate:

~ Co'b~t: M~~t1>'

~ Ml..,~. t~~~_

14_ M,<J,4\e.,( S"~ ~,~~~.-

RBG/236144 3

D. That the Court finds the foregoing persons are knowledgeable and informed

persons each of whom possesses the integrity, probity, competence and disinterested status



E. That the Committee shall conduct itself according to the Plan (Exhibit "A") and

shall render its decision in accordance with the Plan on or before close ofbusiness, Friday, July

30, 1999 unless the time is extended by the Court.

DATED: Honolulu, Hawaii, ~-,,-t..;::O::..- , 1999.

APPROVED AS TO FORM:

DOROTHY SELLERSHUGH R. JONES

DepUtieZral

COLBERT M. MATSUMOTO

Master~

ROBERTBRUCEGRAHAM,~.

Attorney for Trustees under the Will and ofThe Estate ofBernice Pauahi Bishop,Deceased

KEV~N S.C. CHANG

EQillTY NO. 2048 - Estate of Bernice Pauahi Bishop, DeceasedOrder Granting Petition For Approval Of A Plan For Determining Trustee Compensation

Pursuant To Stipulation No. 15 And For Creation Of A Compensation Committee InAccordance With The Plan; Exhibit "A"

RBG/236144 4

PLAN FOR DETERMINING TRUSTEE COMPENSATION

This is the Plan for determining the compensation of the trustees of the Kamehameha

Schools Bernice Pauahi Bishop approved by the Circuit Court of the First Circuit, State ofHawai'i

(the "Court").

PROCEDURAL BACKGROUND

Stipulation No. 15 of those certain Stipulations Concerning Master's Recommendations

C109th, 11Oth

, and 111th Annual Accounts) and Order entered herein on October 2, 1998, provides

that Richard Sung Hong Wong, Oswald Kofoad Stender, Marion Mae Lokelani Lindsey, Gerard

Aulama Jervis, and Henry Haalilio Peters, Trustees Under the Will and of the Estate of Bernice

Pauahi Bishop, Deceased, (the "Trustees") shall submit to this Court for its review and approval a

plan for determining trustee compensation that is in compliance with and satisfies applicable

requirements' of state and federal law, including without exception, federal Intermediate

Sanctions legislation and Treasury regulations incident thereto, and H.R.S. Section 607-20, as

amended by Act 310 of the 1998 Hawai'i State Legislature.

Stipulation No. l~ further provides that the plan shall include prOVISIOn for the

preparation of an independent professional study concerning reasonable trustee compensation

which utilizes relevant and appropriate criteria, and that the study shall be commissioned under

the auspices of the Court, by the Court's master or by such other person or entity as the Court

shall order, consistent with requirements of applicable law and regulations.

Stipulation No. 15 also provides that the cost of any independent professional study shall

be borne as an expense of the Trust Estate and that, should the Trustees or others wish to contest,

rebut or supplement the study by commissioning another study, they shall do so at their own

RBG/229126,04

expense unless the Court first shall have approved the additional study as an expense of the Trust

Estate.

THE TRUSTEES' RESPONSE

The Trustees filed herein on November 13, 1998, their Trustees' Response Concerning A

Plan For Detennining Trustee Compensation (the "Trustees' Response"). In the Trustees'

Response, the Trustees set forth the following federal and state law backgrounds against which

they proposed their plan:

Federal Background

As a tax-exempt educational organization, the Kamehameha Schools Bernice Pauahi

Bishop Estate ("KSBE") may have its exempt status revoked if its net earnings "inure" in whole or

in part to the benefit of individuals. It is well established, however, that the payment of reasonable

compensation to individuals does not result in "private inurement" or private benefit. Under Section

4958 of the Internal Revenue Code, penalties are imposed, however, on "excess benefit

transactions." A transaction is an excess benefit transaction if an economic benefit is provided by

an exempt organization directly or indirectly to or for the use of any "disqualified person," such as a

member of the entity's governing board, if the value of the economic benefit provided the

disqualified person exceeds the value of the consideration received by the entity. Permitted

consideration includes the performance ofpersonal services.

In other words, wbile tax exempt entities are permitted to pay reasonable compensation for

services rendered to them by members of their governing boards and other senior staff members,

these persons are, generally speaking, "disqualified persons" for purposes of the Internal Revenue

Code and Regulations, and their compensation is subject to federal scrutiny for reasonableness.

RBG/236144 2

(~

Proposed Internal Revenue Service (''IRS'') regulations implementing Section 4958 were

filed on July 30, 1998 in the Federal RelZister. They state that compensation of disqualified persons

may not exceed "what is reasonable under all the circumstances." The proposed regulations also

provide that "[cjompensation for the performance ofservices is reasonable ifit is only such amount

as would ordinarily be paid for like services under like circumstances." Proposed Regulation

§ 53.4958-4(b)(3).

This standard is similar to the general rule of deductibility of compensation under existing

IRS regulations. To be deductible as a business expense, compensation must be "reasonable." The

applicable regulation, Reg. §1.162-7(b)(3), states in part as follows:

... the allowance [ofa deduction] for the compensation paid may not exceed what isreasonable under all the circumstances. It is, in general, just to assume thatreasonable and true compensation is only such amount as would ordinarily be paidfor like services by like enterprises under like circumstances.

Congressional reports describing proposed Section 4958 contain several statements that the

standards developed under existing Reg. Section 162 are applicable in determining whether

compensation is reasonable. The same reports state clearly that an individual is not required to

accept reduced compensation merely because he or she renders services to a tax-exempt

organization instead of a taxable entity.

The Congressional reports also state that the tax-writing committees expected the IRS to

promulgate regulations under which a rebuttable presumption could be invoked if a tax-exempt

organization followed a prescribed procedure for setting the compensation of its disqualified

persons. Thus, the proposed Section 4958 regulations include such a rebuttable presumption

procedure.

RBG/236144 3

Under the proposed regulations, payments under a compensation arrangement between a

tax-exempt educational organization and disqualified persons will be presumed to be reasonable if

the following procedures are satisfied:

1. The compensation arrangement is approved by the organization's governing body or

a committee of the governing body composed entirely of individuals who do not

have a conflict of interestwith respect to the arrangement;

2. The governing body, or a committee thereof, obtains and relies upon appropriate

data as to comparability before making its determination; and

3. The governing body or committee adequately documents the basis for its

determination concurrentlywith making that determination.

For a member of a committee or a governing body to be considered not to have a conflict of

interest, the proposed regulations state that a member must not:

1. be related to (i.e., be a member of the family of) any disqualified person whose

compensation is being determined;

2. be in an employment relationship subject to the direction or control of any such


3. be receiving compensation or other payments subject to the approval of such a


4. have any material financial interest that would be affected by the compensation

arrangement; and

5. approve any arrangement with respect to a disqualified person who has approved or

will approve a transaction providing economic benefits to the member.

RBG/236144 4

i'r.

In describing what data is appropriate as to comparability, the proposed regulations state that

relevant information and appropriate data as to comparability would include, but not be limited to:

1. compensation levels paid by similarly situated organizations, both taxable and tax-

exempt for functionally comparable positions;

2. the availability of similar services in the geographic area of the applicable tax-

exempt organization;

3. independent compensation surveys compiled by independent firms; and

4. actual written offers from similar institutions competing for the services of the

disqualified person.

State Law Background

Act 310 of the 1998 Hawai'i State Legislature amended the long-established method of

determining the compensation of charitable trustees. Prior to January 1, 1999, trustee

compensation was based upon a schedule of percentages applied to the annual income of the

Trust Estate and certain other amounts. Effective January 1, 1999, the existing schedule is

abolished as to the trustees of charitable trusts, although it remains in effect for trustees of other

trusts.

As amended, § 607-20 of the Hawai'i Revised Statutes provides in full as follows:

(a) Notwithstanding any other provisions, in the case of a charitable trust, thecompensation of the trustees shall be limited to an amount that is reasonableunder the circumstances.

(b) This section shall apply to existing and new charitable trusts established afterthe effective date of this Act; provided that any provisions in existing trustagreements regarding trustee compensation" shall supersede this section.

The preamble to Act 310 reads as follows:

171e legislature finds that there is a long-standing tradition, wherebytrustees of most charitable trusts serve without compen~ation. While the

RBG/236144 5

legislature considers such voluntary service to be admirable, it believes thattrustees of charitable. trusts should not be prohibited by statute from receivingcompensation. However, trustees who receive compensation from a charitabletrust have a fiduciary duty to make sure such compensation is not in excess ofwhat is reasonable under the circumstances. In addition to this common lawduty, such trustees are subject to penalty underfederal intermediate sanctions lawif they allow their compensation to exceed what is reasonable under thecircumstances. Knowledgeable and well-intentioned people can differ on what isreasonable compensation in any particular situation, but such controversies arebest resolved by a judge who can take into account all relevant circumstances aspresented by parties on both sides ofthe issue. Thus, the purpose ofthis Act is tocodify the duty of trustees not to accept compensation above what is reasonableunder the circumstances.

TIIEPLAN

1. The Court shall periodically appoint a committee (hereinafter, the "Committee") for

the purpose of determining the compensation of the trustees of the Kamehameha Schools Bernice

Pauahi Bishop Estate (hereinafter, the "KSBE Trustees").

2. The Committee shall be comprised of three (3) to five (5) persons as determined by

the Court from time to time.

3. The Court shall constitute the Committee upon the petition of the KSBE Trustees,

the Attorney General asparens patriae to the Trust Estate,or the Court's then-incumbent master.

4. Initially, the Committee shall be constituted by the Court within thirty (30) days of

the entry of an order approving this Stipulation. Thereafter, the Committee shall be constituted not

less often than once every three (3) years and, failing petition by the Attorney General or the

incumbent master, it shall be the responsibility of the KSBE Trustees to cause the filing ofa petition

at least every third year.

5. The Committee shall consist of knowledgeable and informed persons, each of

whom the Court finds to possess the integrity, probity, competence and disinterested status

RBOf236144 6



6. The Court shall designate the members ofthe Committee.

7. The sole issue to be determined by the Committee shall be "What is a reasonable

annual amount of compensation to be paid to each of the trustees of the Kamehameha Schools

Bernice Pauahi Bishop Estate? "

8. The Committee shall commission an independent compensation survey from a

national, independent, professional consulting firm active in the field of executive and trustee

compensation. The Committee shall be authorized to commission additional independent

compensationsurveys if, by simple majority vote ofits members, it shall determine that one or more

additional surveys are reasonably necessary or appropriate.

9. The firm or firms commissioned by the Committee to make a compensation survey

shall (i) study compensation levels paid by similarly situated organizations, both taxable and tax

exempt, for functionally comparable positions; (ii) review and report the availability of similar

services in Hawai'i; (iii) interview the KSBE Trustees and their staff and the Attorney General as

parens patriae to the Trust Estate; (iv) compile independent compensation surveys for review by

the Committee; and (v) render its report to the Committee establishing a range of trustee

compensation that is comparable, reasonable and consistentwith applicable law and regulations. In

addition to the factors enumerated above, the Committee shall have authority to require the

considerationof other relevant factors by the firm or firms. The cost of any compensation surveys

and reports commissioned by the Committee shall be borne out of the Trust Estate.

10: The KSBE Trustees and the Attorney General as parens patriae to the Trust Estate

shall be entitled to submit such evidence, testimony and independent professional studies for the

RBG/236144 7

Committee's review and consideration as may be pertinent and material to the Committee's

deliberations.

11. The KSBE Trustees' reasonable costs and expenses may be paid out of the Trust

Estate only upon the express approval ofthe Court.

12. The Attorney General's reasonable costs and expenses may be reimbursed out of the

Trust Estate only in accordance with the provisions ofH.R.S. Section 554-8.

13. The Committee's deliberations shall not be public proceedings and the Committee

shall not be obliged to receive any public testimony unless the Committee by simple majority vote

shall determine to do so. Without limiting the generality of the foregoing, the Committee shall not

be obliged to receive any public testimony unless the same is responsible, probative, pertinent and

material.

14. The KSBE Trustees or their representative, the Attorney General or a deputy, and

the incumbent master shall be entitled to audit and observe but not participate in the proceedings of

the Committee. Any testimony received by the Committee shall be in writing and shall be subject

to inspection and copying by the KSBE Trustees, the Attorney General and incumbent master.

15. The Committee shall render its decision within six (6) months unless the time is

extended by the Court for good cause.

16. No Committee shall be compensated, except for reimbursement of its reasonable out

ofpocket expenses, until its decision has been filed or as otherwise ordered by the Court.

17. If the Committee fails or is unable to render a timely decision, the Court, upon

petition of the KS:BE Trustees, the Attorney General, or the incumbent master, shall constitute a

new Committee.

RBG/236144 8

18. Ifa vacancy arises on a Committee, the Court, upon petition of the KSBE Trustees,

the Attorney General, or the incumbent master, shall fill the vacancy.

19. The Committee shall file with the Court and deliver to the KSBE Trustees, the

Attorney General and the incumbent master all professional compensation studies commissioned or

received by it, together with statements of the credentials of the firms preparing the studies.

20. The studies shall be accompanied by a report of the Committee's determination of

reasonable trustee compensation. The Committee's determination shall be consistent with the

studies and with any other appropriate comparability data received by the Committee. The

Committee's determination of reasonable trustee compensation may be expressed as a range of

appropriate annual compensationor a limit upon annual compensation. It may provide for differing

levels ofcompensation for individual trustees based upon considerations appropriate under state and

federal law and regulations. The Committee's report of its determination shall include a clear,

concise and concurrent exposition of the basis for its determination and shall be accompanied by

true and correct copies of any and all documents specifically referred to therein.

21. The Committeemay but shall not be required to file with the Court any other written

evidence or submissions received, gathered or considered by it. Any such additional filings shall be

delivered to the KSBE Trustees, the Attorney General and the incumbent master.

22. The Committee's determination shall be determined by a simple majority of the

Committee. Dissenting Committee members shall be entitled to file with the Court a statement

oftheir dissent and the reasons therefor.

23. Upon receipt of the report of the Committee, the Court shall schedule a hearing at

which the KSBE Trustees, the Attorney General and the incumbent master shall be afforded an

opportunity to be heard.

RBG/236144 9

24. The Committee's determination shall be entitled to a presumption of

reasonableness. The Court may approve, disapprove or modify the determination of the

Committee. If approved by the Court, the determination of the Committee shall be final,

conclusive and binding, subject only to appeal as provided in the rules of court. If the Court

finds the Committee's determination to be clearly erroneous or the Committee to have abused its

discretion, the Court may disapprove the determination, which then shall be null and void, and

the Court shall either recommit the matter to the Committee or promptly constitute a new

Committee.'

25.· If the determination of the Committee is modified by the Court, any such

modification shall be made in manner consistent with applicable provisions of state and federal

law and regulations with the object of assuring that the compensation paid the KSBE Trustees is

reasonable within the meaning of both state and federal law and regulations.

26. The Court shall disapprove the Committee's determination in the following

circumstances: (a) where the decision was procured by corruption, fraud or undue means; or

(b) where there was evident partiality or corruption in the Committee or any of its members; or

(c) where the Committee members or any of them were guilty of misconduct, in refusing or

neglecting to obtain the required independent studies, or in refusing to hear evidence pertinent and

material to the issue of compensation proffered by the KSBE Trustees or the Attorney General as

parens patriae to the Trust Estate, or of any other misbehavior, by which the interests of KSBE or

its trustees have been prejudiced; or (d) where the Committee exceeded its powers or so

imperfectly executed them that a determination consistent with applicable law, court orders and IRS

regulations, was not made.

RBG/236144 10

27. The foregoing shall not be deemed or construed to limit the Court's authority to

modify or disapprove the Committee's determination for other cause.

28. The Committee shall be reasonably compensated out of the Trust Estate for its

services and its compensation shall be fixed by the Court.

29. The Committee, but not individual members, shall be authorized to retain competent

tax counsel to advise it concerning its procedures and to assist it in its mandated activities. Any

such retention shall be subject to the prior approval of the Court. Counsel's reasonable and

approved fees shall be paid out ofthe Trust Estate upon approval by the Court.

30. Committee members shall not by reason of their service be deemed to be state

officers nor officers of the Court and their action shall not constitute state action for any purpose.

31. The Committee's records and files shall be retained for the period under review and

for seven (7) years thereafter at the offices of the Trust Estate. The Committee's records and files,

except such as shall have been filed with the Court by the Committee, shall remain under seal of the

Court, available for inspection only by the Court, future masters, the Attorney General as parens

patriae to the Trust Estate, future Committees, and the Internal Revenue Service of the United

States.

RBG/236144 11

/1


Attorneys for The Trustees Under the Willand of the Estate ofBemice Pauahi Bishop,Deceased

ZOD711!~Y -4 PH 4: 10

K.OPEDAlCLERK


STATE OF HAWAII


Of

BERNICE P. BISHOP,

Deceased.

) EQUITY NO. 2048))) PETITION TO APPOINT A) COMPENSATION COMMITTEE) AND TO DETERMINE THE) COMPENSATION OF THE) TRUSTEES OF THE) KAMEHAMEHA SCHOOLS;

EXHIB IT "1"

PETITION TO APPOINT A COMPENSATION COMMITTEE AND TO DETERMINETHE COMPENSAnON OF THE TRUSTEES OF THE KAMEHAMEHA SCHOOLS

Come now JAMES DOUGLAS KEAUHOU ING (Chairman of the Board of Trustees),

CORBETT AARON KAMOHAIKIOKALANI KALAMA, ROBERT KALANI UICHI

KIHUNE, DIANE JOYCE PLOTTS and CHARLES NAINOA THOMPSON, the duly

appointed, qualified and acting Trustees (the "Trustees") Under the Will and of the Estate of

Bernice Pauahi Bishop, Deceased, acting in their fiduciary and not in their individual capacities,

Petitioners herein, and respectfully show as follows:

EXHIBIT "Gil

A. PROBATE RULE 126(C) STATEMENTS

1. Petitioners are the duly appointed, qualified and acting Trustees under the Will

and of the Estate of Bernice Pauahi Bishop, Deceased (the "Will"), who died at Honolulu,

Hawaii, on October 16, 1884, and whose Will and two codicils thereto were duly admitted to

Probate in the Supreme Court of the Hawaiian Islands on December 2, 1884.

2. Petitioners' post office address is Kamehameha Schools, P.O. Box 3466,

Honolulu, Hawaii 96801; Petitioners' business address is Kawaiaha'0 Plaza, Suite 200, 567

South King Street, Honolulu, Hawai'i 96813.

3. Petitioners JAMES DOUGLAS KEAUHOU ING, CORBETT AARON

KAMOHAIKIOKALANI KALAMA, DIANE JOYCE PLOTTS and CHARLES NAINOA

THOMPSON are residents of the City and County of Honolulu, State of Hawai'i. Petitioner

ROBERT KALANI UIeHI KlHUNE is a resident of the Island and County of Hawai'i, State of

Hawai'i.

4. The Trust Estate is a perpetual, charitable educational trust for the purpose of

education of native Hawaiians and has no ascertainable beneficiaries. The Attorney General of

the State of Hawai'i represents all beneficiaries as parens patriae, and will be given notice of

this Petition. In addition, the incumbent master, David L. Fairbanks, will also be given notice of

this Petition.

5. This court has jurisdiction of this Petition pursuant to Hawaii Revised Statutes

("H.R.S.") Sections 560:7-201 and 603-21.7(a)(3). Venue is proper pursuant to H.R.S. §§ 560:7

202 and 603-36(3). This Petition is filed pursuant to Hawaii Probate Rules 3 and 126 (a) and (c).

2

B. THIS PETITION

1. The purpose of this Petition is to have this court appoint a compensation

committee (the "Committee") to determine the reasonable compensation of the Trustees of the

Kamehameha Schools and then, after a hearing, this court shall set the Trustees' reasonable

annual compensation for a three-year period.

2. Pursuant to that Order Granting Petition for Approval ofa Plan for Determining

Trustee Compensation Pursuant to Stipulation No. 15 and for Creation of a Compensation

Committee in Accordance with the Plan filed in this court on May 10, 1999 (the "May 10, 1999

Order"), the court approved that "Plan for Determining Trustee Compensation" (the "Plan"),

which was attached as Exhibit A to the May 10, 1999 Order. (A copy of the May 10, 1999

Order is attached to this Petition as Exhibit 1.)

3. The Plan provides that after the Committee is initially constituted, that

"Thereafter, the Committee shall be constituted not less often than once every three (3) years

and, failing the petition by the Attorney General or the incumbent master, it shall be the

responsibility of the KSBE Trustees to cause the filing of a petition at least every third years."

4. Under the Plan, the court is to appoint and convene an independent and

unconflicted Committee charged with the task of determining the sole issue of: "What is a

reasonable annual amount of compensation to be paid to each of the trustees of the Kamehameha

Schools"?

5. It has been three years since this court approved the reasonable annual amount of

compensation. The court approved the reasonable annual amount of compensation as set forth

that Order Granting Petition To Appoint A Compensation Committee And To Determine The

Compensation Of The Trustees Of The Kamehameha Schools [Filed May 24, 2002j filed on

3

March 22, 2004. The annual compensation was made effective February 1, 2004, and the rate of

compensation approved is summarized as follows:

A. For a single Trustee who is designated as the Chairperson of the Board ofTrustees:

1. Annual Retainer of $30,000, payable in twelve equal monthlyinstallments; and2. A Meeting Fee of $2,000 per meeting, payable for each dulynoticed and recorded meeting of the Board of Trustees or any committeethereof provided for under the Governance Policy. The Meeting Fee shallbe payable for up to a maximum of90 meetings during a 12-month period.

B. For each Trustee who is not the Chairperson of the Board of Trustees:1. Annual Compensation of $30,000 payable in twelve equal monthlyinstallments; and2. A Meeting Fee of $1,500 per meeting, payable for each dulynoticed and recorded meeting of the Board of Trustees or any committeethereof provided for under the Governance Policy. The Meeting Fee shallbe payable for up to a maximum of 90 meetings during a 12-month period.

6. The Trustees subsequently voluntarily relinquished the right to receive

compensation for meetings in excess of45 meetings per year, which continues in effect.

7. The Trustees have been receiving reasonable annual compensation since the

March 22, 200,t Order.

8. The Trustees request that this court appoint an appropriate Committee of three to

five persons to determine the Trustees' reasonable annual compensation in accordance with the

Plan; direct the Committee to act in accordance with the Plan and render its decision pursuant to

a report filed with this court within six months of the date of the appointment of the Committee.

The Trustees further request that upon the filing of the Committee's report, this court set a date

for a hearing on the Committee's determination, at which hearing the Trustees, the Attorney

General, as parens patriae, and the incumbent master be given an opportunity to be heard, and

4

that upon hearing, this court set the Trustees' reasonable annual compensation for a three-year

period.

WHEREFORE, Petitioners pray as follows:

A. That this court appoint a Committee of three to five persons to determine the

reasonable annual compensation of the Trustees of the Kamehameha Schools in accordance with

the Plan approved by this court's May 10, 1999 Order;

B. That this court direct the Committee to conduct itself in accordance with the Plan

and render its decision pursuant to a report filed with this court within six months of the date of

the appointment of the Committee;

C. That upon the filing of the Committee's report, that this court make and enter its

order fixing a date and time for hearing on the Committee's determination of the Trustees'

reasonable annual compensation;

D. That this court then set the Trustees' reasonable annual compensation for a three-

year period; and

E. That this court order such other and further relief as to this court shall deem just

~ /

and equitable in the premises.

5

Each of the undersigned person understands that this Petition is deemed to include an oath,

affirmation or statement to the effect that its representations are true as far as each of the

undersigned persons knows or is informed, and that penalties for perjury may follow

deliberate falsification.

MayDATED: Honolulu) Hawai'i, this 4th day of__-.:::...--=- ->, 2007.

--

CORBETT AARON KAMOHAIKIOKALANI KALAMA»>:

~~mKllfUNE 7

$/'7DIANEJO~

The Trustees Under the Will and of theEstate of Bernice Pauahi Bishop) Deceased

H wai'i Probate Rule 5(b) Certification:

COLL 1. WONGERIC H. SONNENBERGAttorneys for Petitioners)The Trustees Under the Will and of the

Estate of Bernice Pauahi Bishop) Deceased

6

GOVERNANCE POLICY

This governance policy has been developed to provide the framework from whichthe Board of Trustees will be guided in the execution of their fiduciary duties toadminister and oversee the estate established by the Will of Bernice Pauahi Bishop, andto fulfill the educational purposes of the Kamehameha Schools under the Will as intendedby Ke Ali'i Pauahi. Kamehameha Schools' mission is to fulfill Pauahi's desire to createeducational opportunities in perpetuity to improve the capability and well-being of peopleofHawaiian ancestry.

The Trustees have the highest of fiduciary duties recognized by law. Twofiduciary duties stand above all others and serve as the pillars upon which the actions ofthe Trustees and those to whom duties are delegated must be guided: the duty of loyaltyand the duty to act in a prudent manner. The Trustees and those who have been delegatedauthority must ensure that their actions, decisions, and conduct are for the exclusivebenefit of the persons intended to benefit from the purposes expressed in the Will.Secondly, all fiduciaries must discharge their responsibilities in a prudent mannerexercising reasonable care, skill (or such special skills or expertise that they possess), andcaution.

The Hawaii Probate Court has mandated the implementation of a CEO-basedmanagement system. The Trustees must ensure that the delegation of authority to theChief Executive Officer (CEO) is consistent with applicable standards under trust law. Inthis regard, the Trustees must strike the appropriate balance between their fiduciary dutynot to delegate the entire administration of Kamehameha Schools ("KS") and thenecessity to delegate the day-to-day administration to the CEO. Hawaii's UniformPrudent Investor Act sets forth the goveming standard and provides that the Trustees maydelegate investment and management functions "that a prudent trustee of comparableskills could properly delegate under the circumstances." In such circumstances, theTrustees may delegate, and remain without liability for such delegation, if the Trustees:

Exercise reasonable care, skill and caution in:1. selecting an agent;2. establishing the scope and terms of the delegation,

consistent with the purposes and terms of the trust;and

3. periodically reviewing the agent's actions in order tomonitor the agent's performance and compliancewith the scope and tenus of the delegation.

The proper administration of KS requires an integrated management system withdelegated authority and responsibility to ensure the administration ofKS fulfills Ke Ali'iPauahi's intent expressed in her Will. This is especially important given KS' size andcomplexity. The management system will require further delegation by the CEO to otherindividuals with appropriate subject matter expertise and knowledge. In addition, thesystem requires an independent audit department to assist the Trustees with the necessary

EXHIBIT "H"

checks and balances and to monitor the performance of persons to whom authority hasbeen delegated. Furthermore, the Trustees shall establish an Audit Committee that will beresponsible for oversight of the audit process including both the internal and externalaudit functions.

It is understood that the governance policy contained herein will be modified fromtime to time for reasons of clarifying the policy or because of organizational or processchanges. What cannot be changed or modified, however, are the highest standards ofconduct and moral and ethical values by which Trustees and those to whom authority isdelegated must be bound.

Policy

In order to administer Kamehameha Schools (KS) in an effective and efficientmanner to achieve its educational mission, KS shall be governed in conformancewith a CEO-based management system that includes the Trustees; a CEO; VicePresidents of each of the following Groups: Education, Endowment, Finance andAdministration, Legal and Community Relations and Communications (or suchother or fewer Groups as determined by the CEO); an Audit Committee; and aninternal audit department. In general, the Trustees and CEO shall utilize a systemof written policies that sets f011h the Trustees' strategic policies and any specificdelegation of authority policies, and the CEO's day-to-day operational policiesand procedures, including any further delegation of authority. The CEO and VicePresidents shall implement the policies and otherwise administer the day-to-dayoperations of KS. The 'internal audit department shall monitor the activities of KSand the functioning ofthe Trustees, CEO, Vice Presidents and staff, as necessary,to ensure KS is being administered properly and prudently and shall report to theAudit Committee.

Role of Trustees

The Trustees' role is to provide the strategic direction and focus necessary to fulfilland sustain the vision, mission arid values of Kamehameha Schools embodied in theWill of Bernice Pauahi Bishop and the Strategic Plan. In order to accomplish thatrole, the Trustees shall concentrate on strategic policy-making and monitoring theperformance of delegated duties to the CEO, including the CEO's implementation ofthe Strategic Plan. The Trustees shall administer and oversee the educational missionofKS consistent with the terms of the Will of Bernice Pauahi Bishop and the visionofKe Ali'i Pauahi, orders of the Hawaii Probate Court, KS' Strategic Plan andresulting implementation plans, KS' tax-exempt status, and applicable fiduciarystandards and governing laws. The Trustees shall delegate routine managementduties. In particular, the Trustees shall:

1. Ensure that the KS mission is appropriate, relevant and vital to the intendedbeneficiaries under the Will and the vision ofKe Ali'i Pauahi, and monitor thesuccess of KS in fulfilling its mission.

2. Oversee the development of and approve all strategic policies affecting the administrationofKS, especially its educational and financial objectives.

3. Ensure that KS and its assets are managed prudently and exclusively for KS' charitableeducational purposes consistent with the terms of the Will, orders of the Hawaii ProbateCourt, Strategic Plan and resulting implementation plans, KS' tax-exempt status andapplicable laws.

4. Monitor and review financial reports and projections and be accountable for KS' financialwell-being, including its endowment, as it relates to carrying out financial responsibilities.

5. Review and approve the annual budget and ensure that effective fiscal controls areestablished.

6. Hire, support, and provide guidance to the CEO; set goals and objectives for the CEO;evaluate and monitor the CEO's performance; and, where appropriate, remove and replacethe CEO.

7. Consult with the CEO to ensure that management development, compensation andsuccession plans are in place for executive management positions.

8. Approve plans for any major organizational or program change.

Role of CEO/ Delegation of Authority

The CEO shall be responsible for the leadership, administration, management and effectivenessofKS' operations, including but not limited to planning, coordinating, and directing theimplementation ofKS' Strategic Plan and the policies, goals, and objectives set by the Trustees,consistent with Princess Pauahi' s Will and governing law. The CEO shall also perform suchother duties and responsibilities as may from time to time be delegated to the CEO by theTrustees. Specifically:

1. The CEO shall have all necessary and reasonable authority to manage and administer the dayto-day operations of KS except for such authority specifically reserved by the Trustees.

2. The CEO is authorized to establish relevant operational policies and procedures.

3. The CEO is authorized to make and implement decisions based upon reasonableinterpretation of the policies, goals, and objectives created by the Trustees,

4. With respect to personnel matters concerning Vice Presidents, the CEO shall have allauthority, but shall first consult with the Trustees on the compensation, hiring or termination ofVice Presidents. The CEO shall have the authority to change the leadership structure and thenumber of Groups at KS, subject to Trustee approval ofmajor organizational changes.

5. The CEO shall delegate to the appropriate Vice President(s) such authority as the CEOreasonably detennines to be prudent.

6. The CEO shall meet with the Trustees on a regular basis to report and review significantmatters concerning the administration ofKS. The CEO shall periodically provide the Trusteeswith reports regarding the activities of management, together with such other information as is

necessary to enable the Trustees to monitor the administration ofKS, and to ensure that KS isbeing managed in accordance with the policies, objectives, and directives established by theTrustees.

Role of the Vice Presidents

The general role and responsibilities of the Vice Presidents at KS are specified below. Theirmore specific duties and responsibilities are set forth in position descriptions as establishedand otherwise assigned by the CEO.

Vice President for Education

The Vice President for Education is responsible:

1. For the leadership, management, administration, coordination and effectiveness of KS'Education System.

2. To develop, change and/or recommend discontinuance of educational programs in supportof the goals of the KS' Strategic Plan and educational standards for campus based schoolsand other educational programs.

3. To develop and implement measures of effectiveness and to monitor and evaluate theseeducational programs to determine if the Educational System is maximizing its resources torealize desired outcomes and strategic objectives consistent with the mission, the goals andvalues of the Strategic Plan.

Vice President for Endowment

The Vice President for Endowment is responsible:

1. To invest and manage KS' consolidated endowment consistent with standards applicable toinstitutions with comparable endowments, as may be prudent, and in accordance withpolicies approved by the Trustees.

2. To produce at least the targeted net total investment return specified by KS' investmentpolicy.

3. To provide adequate cash distributions to support KS' educational spending as specified byKS' spending policy in perpetuity.

4. To the extent authorized by and consistent with applicable policy, to manage and makereconunendations concerning KS' lands and natural resources.

Vice President for Finance and Administration

The Vice President for Finance and Administration is responsible:

1. To establish prudent financial practices to govern the financial affairs ofKS, includingstrong internal controls and accurate financial forecasts to allow KS to plan spending foreducational purposes.

2. To direct and coordinate a systems-wide range of staff and service functions that provideadministrative support, service and assistance to KS, including all Education and Endowmentsystems.

Vice President for Legal

The Vice President for Legal is responsible:

1. For the overall management and operations of the Legal Group.

2. To provide legal advice and assistance to KS' Trustees, CEO, Vice Presidents and staffrelating to their acts and role at KS.

3. To coordinate and monitor the legal affairs ofKS.

Vice President for Community Relations and Communications

The Vice President for Community Relations and Communications is responsible:

1. To build and maintain strong relationships between KS and the community, especially theHawaiian community.

2. To solicit, receive input and improve the community's understanding and support ofKS andits educational programs, strategies and plans.

3. To establish plans and comprehensive strategies to communicate effectively KS' mission,Strategic Plan and implementation plan, philosophy of education and other matters.

The titles and numbers of the Vice President positions may vary, but their roles andresponsibilities shall be consistent with standards of delegation of authority and responsibilityand as shall be prudent with respect to an institution requiring a diversity of demonstratedprofessional and managerial expertise.

Role of Audit Committee

The Audit Committee will be responsible for oversight of the audit process including boththe internal and external audit functions. One of the primary responsibilities of the AuditCommittee will be to set the "tone" for quality operational, financial and investmentreporting, sound business risk controls and ethical behavior throughout the organization. Tohelp carry out this function, the Audit Committee shall select a Director of Internal Audit,who shall prepare for the review and approval of the Audit Committee an annual audit plan.The Audit Committee shall set goals and objectives for the Director, annually review theperformance of the Director, and, for just cause, remove and replace the Director. The AuditCommittee will be comprised ofthe five incumbent Trustees. The incumbent Master(s)appointed to review KS' annual accounts and a representative from the State of HawaiiAttorney General's office, as parens patriae, will be allowed to sit in on meetings of theAudit Conunittee as visitors, but not as a members.

Role of Internal Audit

The Internal Audit Department is an essential function in a CEO-based management systemin order to provide a check and balance against possible abuses arising in the administrationofKS and to ensure that KS is in fact being administered properly. An independent internalaudit department shall provide an independent appraisal and examination of all controlfunctions within KS, including functions of the Trustees, monitor internally KS' processes toensure the organization's risks are adequately managed, monitor compliance with legal andregulatory restrictions and KS policies, and help to ensure effective utilization of KSresources. In addition, the independent internal audit function shall help to ensure thefollowing objectives:

oThe Will and KS' educational objectives are fulfilled in perpetuity.oKS' tax-exempt status is maintained.oThe assets of KS, including Affiliates, are properly safeguarded from financial loss andused primarily for educational purposes.e Policies and procedures established by the Trustees are being adhered to.o Compliance with applicable state and federal laws and regulations, including the termsof applicable closing agreements between KS and the Intemal Revenue Service.oCompliance with policies and procedures.

The Director of Intemal Audit shall report in writing the results of audit examinations andprojects directly to the Trustees or the Audit Committee established by the Trustees, and to theBoards of Affiliates with respect to audit examinations or projects related to affiliates orsubsidiary organizations.

References1. Hawaii Uniform Trustee's Powers Act (HRS 554A)2. Hawaii Uniform Prudent Investor Act (HRS 554C)3. Restatement of Trusts (Third): Prudent Investor Act (1992)4. IRS Closing Agreement dated February 23,20005. Stipulation Approving a CEO Based Management System and Governance Policy filedAugust 27, 19996. KS Strategic Plan and Implementation Plan (PLL).

Policy Implementation

Related KS Policies

1. 101[T] - Delegation of Authority

Tracking Information

1. Approval Date: August 18, 20042. Initial Effective Date: August 18, 19993. Post Date: January 21,20054. Supercedes: Revised and Restated Governance Policy dated November 22,20005. Next scheduled review: August 18,20056. Responsible Department: Office of the CEO7. Developed by: CEO8. Questions and comments should be directed to the Staff Policy Comments Page.

Kamehameha SchoolsStrategic Plan

2000-2015

KAMEHAMEHASCHOO~

EXHIBIT "I"

KAMEHAMEHA SCHOOLS STRATEGIC PLAN

Contents

4 Commitment Letter

9 Introduction

10 Stipulation

11 Planning Process

11 Phase I: Conducting Internal and External Scans and Defining Strategic Issues

13 Phase II: Study Issues, Formulate Strategies, and Draft a Plan

14 Phase III: Public Review and Comment and Completion of the Final Strategic Plan

15 Ke Ali'i Pauahi's Will

17 Findings of Fact and Conclusions of Law

18 Values Statement

19 Vision

19 Mission

20 Guiding Principles

21 Summary of Goals and Priorities

22 Goals

27 Implementation Framework

27 Governance Process

28 Spending and Investment Policies

28 Development of Operational Strategies

29 Organizational Transformation

30 Letter from KPMG Consulting, LLC

3


Commitment LetterThe individuals named below constitute the Education and Endowment Core PlanningTeams that were formed to help produce a Strategic Plan for Kamehameha Schools. Weare broadly representative of the organization and include teachers and administrators,asset managers and attorneys, neighbor islanders and O'ahu residents, alumni andstudents, parents of current beneficiaries and parents of those whose needs we have notaddressed, staff of Hawaiian organizations and members of the larger community.

The range of representation on the core planning teams is telling of the underlyingphilosophy that guided our work. The strategic planning process is more than merelyplotting a course. It is also about building relationships and integrating our individualefforts. We refer to this process as "wayfinding."

Consistent with this philosophy, we engaged a wide spectrum of the Kamehameha 'onana

and Hawaiian community in the development of this plan. The Values, Vision, Mission,Guiding Principles and Strategic Goals are informed and inspired by the input wereceived from:

• over 1,200 participants in 24 community meetings during Phase I;

• 386 individuals who submitted a completed survey of Hawaiian educational needs;

• 29 community leaders who agreed to be interviewed;

• 2,010 respondents to a Phase II telephone poll of the opinions of a representativesample of the Hawaiian community;

• 427 volunteers who served on our 16 work groups;

• 92 individuals who shared thoughts by letter, internet, phone or fax;

• over 1,000 attendees of 43 community meetings in Hawai'i and the continental UnitedStates during Phase III, and

• 944 respondents to a survey circulated to elicit comments on a draft of the plan.

4


We, the undersigned members of the Education and Endowment Core Planning Teamsjoin with the Chief Executives, the Chief Executive Officer and the Board of InterimTrustees to endorse this Strategic Plan for Kamehameha Schools. Furthermore, we acceptour huleana and commit ourselves to make every reasonable effort to support theimplementation of Kamehameha Schools' Strategic Plan for the benefit of Pauahi'schildren, the people of Hawaiian ancestry.

I mua Kamehameha!

Chief Executives

Chief Executive Officer

Ronald D. Libkuman

dJr7.~Wendell F. Brooks, Jr.Chief Investment Officer

Robert K. U. KihuneChair

~~Kamehameha schoolsPresident

Kamehameha SchoolsInterim Board of Trustees

.~-~-

~ £I~~~ --:v~tJ;1k-Constance H. Lau Francis A. Keala David P. Coon

(J&~c:;br~Colleen 1.WongChiefLegalOfficer~Ch~fRnandalOfficer

5


nav[~y?~- ~

Nathan Aipa IChiefAdministrativeOfficerStrategicPlan CoordinatorEducation CorePlanning TeamEndowmentCorePlanning TeamExecutive PlanningLeadership Group

~~LeRoy AkamineAlumnusEducation CorePlanning TeamExecutive PlanningLeadership Group

Julian AkoKamehameha Secondary SchoolStrategicPlan FacilitatorEducation CorePlanning TeamEndowmentCorePlanning TeamExecutive PlanningLeadership Group

Aaron AuFinancial Assets DivisionEndowmentCorePlanning Team

tJ'.;J- ~.H.~T.]. AuldStudentBodyPresident, Class of 2000Education CorePlanning Team

Rowena BlaisdellEducational ServicesEducation CorePlanning Team

Marsha BolsonEducational Technology & Production DivisionEducation CorePlanning Team

Fred CacholaAlumnusEndowmentCorePlanning Team

Brian ChangPresident's OfficeEndowment CorePlanning Team

l!lj~~juvenna ChangAlumnaEducation CorePlanning Team

6

Wallace ChinControllerDivisionEndowmentCorePlanningTeam

Sharlene Chun-LurnSummerProgramsEducation CorePlanningTeam

LeeAnn CrabbeBudget& Financial ReportingStrategic Plan FacilitatorEducation CorePlanningTeamEndowmentCorePlanningTeamExecutive Planning Leadership Group

Jan DillAlumnusEducation CorePlanningTeam

Rockne FreitasEducation Programming Expansion Supportand Planning DepartmentEducation CorePlanningTeam

~ \0.~UJlJ}IrShevon GarnettRecords ManagementEndowmentCorePlanning Team

$~~E. Kaiponohea HaleHawaiian Studies InstituteEducation CorePlanningTeamExecutive Planning Leadership Group

Mariane HannahsPreschool DivisionEducation CorePlanningTeam

~~f~Neil]. HannahsLandAssets DivisionStrategicPlan Coordinator& FacilitatorEducation CorePlanningTeamEndowmentCorePlanning TeamExecutive Planning Leadership Group


/-, . k_//~~<-<'Ly/~Ramona HaoProgram Evaluation & PlanningEducation CorePlanning Team

Vr0"-V~Glenn HaraPauahiManagementCompanyEndowment CorePlanning Team

Charlene HoeKamehameha Elementary SchoolKapalama CampusStrategicPlan FacilitatorEducation CorePlanning TeamEndowment CorePlanning TeamExecutive Planning Leadership Group

Louis KauKamehameha Investment CorporationEndowment CorePlanning Team

~Kahu David Ka'upuKamehameha Secondary SchoolExecutive PlanningLeadership Group

Kahele KukeaKamehameha Elementary SchoolKapalama CampusEducation CorePlanning Team

~~\Robert LindseyLandAssets DivisionEndowment CorePlanning Team

0-7~Cordy MaclaughlinKamehameha Schools Maui CampusEducation CorePlanning TeamExecutive Planning Leadership Group

Teresa Makuakane-DrechselPost"High Counseling ProgramEducation CorePlanning Team

f!}~Larry McElhenyKamehameha Secondary SchoolEducation CorePlanning Team

Chris MelahnProgram Evaluation & PlanningEducation Core Planning Team

Eassie MillerKamehameha Schools Association of Teachers and ParentsEducation Core Planning Team

M'Liss MooreFinancial Assets DivisionEndowmentCorePlanning Team

Robin NakamuraKamehameha Secondary SchoolEducation CorePlanning TeamExecutive Planning Leadership Group

Lurline Naone-SalvadorHistoric& CulturalAdvisorEndowmentCorePlanning TeamExecutive Planning Leadership Group

, ,C-Coj(..1t7U-1!hu~Ann NishimotoFacilities Development & Support DivisionEndowmentCore Planning Team

~~Rodney ParkPlans DivisionEndowmentCorePlanning TeamExecutive Planning Leadership Group

4Q~Kekoa PaulsenCommunityRelations DivisionEndowmentCorePlanning TeamExecutive Planning Leadership Group

Elizabeth PowersKamehameha Secondary School(retired)Education Core Planning Team

~9:'~Anthony]. RamosKamehameha Secondary SchoolEducation (are Planning Team

7


~~~~Suzanne RamosPreschool DivisionEducation CorePlanningTeam

Barbara RobertsonKamehameha Schools Hawai'i CampusEducation CorePlanning Team

tk\X:, . .J>/M>

Eric s:':e:::;(jLegalGroupExecutive Planning Leadership Group

Lance TachinoEducational Information ServicesEducation CorePlanningTeam

f!!L-I;Yukio TakemotoFacilities Development& Support DivisionEndowmentCorePlanningTeamExecutive PlanningLeadership Group

~~Kenneth TeshimaAppraisalDivisionEndowmentCorePlanning Team

~,~~~Katherine TibbettsProgram Evaluation & PlanningStrategicPlan FacilitatorEducation CorePlanningTeamEndowment CorePlanning TeamExecutive PlanningLeadership Group

~~~Sandra WickleinHumanResources DivisionEndowmentCorePlanning Team

Karen WilkinsonPolicies & ProceduresEndowment CorePlanning Team

Livingston "Jack" WongLegalGroupEndowmentCorePlanning Team

8

./)\-r~-S~R~rdwong . IPauahiManagement CompanyEndowment CorePlanningTeam

tf4---y 71~Zijin YangProgram Evaluation & PlanningEducation CorePlanningTeam

=p~CommunityRelations DivisionStrategicPlan Staff

~tf-fKalbert YoungCommunityRelations DivisionEndowment CorePlanning Team

Janet ZiskKamehameha Schools ArchivistEducation CorePlanning Team


IntroductionKe Ali'i Pauahi, founder of Kamehameha Schools, exemplified the strengths of both herHawaiian heritage and her Christian beliefs. Kamehameha Schools' identity as a Hawaiianinstitution takes its inspiration from her example and vision.

In many ways, the process of developing this plan has been a voyage, with manymetaphors drawn from Polynesian wayfinding. We have rediscovered that vision andcareful preparation are critical to the success of any journey. We have rediscovered, ashave other wayfinders before us, that the process and quality of the voyage are asimportant as achieving the destination. We have rediscovered that what may appear to beadversity actually hones and prepares us for what lies ahead.

This document is a journal of our voyage. It begins with Stipulation 13, the court orderthat served as a catalyst for this landmark planning effort. The Planning Process sectionhighlights the major activities that comprised our journey. We have included pertinentexcerpts from Ke Ali'i Pauahis Will and the related Findings of Fact and Conclusions ofLaw that guided our way. The mana'o from our 'ohana filled our sails, and inspired andinformed the statements of Kamehameha's Values, Vision, Mission, Guiding Principles,Goals and Priorities. The Implementation Framework will take us through the final stagesof planning in preparation for the next journey, the launch of an exciting new era forKamehameha Schools.

Each component of this document is critical to understanding the whole. Readers areasked to take the time to read and reflect on this document in its entirety. Finally, theorder of the goals is not intended to reflect their relative priority

9

I<AMEHAMEHA SCHOOLS STRATEGIC PLAN

StipulationKamehameha Schools submits this Strategic Plan to the Probate Court in response to

Stipulation 13 of the October 2, 1998 Stipulations Concerning Master'sRecommendations (l09th, 1l0th, and l l l th Annual Accounts) and Order.

Stipulation 13 states in pertinent part that:

"The scope of the strategic planning project should involve the development of aneducational plan in conjunction with an investment plan. The educational plan shouldtake into account the future potential of the financial resources of the Trust Estate.The investment plan should be fashioned to meet projected educational program needs.The principal focus of this interrelated planning process should be the educationalmission of the Trust Estate.

"The investment plan should take into full account diversification (including thoughtfulgoal-oriented asset allocation), risk (including income volatility), cost-consciousadministration, the perpetual nature of the Trust, and preservation of the corpus of theTrust Estate consistent with the terms of the Will.

"The strategic planning process shall include input concerning the educational plancomponent of the Strategic Plan from appropriate persons, including but not limited to,administrators, teachers, staff, parents, students, and alumni. The trustees, in theprudent exercise of their discretion, shall act upon the proposed strategic plan within90 days after it is presented to them and shall present a report to the Court and theAttorney General, as parens patriae, regarding their decision."

10


Planning ProcessThe Executive Planning Leadership Group and theEducation and Endowment Core Planning Teams wereformed to produce an integrated Strategic Plan forKamehameha Schools in compliance with Stipulation 13.The groups were broadly representative of the organization and included teachers and administrators, assetmanagers and attorneys, neighbor islanders and O'ahuresidents, alumni and students, parents of currentbeneficiaries and parents of those whose needs we havenot addressed, staff of Hawaiian organizations andmembers of the larger community.

In compliance with the stipulation and to broaden ourbase of planning expertise, we also engaged KPMGConsulting, LLC, as our strategic planning consultant.KPMG brought to this work a cadre of professionals with expertise in education, investments, and financial planning. The KPMG staff supported our work, however, processand content decisions were the purview of Kamehamehas strategic planning teams.

The planning process engaged a wide spectrum of the Karnehameha 'ohana and Hawaiiancommunity in the development of this plan. The plan was developed in three phases.

Phase I: Conducting Internal and External Scans and Defining Strategic Issues

In this phase, we:

• gathered input from Karnehameha Schools stakeholders;

• developed a fuller understanding of stakeholder perceptions of the educational needs ofthe native Hawaiian population;

• communicated our spending and investment policies, the status of current programsand new educational initiatives, and

• formed the Education and Endowment Core Planning Teams and the ExecutivePlanning Leadership Group who were responsible for processing this information anddrafting the plan.

engaged a widespectrum of

and Hawaiian co~l7rnl'1nily.·

11


Among our specific activities in Phase I, we:

o conducted 22 outreach meetings throughout Hawai'i, and two on the continentalUnited States, in which more than 1,200 persons participated and collectively providedover 3,000 suggestions regarding:

- the pressing educational needs of the Hawaiian people

- the strengths of the Hawaiian community

- the role Kamehameha Schools should play in addressing those educational needs

- our role as stewards of Pauahi's legacy

o distributed surveys at community meetings and through publications of KamehamehaSchools and the Office of Hawaiian Affairs which resulted in 386 responses;

o interviewed 29 community leaders;

o requested input via national and statewide print ads and local broadcasts on publicaccess television, and

o held 20 sessions with 38 resource people who provided information and stimulated ourthinking on relevant trends and best practices in the areas of:

- economics - Hawaiian culture

From the results of the internal and external scans we identified 16 strategic issues thatwere used to organize our work in Phase II. Those issues were:

.......W~identified

16~trategic issues.

- leadership

- demographics

o early childhood education

o community empowerment

o Hawaiian culture and language

e kindergarten through grade 12campus based programs

e literacy

e outreach: enrichment programs

o outreach: isolated communities

e outreach: lifelong learningcriteria

12

- education

- the futurist perspective

• outreach: special needs

e research and development

• resource development

o stewardship

o supporting and engaging families

o teacher training and staff development

• Hawai'i land retention and acquisition

o measures of return, values, and investment

I<AMEHAMEHA SCHOOLS STRATEGIC PLAN

Twenty issues were identified that had potential implications for all areas of theorganization and for how we addressed all 16 strategic issues. Working groups wereasked to consider these issues in the development of their reports. These "embeddedissues" were:

Phase II: Study Issues, Formulate Strategies, and Draft a Plan

During this phase, working groups, drawing on the voluntary efforts of 427 staff andcommunity members, addressed the 16 strategic issues. As part of their assignment,working group members reviewed all of the Phase I community commentary, consultedsecondary sources, and tapped their own experience and expertise to develop reportsincluding recommended strategies. Their reports were presented at a retreat attended bythe members of the Education and Endowment Core Planning Teams, the ExecutivePlanning Leadership Group, the Chief Executives, and the Board of Trustees.

While the working groups were studying the issues, a statewide telephone survey wasconducted with a representative sample of 2,010 Hawaiians. The survey askedrespondents to rate the importance of selected strategic issues in relation to the needs ofthe Hawaiian community. They were also asked to identify those issues they thought werewithin the realm of responsibility of Kamehameha Schools.

The input from the Phase I activities, the working groups, and the telephone surveywere brought together in a four-day retreat of the Executive Planning Leadership Group.Out of this retreat carne an initial draft that was shared with the Education andEndowment Core Planning Teams and Trustees. Through an iterative process of reviewand revision, a Draft Plan was prepared for public review and comment.

• accountability

• admissions

• alternative learning environments

e assessment

• building on community strengths

• communication

• community service

• curriculum and assessment

• facilities

• integration of Christian values

• integration of Hawaiian culture

• integration and role of technology

• leadership and leadership development

• literacy

• partnerships

• quality education

• stewardship

• shared decision making

• target audience

• (addressing the needs of the) whole child

13

43 community

/',ll1el~tin;gs, withover1,000

attendees, in Hawai'i and the

continenta! United States.


Phase III: Public Review and Comment and Completion of the Final Strategic Plan

In Phase III, we reached out to the public through direct mail, mass media, andcommunity meetings. Our goal was to share the Draft Plan, to solicit their feedback, andgauge the level of their support.

Our outreach activities included:

• Mailing over 18,000 copies of the Draft Plan to staff, alumni, parents, and friendsof the Kamehameha Schools;

• Placing print ads in publications with national and local circulation;

• Broadcasting the plan presentation on public access television;

• Holding 43 community meetings, with over 1,000 attendees, in Hawai'i and thecontinental United States, and

• Posting the Draft Plan and survey on the Kamehameha Schools website.

Overall, more than 90 percent of the nearly 1,000 survey respondents agreed or stronglyagreed with the Values, Vision, Mission, Guiding Principles and seven Goals contained inthe Draft Plan.

Repeating the iterative process of review and revision established in Phase II, theExecutive Planning Leadership Group utilized the input from the meetings, surveys, andcorrespondence to refine the draft and arrive at the final plan included in this document.

14


Ke Ali'i Pauahis Will

The Will and Codicils of Bernice Pauahi Bishop established Kamehameha Schools. Theygrant broad powers to the trustees to determine the character of the education offeredand to manage the schools and endowment.

The will and Codicils in pertinent part state:

"Thirteenth: I give, devise and bequeath all of the rest, residue and remainder of myestate real and personal, wherever situated unto the trustees below named, their heirsand assigns forever, to hold upon the following trusts, namely: to erect and maintainin the Hawaiian Islands two schools, each for boarding and day scholars, one forboys and one for girls, to be known as, and called the Karnehameha Schools.

"I direct my trustees to expend such amount as they may deem best, not to exceedhowever one-half of the fund which may come into their hands, in the purchase ofsuitable premises, the erection of school buildings, and in furnishing the same withthe necessary and appropriate fixtures furniture and apparatus.

"I direct my trustees to invest the remainder of my estate in such manner as they maythink best, and to expend the annual income in the maintenance of said schools;meaning thereby the salaries of teachers, the repairing buildings and other incidentalexpenses; and to devote a portion of each years income to the support and educationof orphans, and others in indigent circumstances, giving the preference to Hawaiiansof pure or part aboriginal blood; the proportion in which said annual income is to bedivided among the various objects above mentioned to be determined solely by mysaid trustees they to have full discretion.

"I desire my trustees to provide first and chiefly a good education in the commonEnglish branches, and also instruction in morals and in such useful knowledge asmay tend to make good and industrious men and women; and I desire instructionin the higher branches to be subsidiary to the foregoing objects.

"For the purposes aforesaid I grant unto my said trustees full power to lease or sellany portion of my real estate, and to reinvest the proceeds and the balance of myestate in real estate, or in such other manner as to my said trustees may seem best.

"I also give unto my said trustees full power to make all such rules and regulationsas they may deem necessary for the government of said schools and to regulate theadmission of pupils, and the same to alter, amend and publish upon a vote of amajority of said trustees.

"I also direct that my said trustees shall annually make a full and complete reportof all receipts and expenditures, and of the condition of said schools to the ChiefJustice of the Supreme Court, or other highest judicial officer in this country; andshall also file before him annually an inventory of the property in their hands andhow invested, and to publish the same in some Newspaper published in saidHonolulu; I also direct my said trustees to keep said school buildings insured ingood Companies, and in case of loss to expend the amounts recovered in replacingor repairing said buildings.

15

Bernice PauahiBishop

Charles ReedBishop


"I also direct that the teachers of said schools shall forever be persons of theProtestant religion, but I do not intend that the choice should be restricted to personsof any particular sect of Protestants." (Will of Bernice Pauahi Bishop, paragraph 13)

"17th. I give unto the trustees named in my will the most ample power to sell anddispose of any lands or other portion of my estate, and to exchange lands andotherwise dispose of the same; and to purchase land, and to take leases of landwhenever they think it expedient, and generally to make such investments as theyconsider best; but I direct that my said trustees shall not purchase land for saidschools if any lands come into their possession under my will which in their opinionmay be suitable for such purpose; and I further direct that my said trustees shall notsell any real estate, cattle ranches, or other property, but to continue and manage thesame, unless in their opinion a sale may be necessary for the establishment ormaintenance of said schools, or for the best interest of my estate ... And I give untomy executors named in my said will full power to sell any portion of my real estatefor the purpose of paying debts or legacies without obtaining leave of Court; and togive good and valid deeds for the same, the purchasers under which are not to beresponsible for the application of the purchase money" (Codicil 1, paragraph 17)

"4th. Of the two schools mentioned in the thirteenth article of my said will, I directthe school for boys shall be well established and in efficient operation before anymoney is expended or anything is undertaken on account of the new school for girls.It is my desire that my trustees should do thorough work in regard to said schools asfar as they go; and I authorize them to defer action in regard to the establishment ofsaid school for girls, if in their opinion from the condition of my estate it may beexpedient, until the life estates created by my said will have expired, and the lands sogiven shall have fallen into the general fund. I also direct that my said trustees shallhave power to determine to what extent said school shall be industrial, mechanical,or agricultural; and also to determine if tuition shall be charged in any case." (Codicil2, paragraph 4)

At the first Founder's Day ceremony in December, 1889, Charles Reed Bishop, Pauahishusband and a member of Kameharnehas first Board of Trustees, elaborated on herintentions.

"Bernice Pauahi Bishop, by founding the Kamehameha Schools, intended to establishinstitutions which should be of lasting benefit to her country ... The founder of theseschools was a true Hawaiian. She knew the advantages of education and well directedindustry Industrious and skillful herself, she respected those qualities in others. Herheart was heavy, when she saw the rapid diminution of the Hawaiian people going ondecade after decade and felt it was largely the result of their ignorance ... The hopethat there would come a turning point, when, through enlightenment, the adoptionof regular habits and Christian ways of living, the natives would not only hold theirnumbers, but would increase again, like the people of other races, at time grew faint,and almost died out. .. And so, in order that her own people might have theopportunity for fitting themselves for such competition, and be able to hold theirown in a manly and friendly way, without asking any favors which they were notlikely to receive, these schools were provided for, in which Hawaiians have thepreference, and which she hoped they would value and take the advantages of asfully as possible." (Handicraft, Vol. I, No.1, January, 1889. Honolulu H.I.)

16


Findings of Fact and Conclusions of LawThe findings of fact and conclusions of law rendered in response to the Bill forInstructions submitted to Circuit Court of the First Circuit by the Kamehameha SchoolsTrustees in 1962 (Civil No. 9360) clarified the breadth of programs and services that canbe offered in fulfillment of the intentions of the founder.

The pertinent conclusions of law include:

"The court concludes that the primary purpose of Bernice Pauahi Bishop was to leaveher estate to trustees of a perpetual charitable trust for the education of the youth ofHawaii which would tend to make them 'good and industrious men and women.'Nothing in the will forbids education of students elsewhere than on the campus ofthe Kamehameha Schools or any of the proposed expanded educational programs.The will does not limit the age of students to minors. It grants broad powers to thetrustees in the government, administration and regulating of the schools andcontemplates that the trustees exercise judgment and discretion in the establishmentof educational programs at the schools and determining the character of theeducation offered. (Paragraph 13)

"The proposed extension program while not specifically mentioned in the will is inharmony with Mrs. Bishop's primary objective and is not contrary to any provisionsin the will. The extension program would provide instruction for far more studentsthan could be accommodated on the campus of Kamehameha Schools, and in theopinion of the court, the trustees may, in their discretion, establish such a program.(Paragraph 14)

"The proposed scholarship program which would grant financial assistance to worthystudents for education and training beyond the high school level and would carry outthe intention of the testatrix to provide instruction for young people tending to makethem 'good and industrious men and women.' The court concludes that it is withinthe powers of the trustees to establish. (Paragraph 15)

"Insofar as any of the programs proposed by the trustees may constitute a deviationfrom a literal interpretation of the will, this court concludes that the effective carryingout of Mrs. Bishop's primary intent requires that her trustees be granted the authorityand power requested and the establishment of the proposed programs should be leftto the sound judgment and discretion of the trustees, subject to the right of theAttorney General to inquire into the conduct and administration thereof from time totime and subject also to all the other powers of the Attorney General as parens patliaeof the charitable trust." (Paragraph 19, as modified by that Stipulation filed January 4,1963)

(All of the above excerpts are from the Findings of Fact and Conclusions of Law, CivilNo.9360, Circuit Court of the First Circuit, October 23, 1962)

trusteesofa perpetual

charitable trust forthe

education of the youth

Hawai'i...

17

Kctrhehameha Schools is

'qroutidedin the Christian

and Hawaiian values

embraced by Ke Ali'iPauahi.


Values Statement

Aloha Ke Akua

Nui ke aloha 0 Pauahi i ke Alma, kona po'e Hawai'i, ka 'imi na'auao 'ana a meka maiama 'ana ina mea pono 0 kona lahui.

Ua 'ihe pono '0 Pauahi i ka nui 0 kona waiwai rna ka honua a me ke huleana i kau 'iarna luna ona. '0 keia ka mana'o pono no ka 'ohana Kamehameha e ho'omau i ko Pauahihuleana me ka ha'aha'a a me ka hana pono.

'Ihi'ihi ke aloha 0 Pauahi i ke Akua a me Kona mea e piha ai,

Great was Pauahi's love for God and the Hawaiian people, whom sheserved. Because shevalued the pursuitof hnowledge, she believed that education would be the hey to their wellbeing. Pauahi was blessed with much worldly wealth and understood that this blessing wasaccompanied by profound responsibility. Therefore, it is fittingfor the Kamehameha Schools'onana, called upon to cany her legacy fonvard, to humblydoso through good thoughts anddeeds that reflect the values of stewardship in herWill.

Kameharneha Schools is grounded in the Christian and Hawaiian values embraced byKe Ali'i Pauahi. Aloha, love and respect for the Lord, our natural world. and one another,is our foundation. 'Imi na'auao, the quest for knowledge and enlightenment, is essentialfor an educational institution such as Kamehameha. Malama, caring for one another andall aspects of Pauahis legacy, will enable our institution to flourish. 'Ihe pono urges us to

integrate our intellect and our intuition. Kuleana denotes the responsibilities, which accompany our blessings. Let us ho'omau, persevere, with ha'aha'a, humility, in all that we do.

18


VisionKamehameha Schools is a dynamic and nurturing learning community committed toeducational excellence. We assist people of Hawaiian ancestry to achieve their highestpotential as "good and industrious men and women." We do so by contributing to theirdevelopment as people who are:

o grounded in spiritual and Christian values;

o intellectually, emotionally, and socially self-reliant;

o resourceful, resilient, life-long learners;

o equipped with the skills they need to succeed in endeavors of their choosing;

o responsible, ethical, contributing members of their multi-cultural and diversecommunities, and

o prepared to practice and perpetuate the Hawaiian values and traditions ofKe Ali'i Pauahi.

MissionKamehameha Schools' mission is to fulfill Pauahis desire to create educationalopportunities in perpetuity to improve the capability and well-being of people ofHawaiian ancestry.

19


Guiding Principleso Kamehameha Schools will honor Pauahi's sacred trust. Ke Ali'i Pauahi established

this institution on the foundation of her Christian beliefs, cultural pride and love for herHawaiian people. The values of our Founder will guide our policies, programs, andbehavior.

• Kamehameha Schools will think inclusively as we serve people of Hawaiianancestry. Pauahis love and concern for the well-being of her people knew no bounds.We will extend our geographic reach and serve a wider spectrum of educational needs.

• Kamehameha Schools will develop and operate our educational programs andservices as a system. Our educational initiatives will address the multiple learningneeds of students of all ages. Programs and resources will be integrated and managed toachieve maximum benefits.

• Kamehameha Schools will establish alliances to address the educational needs ofpeople of Hawaiian ancestry. We recognize that more can be achieved by workingwith others and will do so in a manner that respects and builds upon their unique andprofound strengths. We will partner with those who share our values and goals.

• Kamehameha Schools will regard our 'ohana as a precious resource. We will treateach other with respect, nurture expertise and talents, and recognize the contributionsof all.

• Kamehameha Schools will stand accountable for our words and deeds. All thosetouched by Pauahi's legacy have special responsibilities. We will maintain respectful,two-way communication at all levels. Inclusive decision-making will be practiced.

Thevalues ofour Founder

will guide our policies,

programs and behavior.

20


Summary of Goals and PrioritiesGoal 1: Kamehameha Schools will provide and facilitate a wide range of integrated,quality educational programs and services to serve more people of Hawaiian ancestry.

Goal 2: Kamehameha Schools will work with families and communities in their efforts tomeet the educational needs of people of Hawaiian ancestry.

Goal 3: Kamehameha Schools will cultivate, nurture, perpetuate, and practice 'Ihe Hawai'i

(which includes Hawaiian culture, values, history, language, oral traditions, literature, andwahi pana - significant cultural or historical places - etc.).

Goal 4: Kamehameha Schools will foster the development of leaders who focus on serviceto others.

Goal 5: Kamehameha Schools will optimize the value and use of current financial andnonfinancial resources and actively seek and develop new resources.

Goal 6: Kamehameha Schools will miilama i 1<a 'iiina: practice ethical, prudent andculturally appropriate stewardship of lands and resources.

Goal 7: Kamehameha Schools will continue to develop as a dynamic, nurturing, learningcommunity.

All programs and services will be consistent with the primary purpose of the Will.All goals will be addressed over the next five- to ten-year period. Initially, KamehamehaSchools will concentrate on the areas identified as high priority in stakeholder surveys,needs assessment, and strategic planning discussions. These early priorities areidentified below.

• Education

- quality kindergarten through grade 12 education

- quality educational programs and services from the prenatal period throughpre-kindergarten

- literacy skills in English and Hawaiian among people of Hawaiian ancestry

- Hawaiian culture and language

- quality diverse career development opportunities

• Endowment

- stewardship of lands and resources

- balancing educational and culturalvalues with economic returns

- protecting our land legacy

- developing new resources

- establishing business alliances to createlearning opportunities and scholarships

21

will continueto develop'q~"

a dynamic, nurturing,

learning community.

f(al7Jehameha Schools will

provideand facilitate a wide

range of integrated, quality

educationalprograms and

services to serve more

people ofHawaiian ancestry.

(At right, groundbreaking

ceremony forHawai'i

campus.)


GoalsGoall: Kamehameha Schools will provide and facilitate a wide range of integrated,quality educational programs and services to serve more people of Hawaiianancestry.

1.1 - Support greater access to quality:

• educational programs and services from the prenatal period throughpre-kindergarten;

• kindergarten through grade 12 education;

• post-high school education and training;

• diverse career development opportunities;

• alternative learning experiences for those with a wide variety of learning styles,aptitudes, and interest, and

• programs and services that meet the requirements of those with special learning needs.

1.2 - Support and strengthen the development of good moral character in all programs.

1.3 - Strengthen literacy skills in English and Hawaiian among people of Hawaiianancestry

• Support instructional programs to promote literacy development.

• Make literacy resources accessible to people of Hawaiian ancestry.

1.4 - Support the improvement of educational services delivered to people of Hawaiianancestry

• Support the professional development of Kamehameha Schools' faculty and staff.

• Support efforts to enhance the effectiveness of educators of Hawaiian youth.

• Conduct on-going assessments of Hawaiian educational needs.

• Conduct applied research that impacts the quality of education for Hawaiians.

• Promote development of curriculum and programs that meet Hawaiian educationalneeds.

22

KAMEHAMEHA SCHOOLS STRA, ~GIC PLAN

Goal 2: Kamehameha Schools will work with families and communities in theirefforts to meet the educational needs of people of Hawaiian ancestry.

2.1 - Support families' efforts to acquire skills and knowledge to meet their educationalneeds and support the optimal development of their children.

• Provide and facilitate educational services to strengthen parenting skills andunderstanding of child development.

• Identify, develop and disseminate resources to support education and literacy.

2.2 - Work with communities to develop and maintain their own programs and servicesto meet the educational needs of people of Hawaiian ancestry

• Facilitate community-based educational needs assessment, planning and networking.

• Explore opportunities that increase community capacity to meet the educational needsof people of Hawaiian ancestry.

Goal 3: Kamehameha Schools will cultivate, nurture, perpetuate, and practice'Ihe Hawai'i (which includes Hawaiian culture, values, history, language, oraltraditions, literature, wahi pana, etc.).

3.1 - Develop an institutional framework to support an on-going process of explorationand education to deepen the understanding of 'Ihe Hawai'i.

• Coordinate, share, and make more accessible existing cultural informational resources.

• Conduct research and training on 'I1ze Hawai'i.

Kamehameha Schools willcultivate, nurture,

perpetuate, and practice;

'Ike Hawai'i .

3.2 - Increase the integration of 'Ihe Hawai'i in all that we do andteach at Kamehameha Schools.

• Promote and nurture the growth of staff, students, and familiesin the knowledge and practice of 'Ihe Hawai'i.

• Promote the integration and practice of 'Ihe Hawai'i in individualand institutional performance.

• Assess the impact of larger cultural issues on Kamehamehasoperations and ability to exist in perpetuity.

3.3 - Promote and nurture 'Ihe Hawai'i in our outreach.

• Develop and disseminate materials, curriculum and programs to further theunderstanding of 'Ihe Ha1<vai'i.

• Coordinate with other individuals and groups wherever possible, to support theperpetuation and practice of 'Ihe Hawai'i.

23

Kamehameha Schools

will foster the development

. of leaders who focus on

service to others.

GoldmanSarns

KAMEHAMEh" SCHOOLS STRATEGIC PLAN

Goal 4: Kamehameha Schools will foster the development of leaders who focus onservice to others.

4.1 - Practice servant leadership as an institution and as individuals.

• Engage in responsible stewardship; exercise social responsibility; and be active, positivecontributors in our various communities.

• Serve as educational and cultural leaders.

4.2 - Provide and facilitate educational programs to develop people of Hawaiian ancestryas leaders who are lifelong contributors to their families, communities and organizations.

• Provide and facilitate instruction in leadership.

• Incorporate service learning in all programs.

Goal 5: Kamehameha Schools will optimize the value and use of current financialand nonfinancial resources and actively seek and develop new resources.

5.1 - Optimize the growth and ensure the perpetuity of the endowment and linkeducation and endowment management to support the educational mission.

• Meet or exceed targets set in the investment policy to provide more resources foreducational spending.

• Create an integrated investment plan to ensure the availability of resources to achieveeducational goals.

• Improve systems to ensure operationally responsive and responsible spending andinvesting.

• Interact with our business partners and others in an ethical, prudent and culturallyappropriate manner.

• Protect Kamehameha Schools' endowment by using sound ecological, cultural,educational, and investment practices.

• Develop and implement prudent investment policies and practices that are consistentwith the Trustees' fiduciary duties and Kamehameha Schools' values.

5.2 - Develop new resources.

• Initiate a resource development program.

• Pursue additional grant funding for native Hawaiian educational programs.

• Institute a tuition and financial aid program that will enable Kamehameha Schools toserve more people of Hawaiian ancestry.

• Develop a network of those who have an affiliation with Kamehameha Schools for the

benefit of people of Hawaiian ancestry.

• Pursue opportunities for business partners toparticipate in and contribute to the education of

people of Hawaiian ancestry.

24

KAMEHAMEHA SCHOOLS STRAltGIC PLAN

Goal 6: Kamehameha Schools will malama i ha 'aina: practice ethical, prudent andculturally appropriate stewardship of lands and resources.

6.1 - Manage lands and other resources to optimize their support of the educationalmission.

• Manage the portfolio of resources to derive an overall balance of economic, educational,cultural, environmental and community returns.

• Develop and incorporate educational programs and curricula into resource stewardshipprograms.

• Develop and incorporate resource stewardship into educational programs and curricula.

• Inventory and manage Kamehameha Schools' nonfinancial resources (e.g. historic,cultural, human, and intellectual).

6.2 - Manage lands to protect and enhance ecosystems and the wahi hupuna (ancestralsites inclusive of all cultural resources and iwi) they contain.

• Integrate Hawaiian cultural values and knowledge into resource stewardship practices.

• Incorporate ahupua'a - land division - management principles which recognize theinterdependencies of ecosystems and create a synergy of uses in land use decisions.

• Promote a broad understanding of stewardship efforts and, as appropriate, culturalresource management programs.

malarna i ka 'aina,

25

KAMEHAME ;CHOOLS STRATEGIC PLAN

Kam.ehameha Schools

will use technology and'.,'.'; ,

.\o/her strategies to enhance

leatning, performance,

aiidine dissemination of

knowledge.

Goal 7: Kamehameha Schools will continue to develop as a dynamic, nurturing,learning community.

7.1 - Build an environment that promotes learning.

o Use technology and other strategies to enhance learning, performance, and thedissemination of knowledge.

o Encourage initiative, creativity, responsible risk taking and teamwork.

o Provide staff development opportunities that build facilitative leadership, systemsthinking, reflection, and inquiry.

7.2 - Optimize organizational performance.

• Establish performance assessment, staff development, and succession planning designedto maximize effectiveness.

o Support change management efforts to operate successfully in continuously changingenvironments.

• Practice decision making that is inclusive, data-driven, and informed by research andexperience.

• Develop and nurture an organizational culture that values our human resources.

7.3 - Create an infrastructure to achieve the goals of the Strategic Plan.

o Develop systems, policies, and procedures that support effective information sharingand decision making.

o Develop action plans, objectives, and performance indicators for decision making.

• Align the organization and resources with strategic goals.

• Develop and implement accountability systems to monitor and improve uponachievement of the goals.

26

I<AMEHAMEHA SCHOOLS STR. .rc PLAN

Implementation FrameworkAll goals identified in the Strategic Plan will be addressed over the next five- to ten-yearperiod. The Implementation Framework includes the Governance Process, Spending andInvestment Policies, Development of Operational Strategies, and OrganizationalTransformation.

Governance Process

The Role and Commitment of the Board of Trustees

o Preamble

"In accordance with the Will of Bernice Pauahi Bishop, the Board of Trustees (theBoard) of the Kamehameha Schools (KS) is composed of five individuals who areequally vested with the responsibility and duty of collectively carrying out thetestamentary wishes of Bernice Pauahi Bishop as set forth in her Will and twoCodicils thereto, as construed by judicial decisions concerning KS.

"KS is a perpetual, charitable trust estate established for exclusively educationalpurposes, namely, 'to erect and maintain ... the Kamehameha Schools.' All activities ofKS must be consistent with and in furtherance of this purpose. Any activity of KSinconsistent with or that jeopardizes this primary purpose is to be avoided.

"The Trustees have the highest of fiduciary obligations recognized by the law... ."

o The Trustees' Role

"The Trustees' role is to create, sustain and fulfill a vision whose primary focus is onthe furtherance of education, while leaving the development and execution of theplan to fulfill the vision to the Chief Executive Officer (CEO). The Board sets policy,management implements policy; the Board is responsible for oversight of the Estatewhile the day-to-day management of the operations of the Estate is the responsibilityof the CEO."

o Governance Commitment

"The Board, on behalf of the persons intended to benefit from the purposes expressedin the Will, will govern the Trust Estate with a strategic perspective through acontinually improved commitment to its vision, mission and values."

(All of the above excerpted from the Karnehameha Schools Governance Policy, August18, 1999 as revised June 1, 2000)

The Role and Commitment of the CEO

Kamehameha Schools' CEO will direct implementation of the Strategic Plan.The implementation process will be characterized by strategic decision making andorganizational transformation.

27

KAMEHAML SCHOOLS STRATEGIC PLAN

Spending and Investment Policies

Kamehameha Schools has adopted policies that govern annual distributions from theendowment and investment performance. The objective of these policies is to maximizesustainable spending for educational purposes while ensuring the growth of theendowment into perpetuity

The Spending Policy targets educational distributions at 4% of the average market valueof Kamehamehas endowment. The Investment Policy establishes long- and intermediateterm investment objectives, asset allocation targets, and performance measurementguidelines. The overall long-term investment objective of the endowment is to earn anaverage annual net real return of 5%. The endowment growth necessary to assure perpetuity is achieved through the reinvestment of a portion of annual endowment returns.

These policies link educational plans with the earnings potential of the Trusts endowment.

Development of Operational Strategies

Kamehameha Schools will be proactive in the implementation of the Strategic plan. Somechanges to current operations will be undertaken by staff of existing programs as part oftheir ongoing review and improvement of their operations and services. Those projectsthat represent significant new endeavors will be referred to the Strategic PlanningEnhancements Group (SPEG).

SPEG will support the implementation of the Strategic Plan by: processing working grouprecommendations; providing a forum to generate and hear new proposals; facilitatingproposal development; and providing input and analysis to the CEO to optimizealignment of programs and services to achieve the strategic goals.

Teams charged with developing potential strategies for consideration by the ChiefExecutives will support the work of SPEG. The teams will include a cross-section ofKamehameha Schools staff, field experts, constituents, and potential strategic partners.

28

KAMEHAMEHA SCHOOLS SH .GIC PLAN

Each proposed implementation strategy will include objectives and measures of progress.Implementation strategies will be evaluated based on their:

• potential to enhance Kamehameha Schools' ability to meet the educational needs ofpeople of Hawaiian ancestry;

• congruence with best practices or sound educational theory;

• availability of expertise to successfully implement the program or service;

• viable opportunities for partnerships to leverage our resources;

• cultural compatibility;

• measurability of outcomes;

• exportability of knowledge and programs, and

• sustainability within available and projected resources.

Organizational Transformation

Kamehameha Schools is in the process of restructuring to successfullyimplement the Strategic Plan. Through this process Kamehameha Schoolswill evolve as a system of quality campus-based and outreach educationalprograms supported by effective management of the endowment. Thistransformation involves:

• an organizational structure aligned with the strategic goals;

• system-wide policies and procedures aligned with the strategic plan;

D a resource allocation plan that reflects strategic priorities;

D redefinition of leadership roles to maximize productivity and effectiveness;

D institutionalization of shared governance;

D establishment of performance goals and measures;

D system-wide accountability;

• greater autonomy and independence in decision making for the major educationalunits, and

• cultivation of an environment characterized by openness and effectivecommunicationat all levels.

29

I<AMEHAME, '=;CHOOLS STRATEGIC PLAN

Letter from KPMG Consulting, LLC

September 18, 2000

Robert Kihune, ChairmanInterim Board of TrusteesThe Kamehameha Schools567 South King Street, Suite 200Honolulu, Hawai'i 96813

Dear Trustee Kihune:

In accordance with Stipulation No. 13 of the October 2, 1998 Stipulations ConcerningMaster's Recommendations (l09th, 1l0th, and l11th Annual Accounts) and Order, theKamehameha Schools (KS) retained KPMG Consulting, LLC (KPMG) to assist KS inplanning, developing and supporting its strategic planning process.

Stipulation No. 13 outlined the scope of the strategic planning for the Trust Estate,including: development of a comprehensive educational and financial strategic plan;development of an educational plan in conjunction with an investment plan, which takesinto account the future potential of the financial resources of the Trust Estate, theprincipal focus of which is the furtherance of the educational mission of KS; and conductof a strategic planning process that included input concerning the educational plancomponent of the strategic plan from appropriate persons, including, but not limited to,administrators, teachers, staff, parents, students and alumni.

KPMG has worked closely with KS to design and implement a comprehensive strategicplanning process that satisfied Stipulation No. 13 and the related requirements of theClosing Agreement with the IRS. Based on the work performed by KS within the pastyear, KS has not only met, but exceeded the Court stipulation and IRS requirements for acomprehensive and integrated financial and strategic planning process that ensured theactive involvement of key stakeholder groups in performing strategic planning to furtherthe educational mission of KS. The strategic planning process carried out by KS has beenopen, objective, far reaching and creative. As a result, KS has developed a strategic planthat should serve it well over at least the next decade.

KPMG appreciates the opportunity to work with KS in this strategic planning process andcommends KS for the spirit, tenacity and purposefulness it has demonstrated in thedevelopment of its strategic plan.

Very truly yours,KPMG Consulting LLC

Robert 1. O'NeillManaging Director

cc: Dr. Hamilton McCubbin, CEO

30

KAMEHAMEHASCHOOLSFounded and Endowed by theLegacy of Princess Bernice Pauahi Bishop

567 South King Street, Suite 200 Honolulu, Hawai'i 96813

E Consulting. Outsourcing. Investments.

r=J_ MARSH MERCER KROLL~ GUY CARPENTER OLIVERWYMAN

Mercer, LLC4 Embarcadero Center, Suite 400San Francisco, CA 94111(415) 743-8700www.mercer.com

Table of Contents

Executive Summary

Finding of Reasonable Compensation

Reasonableness Opinion

Process and Methods

Summary of Interviews

Market Evaluation

Appendix:

A - Mission of Kamehameha Schools

B - Trustee Compensation and Meetings

C - Market Compensation Data

D - Process and Methods

E - Other Observations and Recommendations

Page

2

9

11

13

18

26

39

40

42

54

57

Executive SummaryObjectivesThe Trustee Compensation Committee (the "Committee") for Kamehameha Schools ("KS", "Trust" or"Estate") retained Mercer to conduct an independent survey of compensation practices applicable to therole of Trustee, pursuant to an order of the Circuit Court of the First Circuit-State of Hawaii ("the Court")dated August 2, 2007. The Trustees serve under the terms of the will and codicils of the Estate of BernicePauahi Bishop), and were duly appointed by the Court, which has jurisdiction over the Estate. In itsAugust 2, 2007 Order, the Court appointed the Committee and authorized a new study of Trusteecompensation, consistent with its original May 10, 1999 Order, which serves as the original operatingdocument for this study. The Court authorized similar studies in 1999 and 2002, for which Mercer wasalso engaged by similar committees to conduct the evaluations. Relevant information from these earlierstudies is included herein for background purposes.

The objectives of this evaluation derive from Mercer's engagement letter with the Committee, datedJanuary 11, 2008, and the objectives set forth in the May 10, 1999 Order, specifically to:

.. Study compensation levels paid by similarly situated organizations, both taxable and tax-exempt, forfunctionally comparable positions;

.. Review and report the availability of similar services in Hawaii;

II Interview the Trustees and their staff, and the Attorney General as parens patriae to the Estate;

II Compile independent compensation surveys for review by the Committee; and

II Render a report to the Committee establishing a range of compensation that is comparable,reasonable, and consistent with applicable law and regulations.

These objectives are intended to serve the Committee in determining the sole issue before it: "What is areasonable amount of compensation to be paid to each of the Trustees of the Kamehameha Schools?"

Executive SummaryBackgroundMercer was originally retained by counsel to the "Interim" Trustees to serve as a consultant with respect tothe reasonableness of the compensation paid to the "Former" Trustees from 1992 to 1998. Mercer's report,issued in 1999 (the "1999 Report") was used in litigation regarding the removal proceedings of the FormerTrustees, which ultimately resulted in their resignation.

When Mercer completed its original study in 1999, Kamehameha Schools was about to undergo majorchanges. The Court had installed Interim Trustees to oversee and direct the organization, which was in asignificant state of stress. After the Former Trustees resigned and the new Trustees were installed, acomprehensive Governance Policy was adopted in August 1999.

Under the Governance Policy it is recognized that "The Trustees have the highest fiduciary obligationsrecognized by the law ... A Trustee is held to something stricter than the morals of the market place. Nothonesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior."

The Governance Policy describes the Trustees' role which is to create, sustain, and fulfill a vision whoseprimary focus is on furtherance of education, while leaving the development and execution of the plan to fulfillthe vision to the Chief Executive Officer ("CEO"). The Policy further states: "The Board sets policy,management implements policy; the Board is responsible for oversight of the Estate while the day-to-daymanagement of the operations of the Estate is the responsibility of the CEO."

Among other provisions, the Governance Policy adopted the new CEO-based management model. Thismodel was intended to create a clear distinction between the role of Trustee and that of the CEO andmanagement of the Schools' operations. The Trustees were to be responsible for overall governance, policymaking, and oversight. The CEO and senior management were to be responsible for day-to-day operationsof Kamehameha Schools and the implementation of new policies adopted by the Trustees.

At the time the Governance Policy was adopted, it was expected that the new model would allow the role ofTrustee to evolve into a governance and oversight role similar to that of a board of directors, rather than theliterally full-time duties of the Former Trustees, whose activities delved into day-to-day operations.

Executive SummaryBackground, cant.Prior to the adoption of the new Trustee compensation program in 1999, the Interim Trustees werecompensated at a flat rate (retainer) of $15,000 per month, or $180,000 per year, including the Chairman.This compensation policy was established by the Court based on the situation that applied at the time andafter consultation with "various interested persons including alumni, the IRS, the Master, and the Departmentof the Attorney General." This compensation plan served KS until the new compensation plan, describedbelow, was adopted.

Under the terms of the May 10, 1999 Order, the Court appointed in 2002 an independent TrusteeCompensation Committee who retained Mercer to conduct a study of Trustee compensation, which wasfinalized and presented in October 2003 (the "2003 Report"). Key findings from the 2003 Report included:

ED The KS' Board of Trustees functions as a "working" board (as opposed to an "advisory" board which mayserve many smaller, less complex, charitable organizations) based on: the time required to meet theorganization's needs; the complexity of business operations; issues addressed and strategic planning;fiduciary responsibilities; and development of policies needed to operate in a changing environment.

ED The amount of time required of the Trustees, approximating 2~ days per week on average, wassignificantly more than what was required at comparable organizations that compensate their directors,generally two to three times the typical governance role in a corporate board.

I!! On that basis, and until such time as the Governance Policy and procedures were fully in place and theTrustees' time requirement was substantially reduced, Mercer concluded that the Trustees should becompensated in a manner commensurate with their effort and contributions to the organization.

ED Mercer recommended a range of annual compensation for the Trustee Chair between $210,000 and$225,000, and a range of annual compensation for the remaining Trustees between $165,000 and$180,000.

Executive SummaryBackground, cant.

Specifically, the recommended compensation program included the following:

III Annual retainer $30,000 paid quarterly

III Chairman meeting fee 2,000 per meeting, to a maximum of 90 meetings per year

111 Trustee (non-chair) meeting fee 1,500 per meeting, to a maximum of 90 meetings per year

The Committee, after considering Mercer's report and seeking the advice of such advisors it deemedappropriate, including the Master, the Attorney General as parens patriae of the Estate, and theTrustees themselves, made its recommendation to the Court, which was approved.

The Trustees subsequently voluntarily relinquished the right to receive compensation for meetings inexcess of 45 meetings per year. This effectively caps Trustee compensation at the following levels,which remains in effect today:

III Chairman $120,000 ($2,000 x 45 + $30,000 retainer)

111 Trustee (non-chair) $97,500 ($1,500 x 45 + $30,000 retainer)

Executive SummaryFindingsConsistent with past studies, Mercer developed multiple "market reference points" that, in our opinion, arerepresentative of the market value for the Trustees' role of governance, policy-making, and oversight. Thesemarket reference points include: large private or operating foundations; boards of real estate investmenttrusts; published surveys representing the compensation practices of corporate and nonprofit boards ofdirectors; and local Hawaii corporations. More detailed descriptions of these comparator groups are includedin the body of our report.

In addition, we considered several other potential market comparables, such as boards of non-charitabletrusts, private estates, and other charitable nonprofit boards. We present these data herein for context andobservation, but we did not include them in our "market composite" as ultimately, we do not believe they areadequately comparable to KS.

Market comparisons aside, we believe it is important to note that there are no true comparables toKamehameha Schools. There are no organizations that we are aware of that combine a tax-exempt,charitable mission; vast land holdings including agricultural, residential and commercial real estate includingdevelopment; a substantial and complex endowment; a large multi-campus school; and the addedresponsibility of fiduciary duty required by applicable trust law (as opposed to typical corporate fiduciary duty).

In addition to our market research, we also conducted telephone or in-person interviews with the Trustees,the KS CEO, the Court Master, and a representative of the Department of Attorney General of the State ofHawaii. We also reviewed various records including KS Annual Reports, the Master's Report, KS Form 990,the Governance Policy, the KS CEO Position Description, Trustee Calendar of Activities for 2006 and 2007,and KS' Strategic and Education Plans. In particular we focused on updating our understanding of theTrustees' current role and responsibilities, how that role may have evolved over the last three years, and thedevelopment of the executive staff and the CEO management model.

Executive SummaryFindings, cont.

Based on our professional experience, we have selected for evaluation the most appropriate and relevantmarket comparability data for comparison. Also, where appropriate, we have adjusted such data to takeinto account differences in organization size, scope of operations, organization complexity, and KS'charitable mission.

Our market research and evaluation of the Trustee Compensation Policy, and related supportinginformation, results in several key findings:

1. The Governance Policy is operating as it was intended in that the CEO and her management team aremanaging day-to-day operations, and the Trustees are effectively serving in a governance, policymaking and oversight role.

2. Based on our interviews with the Trustees and the CEO, and review of the Trustee calendar of meetingsand events for 2006 and 2007, we find that the Trustees spend at least 2}2-3 days per week on Trustactivities including: regular board meetings, audit committee meetings, consideration of managementproposals and funding requests, meeting preparation, management reports on current projects andactivities, and quarterly retreats to discuss long-range vision and strategy, but excluding public appearances.

3. Based on our interviews of the Trustees and the CEO regarding Trustees activities, described in theSummary of Interviews section of this report, Mercer believes that the time spent on Trust activities isappropriate and necessary to effectively execute the role and responsibilities of Trustee under theGovernance Policy.

Executive SummaryFindings, 'cont.

4. Further, we find that the amount of time required of the Trustees, 2~-3 days per week on average,is a significant factor in determining reasonable Trustee compensation. The issues regularlyconfronted by the Trustees from expansion of the Schools under the new Education Strategic Plan,to improving the quality and diversification of the endowment, land use and environmental issues,and litigation concerning admissions policies are highly significant, complex and time consumingmatters that require a substantial commitment of time above and beyond that which is required of atypical corporate board.

5. KS is not a typical charitable organization or school and it is therefore reasonable that the actualtime commitment required to discharge the varied and complex responsibilities be consideredrather than a typical corporate or charitable organization model.

6. By taking into account the actual time commitment and nature and complexity of the Trustees' rolein determining reasonable compensation, Mercer believes that KS will be better positioned toattract the caliber and quality of Trustee that KS requires today, and must recruit in the near future.

7. In applying the market data with respect to the governance, policy, and oversight role at KS, webelieve that it is appropriate to weight the data at two times its stated value (three times in the caseof foundations and other nonprofit organizations) even though the Trustees spend far more thandouble the amount of time spent by corporate directors and trustees of large foundationsrepresented by the data reported herein. It is Mercer's opinion that this is a reasonable annualamount of compensation which takes into account the difference between the role of a typicalcorporate director or exempt organization trustee and that of a KS Trustee.

Executive SummaryFinding of Reasonable Compensation

Taking all of our findings into account, the market comparability data we obtained indicate that the marketvalue for the role of Trustee, as determined by the several market reference points we determined mostappropriate, falls within a range from $88,500 for large private foundations to approximately $250,000 forREITs and corporate boards, with an overall market composite value of just under $200,000, as indicatedin the table below.

Large Foundations $29,500 3x $88,500 25%

REITs $130,000 2x $260,000 25%

Corporate Boards $125,000 2x $250,000 25%

Hawaiian General Industry $96,000 2x $192,000 25%

Notes:1Please refer to pages 28 through 31 for a detailed discussion of market data and adjustments.

The competitive market value of all four market reference points, weighted equally, is $197,625. Webelieve this is the amount that best represents a reasonable estimate of the value of the role of a KSTrustee, taking all factors of size, scope of operations, complexity, and other relevant factors into account.

Executive SummaryFinding of Reasonable Compensation, cant.

Based on our market research and analysis, taking into account all factors we considered relevant, we findthat until such time as the role and time requirements of the Trustees changes significantly, the followingterms would provide a reasonable amount of compensation for the Trustees of Kamehameha Schools:

nD Trustee retainer of $75,000 per year, paid monthly;nD Supplemental Chairman of the Board retainer of $30,000 per year, paid monthly;nD A meeting fee of $1 ,500 per meeting, including the meeting fee for the Chairman;Em A cap on the number of compensable meetings of 75 meetings per year, which represents approximately

1.5 meetings per week on average.

This results in maximum compensation for the Chairman of $217,500 and $187,500 for the other Trustees,but may be less, depending on the number of meetings held.

RetainerPremium RetainerMeeting Fees

Chairman$75,000$30,000

$112,500$217,500

Trustee$75,000

112,500

$187,500

We believe these terms provide an appropriate level of compensation to the Trustees given their timecommitments and relative to the market comparability data described in this report. We also believe that thiscompensation program is competitive and will support KS' mission and vision as it recruits highly qualifiedTrustees in the coming years. Over time, if the Trustees' time commitment changes significantly, ourrecommendation would be adjusted based on the facts and circumstances present at the time.

Intermediate Sanctions LegislationReasonableness Opinion

The Taxpayer Bill of Rights 2, signed into law in 1996, enacted new penalty taxes applicable to Section501(c)(3) or 501(c)(4) organizations that engage in "excess benefit transactions." An "excess benefittransaction" is any economic benefit which is provided to a "disqualified person" at other than fair marketvalue, or involves the payment of compensation that is found to be unreasonable. A "disqualified person" isany person in a position to exercise substantial influence over the affairs of the organization, such asexecutives and directors. The tax implications are:

III The tax to the recipient is 25% of the excess benefit, which increases to 200% if the violation is notcorrected by timely repaying the excess to the organization

III Penalty taxes can also be imposed on the organization's trustees, directors or officers (the "OrganizationManagers") who approved the arrangement, if they did so knowing it to be excessive

III The tax on Organization Managers is 10% of the excess benefit up to a maximum of $20,000 pertransaction on a joint and several basis

The law contains an important protective provision, referred to as the "rebuttable presumption" ofreasonableness. If certain requirements are satisfied, the compensation paid is presumed to bereasonable, unless the IRS proves it to be unreasonable on the basis of sufficient contrary evidence.Otherwise, the burden is on the organization to prove the reasonableness of the compensation.

Intermediate Sanctions legislationReasonableness Opinion, cont.

The following steps are required to establish this presumption:III The compensation arrangement is approved in advance by an authorized body of the applicable tax

exempt organization who do not have a conflict of interest with respect to the arrangement;III The authorized body obtained and relied upon appropriate data as to comparability (generally

compensation paid by similarly-situated organizations, both taxable and tax-exempt, for functionallycomparable positions) prior to making its determination; and

III The authorized body adequately documents the basis for its determination concurrently with making itsdetermination (e.g., the record includes the date and terms of the transaction approved, the memberspresent during the discussion and those who voted, the comparability data relied upon and how thedata was obtained, and any action taken by a member of the authorized body, but who otherwise had aconflict of interest).

Mercer's evaluation has been conducted in accordance with our firm's standards for reviewingcompensation arrangements in tax-exempt organizations under Internal Revenue Code Section 4958 andthe regulations there under. Mercer is a compensation, benefits and human resources consulting firm andwe certify that we regularly perform compensation valuation studies of this type on an independent fee basisand are qualified to express an opinion on the reasonableness and comparability of this program.

We have evaluated the proposed compensation program for the Trustees of Kamehameha Schools andcompared it to compensation programs with respect to functionally comparable roles among similarlysituated organizations. We have taken into consideration the comparative market data, the size and scopeof KS' operations, organizational complexity, and the skills, qualifications and level of commitment requiredof the Trustees. In our opinion, the proposed compensation program described herein for Trusteecompensation is consistent with the amount provided for like positions among like organizations under likecircumstances and is therefore reasonable.

Process and MethodsApproachMercer's approach to evaluating Trustee compensation for KS is intended to help the Court appointedindependent Compensation Committee ("Committee") discharge its responsibility, which is to determine thesole issue of: "What is a reasonable annual amount of compensation to be paid to each of the Trustees of theKamehameha Schools?" With that objective in mind, Mercer examines each element of the compensationprogram from two distinct perspectives:

Compensation policy looks at each individual element of compensation (Le., retainers, meeting fees,committee chair premiums, etc.) for competitiveness compared to the markets from which KS recruitsqualified Trustees, with respect to the organizations that are similar to KS and for "best practices" incorporate governance.

Valuation of the total compensation program considers the total annual compensation paid based onthe stated policy, including all forms of compensation, the number of meetings to be held, specialmeetings, etc.

In conducting our review of Trustee compensation, Mercer performed the following work steps:

1. We reviewed all relevant background information necessary to understand the Trustees' role, scope ofresponsibilities, and the breadth and complexity of KS, including: the will and codicils of Princess BernicePauahi Bishop; recent annual reports of the Estate; recent Master's reports and responses;Compensation Schedule of Payments for each Trustee for FYE 2007; Annual Report of Education andEndowment Groups for FYE 2007; Strategic Plans; CEO Position Description; Trustee duties, CEOduties, and collaborative duties; the Governance Policy; Trustees Calendar of Events (2006 and 2007);Trustee self-evaluation; KS Directors and Officers personal liability coverage; and relevant Court Ordersestablishing the Committee, ordering the study of Trustee compensation; and setting forth therequirements of this study.

Process and MethodsApproach

2. We interviewed the Trustee Compensation Committee in person as a group, the Court Master (viatelephone), the Trustees in person as a group and Hugh R. Jones (via telephone), representing theDepartment of the Attorney General of the State of Hawaii ("A.G.") as parens patriae of the Estate.

3. We then carefully evaluated the market for Trustee compensation, considering as many relevant"market reference points" as possible. We used multiple sources of market data applicable to therole and responsibilities of Trustee. This includes market data from specific organizations, bothtaxable and tax-exempt organizations, as well as data from nationally published compensationsurveys.

4. We then arrived at a market competitive range of compensation applicable to the duties,responsibilities and role of Trustee, taking into account other relevant factors as needed fordetermining reasonableness of compensation.

5. Finally we prepared this report taking into consideration: the qualifications, experience, role andresponsibilities of the Trustees; KS' size, scope and complexity of operations; and the mission andcharitable purpose of Kamehameha Schools.

Process and MethodsMarket ComparablesIn our experience, KS is a truly unique organization with the operation of three campuses throughoutHawaii, being the largest private land owner in the state with vast and diverse real estate holdings, and acomplex investment portfolio including: private equity investments, real estate development, residentialand commercial real estate and long-term land leases. Moreover, its required operation under applicabletrust law is an added complexity that most nonprofits (e.g. universities, public charities and privatefoundations) do not have, requiring many key decisions and actions that cannot be delegated tomanagement, such as the holding of title to assets.

In order to address KS's uniqueness and complexity, Mercer believes that a broad search for relevantmarket data is required. This led us in 1999 and 2003, and still leads us to develop multiple "marketreference points"1 for consideration, any or all of which might influence reasonable compensation for theTrustees. These market reference points range from a pure governance role represented by the role ofa corporate director, to the Trustee role among potentially direct comparables. We selected as manyrelevant market reference points as we considered appropriate, which are listed below and describedmore fully in the Appendix:

m Boards of trustees of large private foundations

III Boards of directors of large real estate investment trusts ("REITs")

III Corporate boards among general industry

1m Boards of other large nonprofit orqanizations-

III Other local Hawaii comparators (both not-far-profit and for-profit)"

1 In this context a "market reference point" means a segment of market data (e.g. corporate boards of directors or foundation boards of trustees) that can be used to produce adiscreet sample of compensation data.

2 Consideration of the nonprofit published survey data is new to the 2008 evaluation.3 While Mercer analyzed not-for-profit local Hawaii comparators in its prior evaluation, consideration of the for-profit Hawaii comparators is new to the 2008 evaluation.

Process and MethodsValuation MethodologyThis is a summary of the valuation methodology for each market segment we canvassed. Additional detailsand explanation of our methods are in the Appendix.Nonprofit peer groups

II Source data: Organizations' publicly-filed Annual Reports of Organizations Exempt from Tax (Forms 990)II Total compensation, is valued for each Trustee, including cash compensation, benefits and expense

allowances.II Only compensation provided by the organization in connection with outside director service is included

(compensation for services as an officer in excluded).For-profit (publicly-traded) peer groups

II Source data: Organizations' publicly-filed proxy statements.II Each director was assumed to be a member of two board committees and a chair of one committee.III The average actual number of board and committee meetings was used in estimating total cash

compensation for each organization.III Stock options were valued at the "grant date fair value" using the Black-Scholes valuation methodology;

restricted stock and performance shares are valued at face value.II Initial equity grants upon joining a board, if applicable, are amortized over a six-year period (two terms);

regular annual grants are included in total compensation in the year granted.Published compensation surveys

III Source data: Nationally published third party surveys.III Compensation values reflect the actual amount reported in each survey.II Total cash compensation includes total actual cash paid to the average director, for board and committee

service.III Stock options are valued at roughly 330/0 of face value, a reasonable estimate for the grant date fair value

referred to above; other long-term incentive plan values may vary by survey.


Mercer initially met with the Trustee Compensation Committee on December 12, 2007 to discuss the scopeof the engagement, our proposed work process, the timing required to complete our report and the terms ofour engagement. The Committee informed Mercer that we had been retained to conduct this study ofTrustee compensation and we reviewed the information that we would need to complete this study. OnJanuary 18, 2008, we received delivery of all of the documents and related materials that we hadrequested for our review.

On April 14, 2008, Mercer met again with the Trustee Compensation Committee, and each of the fiveTrustees, as a group. The purpose of these interviews was to update Mercer on any changes at KS andthe governance model since our last evaluation of Trustee compensation, and to gather information on theviews of the various parties regarding Trustee compensation.

Subsequently, Mercer contacted the Master and the representative of the AG's office, to discuss the sametopic; gather their views on the current compensation program, and address any specific questions orconcerns they may have as we conducted our study and developed our recommendations.

The Committee expressed its views about Trustee compensation in that the program needed to provide fairand reasonable compensation for the Trustees, taking into consideration the significant demands placedon the Trustees in terms of responsibility and commitment. The Committee also ensured that Mercerwould have unfettered access to any documents or other materials we would need to conduct our review.And the Committee ensured that we were well informed about the details of their charter and objectives sothat our subsequent report would satisfy the requirements set forth in the Court's May 10, 1999 Order.

Upon meeting with the Trustees, we discussed:

D The current CEO-based management model and the executive organization chart;D The Trustees' current role, duties and responsibilities and how such duties align with the expected role

set forth in the Governance Policy;


III Based on current experience, the Trustees' reasonable expectations for the realistic amount of timerequired to effectively and efficiently discharge their responsibilities, currently and in the coming years;

III How the new management model has been working and whether the role of Trustee as envisioned bythe Governance Policy had been achieved; and

III Observations or concerns of the Trustees about the mission and long-range plans of KS, organizationissues, challenges, and progress made since our last review.

Mercer's interviews with the Trustees are summarized by general topic on the following pages.

Organization Culture

KS is a truly unique organization with a strong culture developed over many years. The Trustees feel animmense responsibility to advance the Trust's mission of educating the native Hawaiian people. This ispresent in the Strategic Plan, where the mission is to increase KS' impact beyond the students it servesdirectly on campus, into pre-school education and community-based programs as two examples. This typeof broad change takes time, thus impacting the Trustees' ability to adopt new policies and programs,requiring sufficient time to ensure proper implementation of the policy by management.

The Trustee decision making process is complex. Decisions are made in the context of long-rangestrategic plans, operational impact, community impact, KS' vision and organization values. Theresponsibility to measure decisions in these terms, and how decisions will affect the Hawaiian people overtime, is most significant and is a much broader platform than that of a typical corporate board.

The Trustees participate regularly in campus and community activities, visit sites as needed to make realestate development or investment decisions, always ensuring that they meet and listen to constituents, andare generally expected to be visible in Trust activities.

Summary of Interviews, cont.

CEO Management Model

The CEO management model appears to be fully implemented and working effectively according to theTrustees. The CEO has been on board since 2003 and is performing exceptionally well in the Trusteesopinion. Notable accomplishments include:

III The development of the KS Strategic Plan;III The hiring of a full executive staff, capable of executing the Strategic Plan over time;III The development of the Education Strategic Plan, fundamentally changing how KS looks at its role in

education; andIII A complete makeover of the endowment, replacing and/or reallocating investments as needed to sustain

KS in perpetuity.

The CEO management model in place allows the Trustees to delegate fully to the CEO the day to dayoperations of the Estate so that they can focus on long-range vision and strategy, governance and oversight.The management model has allowed the organization to align its long-range strategy for mission, education,and investments. Now, more than ever, the staff of KS understand this alignment and what KS is trying toaccomplish long-term.


Trustee Role

The role of Trustee has continued to evolve since our last study. In 2003, we found that the Trustees were stillin the process of developing numerous policies required to accomplish the delegation of many authorities tothe CEO. The management team was still being fully formed. Today, the management team is fully staffedand most organization policies are in place. In fact, as KS has progressed, some policies are now being rewritten so as to conform with current conditions and/or changes required pursuant to the strategic, education,and investment plans.

Yet the role of Trustee is as complex and time consuming as ever. Examples include:

mJ Migrating the investment portfolio to a more diversified investment allocation;mJ Site renovation and master planning for commercial properties;mJ Agricultural and conservation land use; andmJ Evaluating asset acquisition/disposition decisions in terms of how such decisions may impact KS' values

(economic, endowment, culture, community, environment).

On the education side, KS is moving beyond administration of the Schools on three campuses. The EducationStrategic Plan, community outreach programs, building community awareness and support for new programsall require regular and significant Trustee attention.

Time Commitment

We had extensive conversations with the Trustees and the CEO about how the Trustees spend their time.This has been a significant issue for examination because the Governance Policy and management modelwere put in place to ensure that the Trustees were spending their time on the right activities. There were nodifferences of opinion between the Trustees and the CEO in this regard. We also inquired of the Master andthe Deputy AG, both of whom expressed their views that the Trustees had been doing good work for the Trustand that there was a realization that the role does in fact require the amount of time currently indicated todischarge th responsibilities.


Time Commitment, cont.

The Trustees meet regularly each week on Tuesdays and Wednesdays. There is a standard half-day (4 hours)board meeting on Tuesday to conduct the Trust's business, but the meetings often go longer (6 hours or more).Among other things, these meetings include:

III Hearing management presentations and recommendations;III Reviewing new policies for approval;III Receiving reports on numerous plans and programs from an oversight standpoint;III Considering changes in investment allocations and/or new investment managers; andIII Considering budget requests in excess of $1 million.

In addition, the Trustees receive a briefing book in advance of each Tuesday board meeting, generally onThursday or Friday of the prior week. The briefing books can be quite substantial and will often require one-halfto one full day, 4-8 hours, generally on the weekend, to review and prepare for the upcoming meeting.

On Wednesdays, the Trustees generally hold special meetings on other important subjects. This may include afull day retreat with the CEO (four times per year); Audit Committee meetings; meetings of the Ke AIi'i PauahiFoundation or the Bishop Holding Corp (BHC) boards; the Charles R. Bishop Trust trustee meetings (four timesper year); or other campus or community activities. The retreats are very important to the CEO and theTrustees, allowing the Trustees to focus on the long-range vision of KS, major elements of strategy includinginvestment policy, land use, and implementing KS' vision.

It is also important to note the time required of the Trustees outside of approximately ten hours per week ofregular meetings. This includes reviewing the briefing books to prepare for upcoming meetings, keeping upwith organization email regarding KS or community developments, or communicating among the Trustees onmatters of importance that need to be discussed between meetings. Such time spent outside the standing andregular meetings may require an additional ten hours per week routinely.

Summary of Interviews, cant.

In summary, with respect to time commitment, we believe that the Trustees are regularly spending no lessthan 2%-3 days per week on Trust business, and that the time they spend fully takes into consideration theproper allocation of roles between the Trustees and the CEO. We believe that this time commitment accountsfor the regular Tuesday and Wednesday meetings, Board retreats, trustee communication between meetings,and meeting preparation.

It does not include time spent in the community for public appearances, attending campus activities, or otherevents. We feel that this time is particularly valuable to the Trustees, the Schools, and the Trust'sconstituents, but need not be directly compensated. The core time, however, of approximately 2% to 3 daysper week is specifically required to discharge the primary role of the Trustees, being governance, policy, andoversight, and it is reasonable that this time to be compensated based on the substantial time, experience,and skill required to effectively serve in the role.

Trustee Qualifications

Mercer observes that the Trustees have substantial and diverse backgrounds and have been recruited fromplaces that represent a broad labor market for governance responsibilities, as we endeavored to capture inour market composite.

Robert K. V. Kihune served in the US Navy for 35 years and as the Commander of Naval Surface Forces ofthe Pacific Fleet, managing a budget of $22 billion. He is presently the CEO of a privately-owned, for-profittelecommunications company; is Chairman of the USS Missouri Memorial Association, and a member ofseveral additional not-for-profit boards.

Diane J. Plotts is a general partner in the Mideast & China Trading Company and has served as a financeofficer in the US Air Force. She is a director of Hawaiian Electric Industries (HEI), has served as Chair ofHEl's Audit and Compensation Committees and is Chair of the Audit Committee for American Savings Bank.


Trustee Qualifications, continued

J. Douglas Ing is a senior partner of the law firm of Watanabe, Ing & Komeiji and maintains an active lawpractice in land use and development, public utilities, regulatory and commercial law. Mr. Ing served the USNavy on nuclear powered submarines from 1966 to 1971. He has served on several boards, including theNative Hawaiian Legal Corporation, State of Hawaii Board of Land and Natural Resources, Sex AbuseTreatment Center, Parents and Children Together, and the Commission on Water Resource Management.

C. Nainoa Thompson is himself unique as a navigator and sail master for the last 20 years, leading a revival oftraditional arts associated with long distance ocean voyaging in Hawaii and throughout Polynesia. He iscurrently Program Director of the Polynesian Voyaging Society, using his experience and accomplishments todevelop multi-disciplined, culturally relevant educational programs in partnership with other educationalinstitutions, organizations and agencies. He is a member of the University of Hawaii Board of Regents and is onthe Advisory Council of the Ocean Policy Institute.

Corbett A. K. Kalama is an executive vice president with First Hawaiian Bank where he is responsible for thebank's O'ahu region, managing the institution's more than thirty branches on the island. Mr. Kalama is also thepersonal banking and small business banking segment manager for First Hawaiian. He has served as a trusteeof the University of Hawai'i Foundation and for the Queen Lili'uokalani Children's Center as well.

As a group, the Trustees appear to have all of the qualifications required to function effectively as a board,including:

I!! A clear understanding of the role of governance and oversight;I!! Ability to establish policies consistent with the mission and vision of KS, and effectively delegate to the CEO

the authorities to execute those policies;I!! Relevant educational background and work experience;I!! Specific competencies in key areas of finance, long-range planning, investment policy, School operations,

land use, legal matters; andI!! A commitment to the mission, vision and values of Kamehameha Schools.

Market Evaluation

The role set forth in the Governance Policy for a KS Trustee is based on governance, policy making, andoversight. School operations and management of the Estate is now the responsibility of the CEO and themanagement staff. Thus in developing market comparables, Mercer focused solely on the governance, policymaking and oversight function.

We carefully evaluated available market data for market comparables that would best represent the governance,policy making, and oversight function. In addition, we tested the market comparables against additionalscreening criteria, of which all selected market comparables would pass two or more of these criteria:

I!I A tax-exempt organization with a charitable purpose,III A large and complex financial endowment,I!I A large organization involving complex and diverse operations, orI!I A large and diverse real estate portfolio, including commercial, residential, and agricultural investments.

Thus our selection of organizations or market sectors that meet these criteria include:I!I Large private or operating foundations with significant endowments;I!I Corporate boards among real estate investment trusts (REITs);rJ Published surveys for director compensation representing both taxable "corporate" and nonprofit boards; andI!I Other local organizations in Hawaii, representing a potential labor market for recruiting future Trustees.

We considered but did not include:I!I Executive staff positions as these roles are covered by the KS management team;III Real-estate development companies as this is only one aspect of the Trustees role and the REIT boards

cover this adequately; andrJ Tax-exempt public or private universities as the Trustee role is quite different and requires substantially more

time than that of a university trustee.

Market EvaluationLarge FoundationsThe first market comparable includes the compensation provided to trustees of large private or operatingfoundations. We selected foundations based on asset size, ranging from $1.2 billion to $12.3 billion with amedian endowment of $6.3 billion. Three are operating foundations (The J. Paul Getty Trust, Battelle MemorialInstitute and American Legacy Foundation) and the rest are grant-making foundations that are comparable insize of endowment to KS, but lack the complexity of KS' School operations and the real estate portfolio. Battelleis a particularly interesting comparison because, while it is in a different business than KS (technology R&D), itis a charitable trust, equally large and complex in its operations, and the board requires directors with significantskills and experience, similar to KS, while working within its charitable mission.

Compensation reported in the Annual Reports (Forms 990) for private foundations ranges from $21,500 33,400 at the median to $22,500 - 41,500 at the 75th percentile. The average values are $27,900 at themedian and $29,500 at the 75th percentile. Consistent with our prior evaluation, we believe the 75th percentile isthe appropriate reference point for KS when compared to foundations due to KS' complexity relative to grantmaking foundations. Compensation ranges from zero at five organizations, up to a high end of $90,000 per yearat Battelle (where ten trustees work on average 3 hours per week). This is a significant and highly relevantcomparator for KS due to Battelle's size, breadth, and complexity.

The average number of trustees among the large foundations is 12 and the average amount of time commitmentis 3 hours per week. In order to make the market data comparable to KS, we adjust the foundation trustee payto conservatively reflect three times the amount of work required of KS Trustees (who average approximately2%-3 days per week). Moreover, while reasonable to consider, we did not adjust for the fact that the five KSTrustees are doing the same work as that done by 10-12 trustees in the typical large foundation.

Thus, taking time commitment and complexity into account, the value of the governance role among largefoundations is at least $67,500 - $124,500 (three times the 75th percentile value range of $22,500 - $41,500),with an average value of $88,500 (three times the average 75th percentile value of $29,500). See Exhibit 1 inAppendix C for more information.

Market EvaluationREITs

Since the Trustees' duties are ofa governance and oversight nature, we believe that comparison tocorporate directors of public companies is generally relevant. To find such directors who serve in a similarindustry, we examined the compensation of corporate directors of large, real estate investment trusts(REITs). The organizational structure, i.e., governing board and management staff, and operationalcomplexity of a REIT are similar to that of KS,-as far as the real estate portfolio is concerned. While REITswould not have schools in their portfolios, or a large endowment, they do have multiple properties requiringoversight of complex operations such as shopping centers, office buildings and other commercial real estate.

The total direct compensation reported for REIT board members of similar size to KS (measured by assets)ranges from $100,000 at the 25th percentile to $175,000 at the 75th percentile, with a median value of$130,000. The time commitment required of these board members is significantly less than that required atKS. The data indicate that the average board meets eight times per year and that Audit, Compensation, andNominating & Governance committees meet, on average, 8, 5 and 3 times per year, respectively.

Assuming that the "typical" director sits on one board committee and chairs one additional committee, thetypical director would attend, on average, 21 board and committee meetings per year, each generally onehalf day or less in length. This equates to less than one day per week of time, a time commitment of onethird or less than that of the KS Trustees.

Thus to make these data comparable to KS, we adjust for the additional time spent by a KS Trustee byweighting the directors' total direct compensation at two times its actual value, again, a conservativeadjustment. This results in comparable compensation of $200,000 to $350,000 (two times the actual rangeof $100,000 - $175,000), with a median value of $260,000 (two times $130,000). See Exhibit 2 of AppendixC for more information.

Market EvaluationCorporate Boards (public companies)

As noted above, Mercer believes that the governance and oversight responsibilities of corporate boards ofdirectors in general industry is relevant. This represents the broadest market segment, but since mostboards of large organizations are compensated similarly, we feel a broad market comparison is acceptablehere. This comparison is also relevant as several of the past and current Trustees, as well as potentialTrustees that KS may recruit in the future, serve or have served on corporate boards.

The market data for corporate boards similar in size to KS ranges from $94,000 at the 25th percentile to$160,000 at the 75th percentile, with a median value of $125,000 per year in total compensation.

General industry corporate boards typically hold 6-8 board meetinqs' per year and attend an average of 5-7meetings per committee membership", Assuming each member chairs one committee and sits on oneadditional committee, each member would attend 6-8 board meetings and 10-14 committee meetings, for atotal of 16-22 total meetings per year. Assuming each meeting is typically one-half day, the average directorspends less than one day per week in actual time.

Again, to adjust for the additional time commitment of the KS Trustees, we adjust the corporate boardcompensation at two times its actual rate. Again, we believe that this is a conservative adjustment andtends to understate the value of the time spend by KS Trustees. Thus, the market data suggest that thevalue of this segment is $188,000 to $320,000 in total compensation, with a median value of $250,000. SeeExhibit 3 in Appendix C for further information.

1Source: Watson Wyatt 2007/2008 Survey Report on Board of Directors Compensation, Policies & Practices. All organizations with sales ranging from $2B to $3.5B.2Source: Buck Consultants 2007 Board of Directors Compensation and Governance Practices. Reflects simple average of median values reported from Audit, Compensation,and Nominating & Governance committees.

Market EvaluationLocal Corporate Boards

Finally, we examined a group of local public company boards including: Bank Of Hawaii Corp, HawaiianElectric, Central Pacific Financial, and Alexander & Baldwin Inc. These organizations are relevant becausethey establish a rate of compensation for the governance, policy, and oversight role of corporate directors inthe local geography. Moreover, as noted above, several of the current and prior Trustees have served orcurrently do serve, on local corporate boards.

In aggregate, the directors of these companies earn, at median, total direct compensation of $96,000. 1 Onaverage, 12 directors serve the organizations. The organizations report, on average, 10 board meetings peryear. Audit, Compensation and Nominating & Governance committees meet, on average, 9, 7 and 6 timesper year, respectively.

Assuming that the "typical" director sits on one committee and chairs another, the director would attend, onaverage, up to 26 board and committee meetings per year, each generally one-half day. This equates to atime commitment of less than one day per week, a time commitment far lower than that of the KS Trustees.

Again, to make the data comparable to KS, we make an adjustment to weight the directors' total directcompensation at two times the actual value. This results in comparable compensation of $192,000 (two timesthe market value data of $96,000).

While the role KS Trustee is more complex and time consuming than that of a typical corporate director, thesedata do represent the value of the governance role in the local marketplace. The role is relevant for thegovernance function and, importantly, represents a true market for highly qualified business leaders who maybe recruited to serve in the future as a Trustee. See Exhibit 5 in Appendix C for further information.

1Since this peer group is based on a samp.le of only 4 organizations we re ort the median com ensation value, only.

Market EvaluationNonprofit Boards

Published surveys also compile compensation and service data on directors who serve on boards in thenonprofit sector generally. This represents a broad nonprofit market segment, providing an acceptableperspective on the sector. But few, if any, of these organizations are truly comparable to KS, in terms of size,scope of operations, and organization complexity. The vast majority of these organizations have what weterm "advisory" boards, whose primary purpose is organization visibility and fund-raising. Most of theseboards are compensated with small stipends, or are not compensated at all.

For those that do compensate their boards, typically private foundations, the market data indicate that thetotal compensation of a sample of nonprofit boards ranges from $9,000 at the 25th percentile to approximately$35,000 at the 75th percentile, with a median of approximately $25,000.

Nonprofit boards hold an average of 6 board meetings per year at the median, and attend an average of 4additional committee meetinqs". Again, assuming each member sits on two committees, attends 14 totalmeetings per year and each meeting is one-half day, the average director invests less than one day per weekin actual time.

Adjusting for the additional time commitment of the KS Trustees, at three times the stated value based ontime spent, the market data suggest that the value of this segment is approximately $27,000 to $105,000 intotal compensation, with a median value of $75,000. These data are essentially the same as the LargeFoundation data reported above and are presented to the Committee out of thoroughness, but are nototherwise included in our market composite. See Exhibit 3 in Appendix C for additional information.

"Source: Watson Wyatt 2007/2008 Survey Report on Board of Directors Com ensation, Policies & Practices. Not-far-profit or anizations.

Market EvaluationOther Organizations ConsideredWe also considered a group of local comparables including: Alu Like, Inc., the Liliuokalani Trust, Lunalilo HomeTrust, and The Queen's Medical Center; and one organization on the mainland that is considered by some tobe comparable: the Milton Hershey School and Trust.

The Hershey School and The Queen's Medical Center are more comparable than the others noted above, butnot fully comparable in our opinion. The Hershey School is similar regarding operation of the Schools, but it isless complex at the trustee level because the endowment is managed by a separate trust company, not theHershey School Board of Managers. Also, the Hershey School does not have the vast commercial, residential,and agricultural land holdings as does KS. In our last study (2003) we learned that the School Board ofManagers are not compensated, but that the trustees of the trust company are well compensated (as well, weunderstand that many of these trustees may in fact be the same persons as the School Board of Managers).Without access to the compensation provided to the trustees of the trust, which is not publicly available, we arenot in a position to know the compensation of the Hershey board of trustees (inclusive of the trust and theschool) for comparison purposes.

Likewise, the Queens Medical Center trustees are unpaid. It is quite common in fact for the board of a regionalmedical center to serve unpaid in our experience. We find this role to be very different than that of a KSTrustee as a hospital board member may meet for approximately one-half day, five or six times per year only.These boards are more like the advisory boards we referred to above.

Finally, Alu Like Inc. and Lunalilo Home Trust are not an appropriate comparison to KS due to significantdifferences in size and complexity.

The total compensation reported in these organizations' Annual Reports varies widely, from $0 to $94,000.While the market data for these organizations are presented herein, some are too small, some are lesscomplex, and all require far less time. We present these data as relevant to the Compensation Committee'sconsideration of a full range of market data, but determined not to consolidate the data into the marketcomposite due to lack of comparability. See Exhibit 4 in Appendix C for further information.

Market EvaluationOther Relevant Factors

When considering all of the above market data, the unique nature, size, and scope of KS must be taken intoaccount. These are the additional factors Mercer considered most relevant as we considered the amount ofcompensation that would be reasonable.Charitable PurposeKS has a charitable, educational mission. As a charitable trust, the Trustees have a duty to maximize the fundsavailable for charitable purposes in perpetuity. This suggests that the compensation program should becompetitive, but err on the conservative side. We have reflected this conservative standard when applyingadjustments to the market data to make it comparable to KS.Trustee QualificationsA determination of reasonableness of compensation requires a finding that the recipient is qualified for the roleand performing in a manner that meets or exceeds the expectations of the role. Based on our interviews with theTrustees, a review of their biographies, and our discussions with the CEO, the Master, and the Deputy AG, webelieve that the Trustees have the required experience, background and competencies to serve effectively intheir role. Further, we understand from reviewing the Master's reports and our interview with the CEO, that theyare performing their role effectively. We make no adjustment, premium or discount, for qualifications.Organization Character and ConditionKS is a highly complex organization with a significant endowment, complicated real estate investments,operating multi-campus schools, and a most significant requirement for public awareness and interaction with abroad base of constituents. This makes the role of KS Trustee at least as complex as the governance roleassociated with corporate boards generally and far more complex than the trustee role among large grantmaking foundations. This would suggest a premium in the market place, but we have made no adjustment toaccount for this added complexity.Fiduciarv ResponsibilitvTrustees must hold themselves to a higher fiduciary standard than the typical corporate oversight role. Asfiduciaries, they must, as a matter of law, take title to the organization's assets and can


be held personally liable for losses. While the typical corporate board maintains Directors and Officers ("0&0")liability coverage (as does KS), counsel advises Mercer that trust law requires a higher standard of fiduciary dutythan that of a corporate board member under corporate law.

Regarding the liability coverage, we were asked whether the 0&0 policy provided a personal benefit to the Trusteesthat should be included in their remuneration. Mercer believes that the coverage does not provide a personal benefitand should not be included in their remuneration for several reasons:

1. The policy is a standard not-for-profit organization 0&0 policy covering all past, present and future trustees,officers, executive directors, department heads, committee members, staff or faculty members, employees, orvolunteers of the organization. All major organizations have such policies and, as such, we believe this policyrepresents an "ordinary and necessary business expense" as defined in Code section 162.

2. As a business expense, the amount of benefit should not be included in the Trustees remuneration because itis a "working condition fringe benefit" as defined in Code section 132. This provision defines a workingcondition fringe benefit to include any property or service provided to an employee (including directors) of anemployer to the extent that, if the employee had paid for the property or service directly, the amount paidwould be allowable as a deduction under Code section 162.

3. Even if it were included in the Trustees' remuneration, the amount would be "de minimis" due to the coverageof literally thousands of insured persons, and the spreading of the policy premium over this large group.

4. Finally, the regulations under Code section 4958 (dealing with intermediate sanctions penalties) states thatsuch premiums are excludable from remuneration if they are a "de minimis fringe benefit", but anyreimbursement of section 4958 penalty taxes or a payment to reimburse a Trustee for a loss where the personhad acted "willfully and without reasonable cause" would be included.

Mercer is a benefits and HR consulting firm and we do not provide tax advice. Questions about these tax provisionsshould be directed to tax counsel.


Time Commitment

Mercer evaluated competitive pay under several market reference points as noted above. In addition, weinvestigated the number of meetings attended per year (as disclosed in shareholder proxy statements) or theamount of time devoted per week (as disclosed on Annual Reports - Form 990) among nonprofits. We madedetailed calculations regarding the average or expected number of meetings held per year, the averagelength of such meetings, and the average total time commitment as a result. In each case, the averageamount of time required of the corporate directors or trustees is substantially less than the KS Trustees, assummarized in the table below.

Not-for-Profit

For-Profit

Large Foundations

Published Survey Sample

Local ComparablesCorporate Boards (REITs)Corporate Boards (General Industry)Local Comparables (HI General Industry)

< 1 day/week

< 1 day/week

< 1 day/week< 1 day/week< 1 day/week< 1 day/week

In contrast, KS Trustees are spending approximately 21'2 to 3 days per week in the performance of theirduties. We believe that this is a reasonable commitment of time to effectively perform the duties of Trustee aswe understand the role. Thus, to make the market data comparable to KS, it should be adjusted to take theadditional time commitment into account, and we have made those adjustments as described on precedingpages.

Market EvaluationSummaryBased on our review of all relevant market data, we believe that reasonable compensation should be basedon the four market reference points-adjusted to be comparable to KS in terms of time commitment andresponsibility-as representative of the labor market for the role in which the Trustees operate. Based on ouranalysis, we believe that the appropriate range for KS Trustee compensation is between $100,000 and$250,000, with a target value of approximately $200,000.

Competitive Market Range for Trustee Compensation

50

~ Please refer to AppendixC, Exhibit 6 for detail.

~ The overall marketcomposite valuecalculated by Mercerreflects a simple averageof each market referencepoint's median value.

~ The overall marketcomposite range reflectsthe median values fromeach market referencepoint used in the overallcomposite calculation.

• $192

60

00$197.6 Composite

$88.5 Foundations

$260 REITs & Corporate Boards

EJ Market Competitive Range

AI. 75th Percentile

+50th Percentile

-25th Percentile

$350

$100

$400

$50

~ $300oooV7

';; $250o~ell<Ii

[ $200EooJ§ $150of-

$0 -t--------,---,-------,-------,-----,------,-----------,

Overall MarketComposite

LargeFoundations

RErfs Corporate Boards Hawaii GeneralIndustry

Appendix A: Kamehameha Schools MissionMission & Context

Kamehameha Schools' mission is to fulfill Pauahi's desire to create educational opportunities inperpetuity to improve the capability and well-being of people of Hawaiian ancestry

mJ KS is committed to addressing the diverse educational needs of the Hawaiian community and tocreating long-term intergenerational change via education

III KS is driven by the needs of its members and its social obligation to provide benefit for thecommunities in which they operate, rather than the needs of shareholders

KS's three strategic priorities are as follows:

mJ Optimize and 'build' for increased impact by undertaking activities that ensure that support isprovided to students from pre-natal stages to eight years of age

III Sustain educational momentum in later school years by supporting students and their families

III Innovate and optimize for efficiency and effectiveness by ensuring that campuses are available andcan be utilized in an optimal fashion

KS is unique as a not-for-profit organization and as a large business.

mJ Over the past fiscal year, the number of students and families impacted by Kamehameha campusand community programs increased by over 29%, from 28,000 to 36,000

III Total endowments increased to over $9.1 billion from $7.7 billion at the beginning of the year

III KS collaborated with more than 60 community organizations statewide by providing services andprogram funding

Source: Kamehameha's Mission Statement (from Website), and Kamehameha Schools Education Strategic Plan (from Mercer data request).

Appendix B: KS Compensation and MeetingsKS Trustee Compensation

The following table provides an overview of Trustee Compensation paid for fiscal year ended 2007.

MonthChair Jul-Dec xChair Jan-Juri x

7/06 $ 8,500 $ 8,500 $ 8,500 $ 8,500 $ 10,500 $ 44,500

8/06 $ 10,000 $ 11,500 $ 10,000 $ 11,500 $ 14,500 $ 57,5009/06 $ 7,000 $ 8,500 $ 8,500 $ 8,500 $ 10,500 $ 43,000

10/06 $ 10,000 $ 10,000 $ 10,000 $ 10,000 $ 12,500 $ 52,50011/06 $ 8,500 $ 5,500 $ 7,000 $ 4,000 $ 6,500 $ 31,50012/06 $ 2,500 $ 2,500 $ 2,500 $ 2,500 $ 2,500 $ 12,500

1/07 $ 12,500 $ 10,000 $ 10,000 $ 10,000 $ 10,000 $ 52,5002/07 $ 12,500 $ 10,000 $ 10,000 $ 10,000 $ 10,000 $ 52,5003/07 $ 8,500 $ 7,000 $ 5,500 $ 7,000 $ 7,000 $ 35,0004/07 $ 12,500 $ 8,500 $ 10,000 $ 10,000 $ 10,000 $ 51,0005/07 $ 10,500 $ 8,500 $ 8,500 $ 8,500 $ 8,500 $ 44,5006/07 $ 10,500 $ 8,500 $ 8,500 $ 8,500 $ 8,500 $ 44,500

Total - 12 months ended 6/07 $ 113,500 $ 73,500 $ 97,500 $ 99,000 $ 111,000 $ 27,000 $ 521,500

Total - 12 months ended 12/0 $ 97,500 $ 97,500 $ 97,500 $ 97,500 $ 120,000 $ 510,000

Trustees fees:Meeting fee $1500 per meetingChair $500 per meetingRetainer $2500 per month ($30000 annually)

Source: All data provided by Kamehameha Schools

Appendix B: KS Compensation and MeetingsKS Trustee Meetings

The following table provides an overview of the number of meetings attended by Trustees in a given monthfor the years ending 2006 and 2007. Board meetings include only the regular Tuesday board meetings.Total meetings includes all other regular standing meetings and special meetings including AuditCommittee, other subsidiary and or trust meetings, off-sites, etc.

2006 2007 2006 2007January 5 5 January 16 15February 5 4 February 19 16March 5 4 March 21 12April 6 5 April 16 23May 3 3 May 22 19June 4 4 June 17 15July 3 5 July 19 16August 7 2 August 20 16September 5 5 September 11 13October 4 5 October 14 10November 5 2 November 16 11December 3 4 December 17 13

Total 55 48 Total 208 179Average 4.6 4.0 Average 17.3 14.9

Source: All data provided by Kamehameha Schools

Appendix C: Market Compensation DataExhibit 1: Large U. S. Foundations

The Ford Foundation' $12,253 13 9/30/2006

The J. Paul Getty Trust 4 $10,133 None nla None None n/a 15 6/30/2006

~ "ert Wood Johnson Foundation 5 $9,368 $46,500 nla nla $21,500 $41,500 $29,500 n/a n/a 15 12/31/2005

<. I<ellogg Foundation Trust 6 $7,332 No Board Chair Identified $28,000 $28,000 $28,000 $7,307 nla 3 8/31/2006

Lilly Endowment, Inc 4. 7 $7,602 $644,200 $103,750 nla 40 $55,500 $64,950 $58,875 nla nla 8 12131/2006

The William and Flora Hewlett Foundation $7,321 None nla nla 2 None None n/a nla 11 12131/2005

Davd & Lucille Packard Foundation $6,351 None nla nla 3 None None nla nla 11 12/31/2006

The Andrew Mellon Foundation $6,131 No Board Chair Identified $20,000 $25,000 $22,143 nla nla Part Time 8 12/31/2006

John D. and Catherine T. MacArthur Foundation 4 $6,178 $35,500 nla nla 5 $13,500 $29,381 $25,626 nla nla 5 14 12/31/2006

Gordon and Betty Moore Foundation 4. 8 $5,309 None $6,320 n/a 2 None None $5,618 nla 2 10 12/31/2005

Califomia Endowment $4,406 $48,000 nla nla 8 $17,250 $36,125 $27,875 n/a nla 4 18 2/28/2006

The Rockefeller Foundation $3,810 $9,000 nla nla 3 $3,500 $9,500 $7,071 $2,000 nla 2 16 12/31/2006

Battelle Memorial Institute 9 $1,113 $95,000 nla n/a 3 $22,500 $90,000 $74,063 nla nla 3 10 9/30/2006

American Legacy Foundation $1,181 None nla nla 5 None None nla nla 5 12 6/30/2006

75th Percentile $7,534 $71,500 nla rva 5 $22,500 $41,500 $29,500 nla nla 4 15

Median $6,264 $46,500 nla nla 3 $21,500 . $33,400 $27,875 nla nla 3 12

Averaqe $6,321 $130,414 nla nla 7 $22,639 $39,762 $33,397 $4,975 nla 3 12

25th Percentile $4,632 $35,100 nla n/a 3 $17,250 - $28,000 $25,626 nla nla 2 10

Note: Analysis excludes zero values. Analysis excludes data associated with incumbents who clearly served a partial years worth of service, where disclosed andlor discemable.

Source: Most recently disclosed Form 990.

1 Rounded to the nearest hour.

'ects minimum and maximum values in the sample.

,..eludes executives and Board Chair, where applicable.

4 Sample Includes an exec utile that is also a Trustee. We hale included the incumbent in the sample for the trustee size, but hale excluded the incumbent's compensation,

5 Robert Wood Johnson Foundation has a policy of reimbursing only actual expenses incurred,

6 W.I<. I<ellogg Foundation Trust has one corporate trustee, ser\ing 40 hours per week and eaming $459,085 in compensation. Benefits reflect the compensatory portion of the 0&0 liability insurance premium for the indiwdual trustees.

7 Lilly Endowment's sample includes one emeritus director.

8 Moore Foundation's Trustees' benefits compensation is related to professional liability insurance.

o Battelle's Director Compensation is di"ded between "Program Servces." representing 80% of Total Compensation, and "Management & General," representing 20% ofTotal Compensation,

Appendix C: Market Compensation DataExhibit 2: Real Estate Investment Trusts Policy

oston Properties Inc $11,193 $50,000 $1,500 $0 $15,000 $1,000 $0 $0 $15,000 $1,500 $0Kimco Realty Corp [2006] $9,098 $38,000 $2,000 $0 $10,000 $2,000 $0 $10,000 $10,000 $2,000 $0Developers Diversified Rlty [2006] $9,090 $50,000 $0 $0 $10,000 $0 $0 $0 $10,000 $0 $0Cbl & Associates Pptys Inc [2006] $8,105 $27,500 $1,500 $0 $0 $1,500 $0 $0 $24,000 $1,500 n/aMacerich Co [2006] $8,121 $40,000 $1,000 $0 $10,000 $1,000 $0 $0 $20,000 $1,000 $0Duke Realty Corp $7,662 $0 $3,500 $0 $6,500 $1,000 $0 $0 $10,000 $1,000 $0Amb Property Corp $7,262 $0 $2,000 $0 $8,000 $1,500 $0 $0 $12,000 $1,500 $0Brandywine Realty Trust [2006] $5,214 $35,000 $1,500 $0 $10,000 $1,000 $0 $0 $15,000 $1,000 $0Camden Property Trust [2006] $4,891 $18,000 $1,000 $0 $0 $750 $0 $0 $7,500 $750 $0Weingarten Realty lnvst [2006] $4,993 $25,000 $0 $4,000 $2,000 $0 $0 $5,000 $5,000 $0 $0Alexandria R E Equities Inc [2006] $4,642 $25,000 $1,500 $0 $15,000 $1,500 $0 $0 $20,000 $1,500 $0Felcor Lodging Tr Inc [2006] $2,684 $35,000 $0 $0 $0 $1,000 $0 $5,000 $5,000 $1,000 $0

Summary Statistics (Excluding Zeros):75th Percentile $8,363 $39,500 $2,000 n/a $10,000 $1,500 n/a n/a $16,250 $1,500 n/aI\~edian $7,462 $35,000 $1,500 n/a $10,000 $1,000 n/a $5,000 $11,000 $1,250 n/a

3th Percentile $4,968 $25,625 $1,500 n/a $8,000 $1,000 n/a n/a $9,375 $1,000 n/aIAverage $6,913 $34,350 $1,722 n/a $9,611 $1,225 n/a $6,667 $12,792 $1,275 n/a

Appendix C: Market Compensation DataExhibit 2: Real Estate Investment Trusts Total Compensation Value

Boston Properties Inc $11,193 $50,000 $15,000 $15,000 $23,000 $103,000 $70,833 $173,833'rnco Realty Corp [2006] $9,098 $38,000 $8,000 $20,000 $20,000 $86,000 $144,324 $230,324

uevelopers Diversified Rlty [2006] $9,090 $50,000 $0 $10,000 $0 $60,000 $60,000 $120,000Cbl & Associates Pptys Inc [2006] $8,105 $27,500 $12,000 $0 $12,000 $51,500 $28,650 $80,150Macerich Co [2006] $8,121 $40,000 $6,000 $10,000 $3,000 $59,000 $80,113 $139,113Duke Realty Corp $7,662 $0 $28,000 $6,500 $2,000 $36,500 $53,333 $89,833Amb Property Corp $7,262 $0 $12,000 $8,000 $22,500 $42,500 $137,324 $179,824

Brandywine Realty Trust [2006] $5,214 $35,000 $15,000 $10,000 $23,000 $83,000 $40,000 $123,000Camden Property Trust [2006] $4,891 $18,000 $7,000 $0 $7,500 $32,500 $100,000 $132,500Weingarten Realty Invst [2006] $4,993 $25,000 $0 $11,000 $0 $36,000 $62,695 $98,695Alexandria R E Equities Inc [2006] $4,642 $25,000 $21,000 $15,000 $21,000 $82,000 $96,600 $178,600Felcor Lodging Tr Inc [2006] $2,684 $35,000 $0 $5,000 $8,000 $48,000 $25,971 $73,971

Summary Statistics (Excluding Zeros):75th Percentile $8,363 $39,500 $15,000 $14,000 $22,125 $82,250 $97,450 $175,025Median $7,462 $35,000 $12,000 $10,000 $16,000 $55,250 $66,764 $127,75025th Percentile $4,968 $25,625 $8,000 $8,500 $7,625 $41,000 $50,000 $96,479

.eraqe $6,913 $34,350 $13,778 $11,050 $14,200 $60,000 $74,987 $134,987

Note: Compensation above reflects values associated with a director who is a member of the board, a member of the Audit Committee and Chair of theCompensation Committee. This is Mercer's standard assumption for valuing "typical director" compensation.

Appendix C: Market Compensation DataExhibit 2: Real Estate Investment Trusts Member Profile

General Board Members Committee MembersNon- Other

Non- Total Employee Lead Audit Compensation NomiGov Committee

Company Employee Employee Directors Chairman? Director? Committee Committee Committee (Avg)

(Non-Erm.) (Non-Emp.) (Ncn-Ernp.) (Non-Ernp.)

Boston Properties Inc + 2 8 10 N N 3 3 3 0

Kimco Realty Corp [2006] 3 6 9 N y 3 6 6 0

Developers Diversified R1ty [2006] 1 9 10 N Y 4 4 3 2

Cbl & Associates pptys Inc [2006] 3 6 9 N N 4 4 4 1

Macerich Co [2006] 4 5 9 N y 3 3 3 0

Duke Realty Corp 1 11 12 N Y 4 4 4 4

Amb Property Corp 1 8 9 N Y 4 3 3 2

Brandyw ine Realty Trust [2006] 1 9 10 Y N 3 3 4 3

Camden Property Trust [2006] 2 8 10 N Y 3 3 3 4

Weingarten Realty Invst [2006] 1 8 9 Y N 3 3 3 3

Alexandria R E Equities Inc [2006] 2 7 9 y y 3 3 3 0

Felcor Lodging Tr Inc [2006] 2 10 12 N N 5 4 3 2

Summary Statistics (Excluding Zeros):

Notes:

+ Reflects go-forward future compensation as disclosed in the rrost recent proxy statement.

Appendix C: Market Compensation DataExhibit 2: Real Estate Investment Trusts Meeting Profile

Gene ral Board Com m ittee MeetingsOther

In-Person Telephonic Audit Compensation Nom'Gov Committee

Company Meetings Meetings Committee Committee Committee (Avg.)

Boston Properties Inc + 10 0 8 11 4 0

Kirnco Realty Corp [2006] 4 0 6 4 2 0

Developers Diversified R1ty [2006] 9 0 9 5 2 4

Cbl & Associates Pptys Inc [2006] 8 0 6 2 2 5

Macerich Co [2006] 6 0 9 5 1 0

Duke Realty Corp 8 0 5 5 4 7

Amb Property Corp 6 0 10 5 2 1

Brandywine Realty Trust [2006J 10 0 13 10 3 0

Carrden Property Trust [2006] 7 0 7 3 2 1

Weingarten Realty Invst [2006J 5 0 4 4 4 0

Alexandria R E Equities Inc [2006] 14 0 9 5 4 0

Felcor Lodging Tr Inc [2006] 8 0 8 5 4 0


Notes:

+ Reflects go-forward future compensation as disclosed in the rrost recent proxy statement.

Appendix C: Market Compensation DataExhibit 3: Broad Not-far-Profit and For-Profit Published Survey Market

Regular Board Service

Annual Cash Retainer $30,000 $10,000 $11,000 $20,000 $30,000 $40,000 $50,000 $30,000 $40,000 $50,000 $25,000 $30,000 $45,000 $30,000 $37,500 $45,000 $28,750 $36,875 $47,500

Board Meeting Fees $1,500 $1,000 $1,000 $1,500 $1,500 $1,500 $2,000 $1,500 $1,750 $2,000 $1,125 $1,500 $2,180 $1,500 $1,500 $2,000 $1,406 $1,563 $2,045

Committee ServiceMember Annual Retainer nla n/a nla n/a $4,917 $5,833 $8,833 nla $8,713 nla nla $5,833 nla $5,000 $7,217 $10,000 $4,958 $6,899 $9,417

Member Meeting Fees $1,500 n/a nla nla $1,067 $1,500 $1,667 nla $1,221 nla nla $1,417 nla $1,000 $1,500 $2,000 $1,033 $1,409 $1,833

Chair Annual Retainer nla nla nla nla $6,667 $9,833 $13,333 n/a $9,258 n/a n/a $6,667 nla $6,667 $11,667 $16,250 $6,667 $9,356 $14,792

Chair Meeting Fees $2,000 nla n/a nla $1,217 $1,500 $2,000 n/a $1,530 nla n/a $1,500 nla $958 $1,733 $2,317 $1,088 $1,566 $2,158

Total Cash Compensation $8,936 $24,750 $33,249 nla nla n/a $54,722 $68,250 $84,397 n/a n/a nla $55,875 $64,917 $76,433 $55,299 $66,583 $80,415

Equity nla n/a nla nla $53,085 $83,677 $125,990 n/a nla n/a $30,458 $67,833 $115,823 $62,501 $96,440 $135,474 $48,681 $82,650 $125,762

Total Compensation $97,500 $8,936 $24,750 $33,249 $118.187 $151,707 $196.3751 $54.722 $68.250 $84,397 $97,436 $132,760 $191,635 $107,004 $139,472 $175,230 $94,337 $123,047 $161,909

Notes:

'Source: Walson Wyatt 2007/2008 Survey Report on Board otDirectcts Compensation, Policies & Practices. Not-for-Profit companies; note data refiective of small sample sizes. Sample notscoped according to size.

'Commillee servce data insufficient Compensation data reflected above is based on organizations paying bolh meeting fees and retainers.

'Total cash compensation and total compensation values reflect Wyatt's disclosed "Total Compensation (Including Committee Compensation)".

'Source: Mercer's November 2007 Research Report: US Mid-Sized 150 2006 Director Pay. General industry companies with median revanues of $2.9B and median assets of $3.5B.

5Analysis of committee service market data is based on the simple average of respective quartile values from Audit, Compensation, and Governance/Nominating Committees,

6Equitycompensation value for board service. Equityawards (stock options, restricted stock and com man stock) valued at time of grant Options valued according to the Black-Scholes model. If no grant dale was specified, Mercer assum edaward was granted at most recent annual meeting. Initial equity awards valued and annualized over a six-yaar period.

'Total compensation (retainers for board and committee service. meeting fees, the grant-dale value of annual equity awards , and the annualized portion of initial equity awards) for a typical director (Compensalion Committee Chair and memberof the NominatinglGovernance Committee).

·Source: Walson Wyatt 2007/2008 Survey Report on Board orDirectors Compensation. Policies & Practices. All organizalions companies (exclUding banking, finance, insurance, health care and not for profit industries) with sales ranging from $2B to $3.5B.

.."1mmitte service data reflect the averages of com pensation, audit and nomlnaling committee average values for organizations with revenues ranging from $2B to $58. Compensation data reflected above is based on organizations paying both meeting fees and n

Jlal cash compensation and total compensation values reflect Wyatt's disclosed "Total Compensation (InclUding Committee Compensation)".

"Source: National Association of Corporate Directors (NACO) and the Center for Board Leadership: 2006/2007 Director Compensation Report. General industry companies with revenues of$1 B 10$2.5B.

"Board meeting fees reported in 5 urvey reflect aggregate annual values. Mercer interpolated the per meeting fee bydi"';ding each quartile's annual value by the median number of annual meetings held reported in Wyatt's general industry cui above. scoped torevenues of $2B to $3.5B (8 meetings).

"Equity includes options and full value awards. All stock valuations are based on respective com panys stock price on date of its annual meeting. Options valued al33% of granl value.

"Source: Buck Consultants 2007 Board ofDirectors Compensation and Governance Practices. General industry companies with sales of $1B 10$4.9B. Board meeting fees and committee-related compensation values are not scoped according to revenue.

"Committee compensation reflects simple average of respeelive quarliles of audit, compensation, and nominatinglgovernance committees.

"'Total cash compensation com puted as the respeclive quartile of basic board pay for Ihose paying commillee service (relainer plus board meeting fees multiplied by number of board meetings) plus the respective quartile of the simple average of additional cash faservice (average of audit, compensation, and nominalinglgovarnance commillees), which is the retainer plus meeting fees multiplied bynumberofmeetings for each committee.

"Total annual equity grant value is based on Btack-Scholes model, using the company-specific assumplions for volatility, term, risk-free rate and diwdend yield as most recently reported in public filings.

'''Total Dfrecl Compensation based on Black-Scholes model.

19Generallnduslrymarketcomposite reflects the simple average of each quartile of data from Mercer, Wyatt,NACO and Buck.

Appendix C: Market Compensation DataExhibit 4: Not-far-Profit Direct Comparables

Milton Hershey School & School Trust 4 No Board Chair Identified

Queens Medical Center 5.6 None n/a n/a 5 None None 2

, 'Iiuokalanl Trust 7 $145,500 n/a n/a Full Time $93,800 $93,800 $93,800 n/a Full Time

.ialllo Home Trust No Board Chair Identified $16,777 $16,777 $16,777 n/a 2

Alu Like, Inc. 8 None n/a n/a nJa None None nla n/a

75th Percentile $819 n/a n/a nJa n/a n/a - n/a n/a n/a n/a 2 11

Median $383 n/a n/a nla n/a nla nla n/a n/a nla 2 7

Axeraqe $1,994 nla nla nJa nJa n/a - n/a nJa n/a nla 2 9

25th Percentile $14 n/a n/a n/a nla n/a - n/a nla n/a n/a 2 3

Note: Analysis excludes zero values. Analysis excludes data associated with Incumbents who clearly served a partial year's worth of service. where disclosed and/or disc emable.

Source: Most recently disclosed Form g90.

1 Rounded to the nearest hour.

2 Reflects minimum and maximum values in the sample.

3 Includes executives and Board Chair, where applicable.

4 Hershey Trust Corp is a Trustee, contributing part-time servce and receivnq $1,000 compensation. The value of compensation has been excluded from our analysis.

5 The Queen's Medical Center sample includes an executive that Is also a Trustee. We have included the incumbent in the sample for the trustee size, but haxe excluded the incumbent's compensation.

6 Queen's Medical Center has one Chair and two Vice Chairs. Six of the Trustees are disclosed as ha~ng served for part of the year; we have included all such listed Trustees, since there is no disclosure as to any Trustees resiqninq. The President & CEO and theChief of Staff are executives sef'ing as Trustees; we have excluded their compensation from the analysis.

7 Liliuokalani Trust does not disclose whether one of its Trustees serves as Chair. Mercer called the Trust and confirmed which disclosed Trustee serves as Chair.

8 Alu Like Inc. has one Chair and two Vice Chairs.

Appendix C: Market Compensation DataExhibit 5: For-Profit Direct Comparables-Hawaiian General IndustryPolicy

Bank Of Hawaii Corp

Hawaiian Electric Inds [2006]

Central Pacific Financial Cp [2006]

Alexander &Baldwin Inc

$10,473$9,994$5,680$2,479

$20,000$32,500$10,000$33,000

$750$0

$800$1,500

$0$0$0$0

$5,000$5,000$8,000$7,500

$750$0

$600$1,500

$0$0$0$0

$0$5,000

$0$0

$5,000$10,000$12,000$12,000

$1,500$0

$600$1,500

$500$0$0$0

Summary Statistics (Excluding Zeros):75th Percentile n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aMedian $7,837 $26,250 $800 n/a $6,250 $750 n/a n/a $11,000 $1,500 n/a25th Percentile n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aAverage $7,157 $23,875 $1,017 n/a $6,375 $950 n/a n/a $9,750 $1,200 n/a

Appendix C: Market Compensation DataExhibit 5: For-Profit Direct Comparables-Hawaiian General IndustryTotal Compensation Value

"'lank Of Hawaii Corp

.-aw aiian Bectric Inds [2006]

Central Pacific Rnancial Cp [2006]

Alexander & Baldw in Inc

$52,498$48,204$10,000$100,000

$100,748$90,704$42,400$175,000

Summary Statistics (Excluding Zeros):75th Percentile n/a n/a n/a n/a n/a n/a n/a n/aMedian $7,837 $26,250 $7,500 $7,750 $15,750 $45,375 $50,351 $95,72625th Percentile n/a n/a n/a n/a n/a n/a n/a n/aAverage $7,157 $23,875 $10,100 $7,625 $13,950 $49,538 $52,675 $102,213

Note: Compensation above reflects values associated with a director who is a member of the board, a member of the Audit Committee and Chair of theCompensation Committee. This is Mercer's standard assumption for valuing "typical director" compensation.

Appendix C: Market Compensation DataExhibit 5: For-Profit Direct Comparables-Hawaiian General IndustryMember Profile

Company

2007Revenue

($MiI)

General Board MembersTotal Non-Employee Lead

Employee Non-Employee Directors Chairman? Director?Audit

Committee

Committee MembersCompensation Nom/Gov

Committee CommitteeOther Committee

(Avg)

Bank Of Hawaii Corp $842 11 12 N YHawaiian Electric lnds [2006] $2,536 11 12 Y YCentral Pacific Financial Cp [2006] $396 14 15 Y YAlexander & Baldwin Inc $1,681 8 9 N Y


(Non-Emp.)

5554

(Non-Emp.)

4554

(Non-Emp.)

103

53

(Non-Emp.)

4

3

6o

Appendix C: Market Compensation DataExhibit 5: For-Profit Direct Comparables-Hawaiian General IndustryMeeting Profile

Company

2007Revenue

($MiI)In-Person TelephonicMeetings Meetings

Committee MeetingsAudit Compensation Nom/Gov Other Committee

Committee Committee Committee (Avg.)

Bank Of Hawaii CorpHawaiian Electric Inds [2006]Central Pacific Financial Cp [2006]Alexander &Baldwin Inc

$842$2,536

$396$1,681

1013

612

oooo

614

106

98

6

5

57

103

oooo


Appendix C: Market Compensation DataExhibit 6: Overall Market Composite

Large Foundations $29,500 < 1 3x $88,500

REITs $130,000 < 1 2x $260,000

Corporate Boards Published Surveys $125,000 < 1 2x $250,000

Hawaiian General Industry Peer Group $96,000 < 1 2x $192,000

Notes:

"Please refer to the Market Evaluation section for a detailed discussion of market data and adjustments.

2Adjustment factor reflects the multiple applied to market data to be considered comparable to KS in terms of

time commitment and level of responsibility.

3Reflects reported median market value adjusted by the Adjustment Factor.

"Overall market composite reflects the sim pie average of each market reference point's adjusted median

market value.

Appendix D: Process and Methods

In our experience, KS is a truly a unique organization with the operation of three campuses throughoutthe state, being the largest private based owner in Hawaii with vase and diverse real estate holdings;and a complex investment portfolio including: private equity investment, real estate development,residential and commercial real estate and long-term land leases. Moreover, its required operationunder applicable trust law is an added complexity that most not-for-profits do not have (e.g. universitiesand most private and charitable foundations), requiring many key decisions and actions that cannot bedelegated to the CEO.In order to address KS's uniqueness and complexity, Mercer believes that a broad search for relevantmarket data is required. This led us in 1999 and 2003, and still leads us to develop multiple "marketreference points"1 for consideration, any or all of which might influence reasonable compensation for theTrustees. These market reference points range from a pure governance role represented by the role ofa corporate director to the Trustee role among potentially direct comparables. We selected as manyrelevant market reference points as we considered appropriate, which are described below.Boards of trustees of large foundations

III These organizations have a charitable mission, may include significant operations, and hold a similargovernance and oversight role as the Trustees.

III Data were collected from the most recently available IRS Form 990 Annual Reports of 14 largeprivate and operating foundations with assets ranging from $1 billion to $12 billion; median assetsapproximate $6.5 billion.

Boards of directors of large real estate investment trusts ("REITs")III This market segment represents the value in the marketplace of the governance role in diversified

real estate holding companies.III Data were collected from the most recent public proxy filings from 12 REITs with assets ranging from

approximately $3 billion to $11 billion; median assets approximate $7 billion.

1 In this context a "market reference point" means a segment of market data (e.g. corporate boards of directors or foundation boards of trustees) that can be used to produce adiscreet sample of compensation data.


Boards of directors among general industry (i.e. corporate boards) and not-for-profit orqanlzatlons'

!I This market segment reflects the role of governance and oversight, again similar to the Trustees'responsibilities.

II Data were collected from nationally-published surveys of corporate directors among general industry andnot-for-profit organizations with revenues ranging from $1 to $5 billion (surveys do not organize data byasset size), where scoping data were available. These ranges were selected to reflect the size oforganizations that have multiple lines of business, and thus better reflect the complexity of KS.

!I Data were also collected from Mercer's proprietary database of 150 mid-sized general industry companies.

Direct Comparables

!I We developed groups of both not-for-profit and for-profit peer organizations that were directly comparableto KS in terms of location or organizational structure.

Not-for-profit direct comparables:

~These include organizations located in Hawaii: Alu Like, Inc., the Liliuokalani Trust, the Lunalilo HomeTrust, and The Queen's Medical Center. They represent similar services and trustee roles in theHawaiian market; however we caution that these organizations are very different in terms of size,complexity, operations and asset base.

~ Data were collected from the organizations' most recently available IRS Form 990s.

~ We also considered the Milton Hershey School & School Trust as this organization was of interest to theA.G.'s office as a comparable.

1 Consideration of the not-far-profit published survey market reference point is new to the 2008 evaluation.


For-profit direct comparables: 1

>These include several general industry companies in Hawaii: Bank Of Hawaii Corp, Hawaiian Electric,Central Pacific Financial, Alexander & Baldwin Inc.

>These organizations reflect the market for directors of general industry corporations in Hawaii; however,again they are very different in terms of size, complexity, operations and assets.

>Data were collected from the most recent public Proxy filings.

1 This market reference point is new to the 2008 evaluation.

Appendix E: Other Observations and Recommendations

On a related governance topic as we conducted our evaluation, we had occasion to speak to theTrustees and the Committee about the need to recruit highly qualified Trustees to replace thoseTrustees who will step down as their terms expire (Each Trustee being subject to a two term limit). Welearned that in order to maintain board continuity, the Trustees terms were initially staggered by oneyear so that the makeup of the board would change over five years rather than all at once.

However, we note that the Trustees typically serve two terms and, as a result, there will be a completeturnover of the board over the coming five years, followed by five years with no turnover, assuming allTrustees serve two terms. Our experience on governance matters suggests that board continuity andinstitutional memory are crucial to high performing boards, and we therefore suggest that KS considerwhether the Trust would be better served if the overlapping Trustee terms turn over on a 1O-year cyclerather than a 5-year cycle. This may also have a positive impact on the Trust's ability to recruit highlyqualified Trustees, as they would not be required to conduct a difficult search each year for fiveconsecutive years.

www.mercer.com

7541 Napoko PlaceHonolulu, Hawai'i 96825

Phone(808)522-7278 ext 29Facsimile(808)522-7282

Trustee Compensation Committee"Estate of Bernice Pauahi Bishop

REQUEST FOR PROPOSAL

Rosanne K. GooDouglas M.GotoMichael E. Rawlins

TO CONDUCT A COMPENSATION SURVEYTO BE USED IN DETERMINING THE COMPENSATION OF

THE TRUSTEES OF THE KAMEHAMEHA SCHOOLS

OBJECTIVE

The Tn.zs(t'lt'l Compt'lZJ$tl¢ioZl- Com.zJ:J.irXt'lt'l created by Order of the probate court of the First Circuit,State of Hawai'i ("Corui"), entered in Equity No. 2048 on August 2,2007, for the purpose ofdetermining the compensation of the Trustees of the Kamehameha Schools, seeks to engage anational professional consulting firm active in the field of executive and trusteecompensation to conduct an independent compensation survey for the purpose of assistingthe Committee in determining such compensation.

BACKGROUND

Kamehameha Schools is a substantially endowed private educational charitable trustestablished by the Will of Bernice Pauahi Bishop ("Will"), whose primary mission is theeducation of children of Hawaiian ancestry. Kamehameha Schools, founded in 1887,operates three K-12 campuses located on the Islands of Oahu, Maui, and Hawai'i, a statewidepreschool program, a system of satellite elementary schools located on neighboring islands,summer school programs, and a financial aid program for pre-school and post-high students.The Kamehameha Schools are conducted as Protestant schools.

Kamehameha Schools' investment properties are located in Hawaii and elsewhere.Kamehameha Schools" consolidated (on a GAAP basis) asset and financial portfolio as ofJune 30, 2007, includes:

• Annual revenues of approximately $721 millionIt Assets of approximately $7.0 billion• Approximately 173,000 acres of conservation land; 189,000 acres of

agricultural land; and 833 acres of commercial property.• Multiple subsidiary and supporting organizations.

Kamehameha Schools has a board of five (5) trustees. The incumbent Trustees wereappointed by the court and began serving on January 1, 2001, with the exception of CorbettKalama, who was appointed on April 1, 2007.

* Order of the Probate CourtIn the Circuit Court of the First CircuitState of HawaiiRe: Equity No. 2048; August 2, 2007


Kamehameha Schools operates under a CEO-based management system as set forth in KSGovernance Policy, approved by court Order dated August 27, 1999, as amended. Thecurrent organizational chart is attached as Exhibit A.

Kameharneha Schools has also developed a Strategic Plan that will serve to guide thedirection of Kamehameha Schools over the next decade. Strategies to implement theStrategic Plan have been and are continuing to be developed, including an EducationalStrategic Plan approved by the Trustees in June 2005. For more information about theStrategic Plan, Kamehameha Schools' Governance Policy and other information can befound on the Kamehameha Schools website: www.ksbe.edu.

Kamehameha Schools is a charitable entity having tax exempt status under Internal RevenueCode Section 501 (c)(3) alld is organized alld operated for educational purposes within themeaning of Section 170(b)(1)(A)(ii) of the Internal Revenue Code.

Pursuant to a COUli order filed on May 15, 1999, the court approved a plan (the" Plan") todetermine the Trustees' compensation at least once every three years. Under the Plan, thecourt appoints a Trustee Compensation Committee (the "Committee") to determine "What isa reasonable annual amount of compensation to be paid to each of the trustees of theKamehameha Schools?" In making its determination, the Committee is charged withcommissioning all independent compensation survey from a national, independent consultingfirm active in the field of executive and trustee compensation. Any compensation studycommissioned or received by the Committee, together with a statement of the credentials ofthe firm preparing the study, will be filed with the COUli. The compensation determined bythe Committee must be in compliance with and satisfy applicable requirements of state andfederal law, including without exception, federal Intermediated Sanctions legislation andTreasury regulations incident thereto, and Hawai'i Revised Statutes 607-20, as amended byAct 310 of the 1998 Hawai'i State Legislature.

The court approved the current compensation of the Trustees by the court Order filed onMarch 22, 2004.

SCOPE

The scope of the compensation survey shall involve (i) identification of Roles &Responsibilities: (ii) study of compensation levels paid by similarly situated organizations,both taxable and tax-exempt, for functionally comparable positions; (iii) review and report ofthe availability of similar services in Hawai'i; (iv) interviews of the Kamehameha Schools'Trustees and their staff and the Attorney General of the State of Hawai'i as pttrf'i1JS p!t(ri!if'i tothe Trust Estate: (v) compiling independent compensation surveys for reviews by theCommittee; and (vi) rendering a report to the Committee establishing a range of trusteecompensation that is comparable, reasonable and consistent with applicable law andregulations. In addition to the factors enumerated above, the Committee has authority torequire the consideration of other relevant factors by the consulting finn.

* Order of the Probate CourtIn the Circuit Court of the First CircuitState of HawaiiRe: Equity No. 2048; August 2, 2007


The compensation survey must be consistent in all respects with the Will, applicable law andjudicial decrees, and must be developed in accordance with the requirements set forth in thePlan and the Orders.

PROPOSAL

The proposal submitted must include the following:

Credentials and Qualification. The proposal must present your professionalqualifications and expertise to conduct an independent compensation survey and to render areport establishing a range of compensation. Particular emphasis should be given to yourexperience in the field of executive and trustee compensation. Indicate the names of otherorganizations for which you have performed similar engagements and the scope of suchengagements.

Approach and Process. The proposal should present your approach to conduct thecompensation survey, including the proposed work plan for completion of the engagement.

Resources. Indicate the resources to be used in conducting the compensation survey.Provide resumes for those individuals you anticipate will be involved in the engagements andindicate how the engagement team will be structured.

Time Frame. The compensation survey is currently due January 11, 2008, theCommittee will ask for an extension after selecting the consulting firm.

Fees. Provide an estimate of the cost of your services and your billing practice.

LOGISTICS

The proposals are due on November 9,2007 at:

Trustee Compensation Committee7541 Napoko PlaceHonolulu, Hawaii 96825

The Committee will review each submission and may schedule telephone conferences orpersonal interviews where appropriate. The intended time line is to select a consultant byDecember 9,2007 and allow 10 weeks to complete the survey.

SELECTION CRITERIA

The trustee Compensation Committee has made no pre-conunitment to any firm. Selectionwill be based upon the proposals received, responsiveness, resources, qualifications,references, proposed fees and other standard considerations.

Attachment

* Order ofthe Probate CourtIn the Circuit Court ofthe First CircuitState of HawaiiRe: Equity No. 2048; August 2, 2007

• . .._._.__ __.__·__ ..·_·· _. __._c_.__.. · _ _ _.__.._., _ _ _ _._ ~. ._ .._ ..__._.._.-'--_.. .. ~ _ ._ _

Martin L. KatzWorldwide Partner

MERCERr:=L MARSH MERCER KROLL~ GUY CARPENTER OUVERWYMAN

January ii, 2008

Michael E. RawlinsTrustee Compensation CommitteeKamehameha Schools7541 Napoko PlaceHonolulu, HI 96825

Private & Confidential

Subject: 2008 Trustee Compensation Evaluation

Dear Michael:

Three Embarcadero Center, Suite 1500San Francisco, CA 941114157438n8 [email protected]

We thank the Trustee Compensation Committee ("Committee" or "you") for the opportunity towork on this matter. The objective of this letter is to confirm the scope of our engagement toconduct an evaluation of the annual compensation of the Trustees of the Estate of BernicePauahi Bishop (the "Estate" or "Kameharneha Schools") on behalf of the Committee andpursuant to the order of the Probate Court in the First Circuit Court of the State of Hawaii("Court"). This work will be subject to the terms and conditions of our consulting relationship asoutlined in the Kamehameha Master Terms and Conditions, incorporated herein by reference.

Background

The Court appointed a Trustee Compensation Committee to determine, at least once everythree years, the reasonable annual amount of compensation to be paid to each of theTrustees of Karneharneha Schools. In December 2007, the Committee selected Mercer toconduct a review of the Trustee compensation program based on Mercer's response to your'Request for Proposal'. Mercer also conducted the last review of the Trustee compensationprogram in October 2003.

This engagement letter outlines Mercer's approach and work plan for evaluating.Kamehameha Schools' Trustee compensation program.

Scope of Services

Mercer's approach will be consistent with the process established during the previousevaluation, as outlined below:

EXHIBIT "L"Consulting. outsourcing. Investments.

MERCER1:":]_ MARSH MERCER KROLL~ GUY CARPENTER OLIVERWYMAN

Page 2January 11, 2008Michael E. RawlinsTrustee Compensation CommitteeKamehameha Schools

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1. Identify and review Kamehameha Schools' current compensation program, Trusteeroles, responsibilities and time commitments, based on interviews and a review of relevantdocuments... Interview Trustee Compensation Committee members, all Kamehameha Schools

Trustees including the Chair, the Chief Executive Officer and the Deputy AttorneyGeneral of the state of Hawaii.

2. Study of compensation levels paid by similarly situated organizations, both taxable andtax-exempt, for similar roles.EI Peer Group market references:

o Private Foundations!J Real Estate Investment Trusts (REITs)o General industry

III Published survey market references:!J Not-for-profit sectorn General industry

.. Also consider similar roles and organizations in Hawaii, as available.

3. Develop competitive compensation policy; review & discuss with TrusteeCompensation Committee.

4. Prepare a report to the Committee that recommends a range of Trustee compensationthat is appropriate and reasonable.

5. Review the draft report with stakeholders (e.g., the Committee, the deputy AG).

6. Finalize materials and present findings.

Instructions

You or your designee will serve as our primary contacts for your organization. We report tothe Committee regarding this engagement and will take all of our instructions regarding theengagement from you.

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MERCERr=J_ MARSH MERCER KROLL~ GUY CARPENTER OLIVER WYMAN


Staffing

I will have overall responsibility for all of the work described herein. Yolande Foord, aPrincipal with experience working with Kamehameha Schools and not-far-profit organizationsgenerally, will assume responsibility for the project management and will complete day-to-daywork with other consultants in the Human Capital practice located in San Francisco.

Professional fees and expenses

Professional Fees for the compensation consulting services will be billed as incurred at ourregular hourly billing rates. We estimate that we will accrue between $50,000 and $60,000 inprofessional and administrative fees to conduct the evaluation.

Professional Fees are billed on a monthly basis. In addition to Professional Fees, you will alsopay for our expenses and disbursements incurred in connection with the provision of theServices. You will be responsible for any sales taxes, including those assessed by any taxauthorities subsequent to payment for the Services.

Timeframe

Our intent is to finalize all deliverables around June 2008, SUbject to receiving all appropriate datain a timely fashion. If such information is not timely received, projected timeframes maychange. We will send you a work schedule and timeline, which can be adjusted at the projectplanning meeting, jf needed, to better suit your needs.

Tenns and Conditions

This letter is subject to the terms and conditions of our consulting relationship as outlined in theKamehameha Master Terms and Conditions.

Full Agreement

. We have found that clarifying our terms of engagement helps to prevent any misunderstandings ..Consequently, this letter, once accepted as indicated by our signatures below, will reflect our full.and complete understanding and agreement of the terms of our relationship.

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MERCERr::J_ MARSH MERCER KROLL~ GUY CARPENTER OLIVERWYMAN


We look forward to working with you. If you have any questions about these terms, please do nothesitate to call. If not, please indicate your agreement to the terms of this letter by signing theenclosed copy of this letter and returning it to me.

MERCER /hdBy: 7/UL

Name: Martin L. Katz

ACCEPTED AND AGREEDKamehameha SchoolsTrustee Compensation Committee

Date: January 11, 2008

By:

Name:(Please Print)

Copy: Yolande Foard, Mercer ConsultingCindy Gentry, Mercer Consulting

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MERCERrJ_ MARSH MERCER KROLL~ GUY CARPENTER OLIVERWYMAN

Exhibit AData Request

Key documents:

1. Current Trustee pay schedule and policy

2. Annual Kamehameha Schools reports (2005, 2006, 2007)

3. Court-mandated policies

4. 0&0 Policy (summary page that describes the level and type of coverage)

5. Calendar for 2006, 2007 and 2008

6. Last Special Master Report

7. Strategic Plan Document

8. Trustees' self evaluations

9. Completed Strategic Plans

10. Job descriptions for the Trustees and CEO

Consulting. Outsourcing. Investments.

Report of the Trustee Compensation Committee Regarding a ...Committee and its determination ofthe sole issue before it is designed to complywith the Intermediate Sanctions Law. Compliance

Documents