Case Study 2023 Business Finance



Midwestern: Contemporary Art

Read the Midwestern: Contemporary Art case study. Prepare an analysis of the case study that addresses the following objectives:

1. Part A:

a. Evaluate the type of conflict illustrated in this section of the case.

b. Assess alternatives and recommend a structural solution that the organization might implement that will reduce the conflict from role ambiguity.

2. Part B: Assess alternatives and recommend solution(s) that Peggy Fischer might implement or recommend to the board using the case discussion questions as a guide.

Conclusions must be well reasoned and supported with at least 5 citations from the course readings. The analysis should be a minimum of 750 words in APA format, excluding the title page and references. Be sure to follow the guidelines outlined in the grading rubric below.


Case 5  Midwestern::Contemporary Art 

 (A) Who Is in Charge?  

The Midwestern::Contemporary Art (MCA) museum is one of the nation’s largest facilities devoted to modern art, exhibiting some of the most compelling and thought-provoking works of art created since 1945. The MCA documents contemporary visual culture through painting, sculpture, photography, video, film, and performance arts. The museum is located in a new facility near the historic White Tower in the heart of the city of Great Lakes, and boasts a gift shop, bookstore, restaurant, 300-seat theater, terraced sculpture garden, and spectacular view of Lake Michigan. Under the leadership of several directors over four decades, the MCA was transformed from an insignificant art showroom in a converted bakery into what is known today as a major shrine to contemporary art. The MCA’s continued success can be attributed to the vision of its leaders, succinctly captured in the museum’s mission statement:  The mission of MCA is to be an innovative center of contemporary art where the public can directly experience the work and ideas of living artists as well as understand the historical, social, and cultural context of the art of our time.  The museum boldly interweaves exhibitions, performances, collections, and educational programs to form a challenging, refreshing, and exciting atmosphere for our visitors. In addition, we take pride in providing insights into the creative process for our public viewers.  MCA aspires to attract a broad and diverse audience, create a sense of community, and act as a venue for contemplation and discussion about contemporary art and culture.  Peter and Catherine Smith  Peter and Catherine Smith met when they were teenagers. Friends of the couple said the two functioned as a unit. The couple was not well known among the downtown crowd of collectors until they became involved with contemporary art in the 1970s. Thereafter, the Smiths tended to shy away from the social limelight.  Both Smiths had careers in the legal sector—Peter graduated from an Ivy League school and became the assistant to the chairman of a national retailer headquartered in Great Lakes. He later served as a municipal judge. Catherine graduated from a Great Lakes law school and became the first female lawyer in the state attorney’s office, handling cases in child and spousal abuse.  The couple began collecting art after Catherine experienced cerebral vascular spasms in the late 1960s and was forced to give up her legal career. In an assessment of her life, Catherine told her husband that she would be unable to fulfill three of her lifelong dreams: raising their daughters, breeding horses, and acquiring a collection of art. Upon Catherine’s Source: Research assistant Rudolph Ng and Professor Matthew Liao-Troth prepared this case as a basis for class discussion, not to illustrate effective or ineffective handling of an administrative situation. Jane Lee assisted with preliminary work on this case and made suggestions for the teaching notes. 674 Case 5 unexpected recovery, the couple dedicated more time to their children, invested in a horse, and made their first art purchases.  A visit to New York’s Museum of Modern Art in the early 1970s prompted the couple’s interest in works created by contemporary artists. After much research and firsthand observations at galleries, the Smiths began to purchase works of art in the minimalist genre, along with examples of new realist paintings and conceptual art. Such works had not been acquired in depth by Great Lakes collectors, but by 1980 the Smiths’ intense collecting activity was recognized by supporters of the MCA.  In June of 1981, Peter was invited to be a member of the MCA board of trustees. Catherine recalled later,  Board President Heidi Goldman visited us, saying, “I have good news and bad news. You have been asked onto the board, and we need a check for $10,000.” I admired that directness.  Peter Smith joined the board and began pushing his desire that the MCA would attract more artists and a broader audience base to appreciate contemporary art. He and his wife were prepared to donate more money to make the MCA a better museum with a facility larger than the three-story townhouse it then occupied. In 1989, Peter Smith was elected the board chairman. He then devoted more time to managing the MCA with the hope that his business acumen could make the MCA a more nationally prominent museum.  Keith Schmidt  Keith Schmidt was hired as the MCA’s executive director at the start of 1989. Before that, Schmidt served as director of the Seaside Art Museum on the West Coast. Prior to that, he was director of the Southern Museum of Art. At both museums, Schmidt successfully instigated novel building programs, including plans for a new museum building in Seaside and the design and construction of a 70,000-square-foot, $12.1 million adaptive reuse project of historic National Register buildings for the Southern Museum of Art.  During his first month at the MCA, Schmidt showed that his reputation was well earned. One of the first things he did at the MCA was to set goals for the museum. He wanted the museum to be the best in the Midwest and among the top five across the nation in five years. To achieve such an ambitious objective, he realized the necessity of large donations and media attention. Henceforth his time was split among fund-raising, recruiting the best curators, and obtaining and showing the best artwork.  The Conflict between the Chairman and Director  During the two-year overlap of Smith’s chairmanship and Schmidt’s term as executive director, the two men often had intense debates at board meetings. These confrontations were rooted in a number of areas: what artifacts to show, which artist to invite to forums, and when to hold exhibitions. However, the most heated arguments occurred over the direction and speed of the MCA’s expansion.  John Stuart, a former board member and chairman of the museum’s budget committee, commented on the differences between Smith and Schmidt:  I remember a specific meeting when Peter challenged Keith. We were coming out of a rough time—having funded some very expensive exhibitions—and were just about to break even  Midwestern::Contemporary Art 675  financially. Keith wanted to rent extra office space and hire more staff. Peter asked why we were moving so quickly, but he didn’t give orders or intimidate anyone. Besides, any good board chairman had to ask, and it was his responsibility to make intelligent business decisions. During the first six months of 1990, Peter asked a lot of questions. He wanted to proceed in a conservative manner and be assured that there was a backup plan if we didn’t continue the plans with the new building. Yet Keith proceeded, racing ahead like a wild bull and perhaps without authority to take such action. There was no question that Keith and Peter disagreed on a number of financial issues. However, each year, we always ended up with a balanced budget, and so I feel that Schmidt acted very responsibly in dealing with fiscal matters.  By October 1991, tension between the two had become very visible to others in the museum. Smith approached his friend and fellow board member, Jennifer Lee, for advice. At a loss for how to handle the aggressive style of Schmidt, Smith expressed his frustration:  Jennifer, I don’t know how other folks on the board feel, but I’m pretty darn sure about my  duties and responsibility as a chairperson. You know, they didn’t put me in this position without a charge. I’m here to oversee the museum’s operation, and Keith’s exceedingly ambitious agenda isn’t financially sound. I feel that as the board chairman, I should have the final say on this serious matter.  On the other hand, Keith Schmidt also sought to build coalition support from board members. He approached Richard Lang, counsel to the board, and told him his problem with the chairman:  Throughout my 12-year experience as an art museum director in three other places, I have never had so much interference from the board and chairpersons. I always thought that if the board hired me, then they must trust my ability as a leader and manager of their institution. Rarely had previous chairpersons or board members questioned or objected to my proposals since they had faith in my professional knowledge. After all, my recommendations and proposals have almost always resulted in prosperity and development of their institutions. However, sometimes at MCA, some members of the board, and especially Peter, seem to be downright intrusive and skeptical of my day-to-day management.  In November 1991, the board decided to vote on whether to go with Schmidt’s advice to rapidly expand the MCA or to adhere to Smith’s conservative policy. Although most members were somewhat skeptical about Schmidt’s aggressive plan to develop the museum, most of them felt that they should take the risk. After the vote, Smith was reasonably upset since his opinion was not supported by the majority. Soon after, Peter and Catherine Smith disappeared from the Chicago art community, and repeated phone calls from the MCA were not returned. At this point, the board elected a new chairperson for the MCA.  Discussion 

Questions for Part (A) 

1. Is Peter Smith micromanaging Keith Schmidt? 2. What type of conflict are they experiencing? 3. What can an organization do structurally to reduce conflict resulting from role  ambiguity?  676 Case 5 4. How should Peter Smith react when his advice is not followed by the board? 5. How are the roles of board chairman and an executive director different in an  organization such as the MCA?  (B) The Decision  It is now the fall of 1997. Peggy Fischer, who earlier this year was elected chair of the Midwestern::Contemporary Art (MCA) board, pored over the messages that her secretary had left on her desk. Almost immediately, Fischer’s attention turned to a message marked “urgent” on the very top of the stack. Bob Hatchs, the museum’s treasurer, had left a memo stating that the MCA was currently facing a very critical financial situation because a $5 million pledge to the museum had not been honored. After reading Hatchs’s memo, Fischer realized the gravity of the MCA’s financial situation— without the $5 million promised by Peter Smith, the museum’s ability to fulfill its mission and attract important exhibits to its state-of-the-art facility would be jeopardized. The new chairperson was determined to resolve the issue as soon as possible in order to preserve both her and the museum’s reputation in the art world as well as the local community.  Peggy Fischer  As a modern art enthusiast, Peggy Fischer collected a wide variety of artifacts ranging from postmodernist paintings to surrealist sculptures. In 1980, her friends in the Chicago art community suggested that she join the MCA, and after several financial contributions to the museum she became a board member. In 1989, after Peter Smith became chairman of the MCA’s board and Schmidt became the director, Fischer, like other members, often noticed that there were conflicts between two strong-willed men. Nevertheless, she chose to remain quiet as the heated debates between the two escalated. After Smith left the MCA board and Avery Truman replaced him, Fischer was chosen as the next chairperson because of her ability to establish excellent interpersonal relationships among board members.  Fischer knew that Peter Smith and his wife Catherine had been long-time supporters of the MCA until museum director Keith Schmidt was hired in 1989. After a series of explicit heated debates and covert power struggles between Peter Smith and Keith Schmidt, the Smiths disappeared from the Chicago art scene at the end of 1991 and missed all payments on their $5 million pledge toward the planned new building for the museum.  Like many nonprofit organizations, the MCA typically does not receive the full amount of pledges. Some donors are unable to fulfill pledges because of unexpected financial hardship. Others simply change their giving priorities between the time they sign the letter of intent to give and the point where payment becomes due. Normally a nonprofit would defer obligations based on such a pledge until it was realized, but at the time the Smiths’ pledge failed to materialize, the MCA was in a fiscal bind: Construction funding depended on that pledge. In addition, in 1995 while construction was under way, a revision of accounting rules by the Financial Accounting Standards Board (FASB) had big implications for how the MCA could treat the pledge.  Midwestern::Contemporary Art 677  The New Building for the MCA  After receiving promises and pledges from a variety of board members and other donors, the MCA board went ahead with construction of a new building for the institution starting in 1993. Not only was the new MCA to be the first project designed in the United States by architect Mattias Lee Bollinger, but it would also be the first building made specifically for the MCA’s use since the institution’s founding in 1967. With almost seven times the square footage of the museum’s previous facility, the new home of the MCA would provide space for installing both temporary exhibitions and works from the permanent collection. The building also would give the MCA a terraced outdoor sculpture garden, a museum store for books and design objects, a café and special events area, and a 15,000-volume art library. In addition, there was to be room for the Gibbons Education Center, which incorporates studio classrooms—or a space suitable for symposia and performances—and a 300-seat auditorium. The new MCA facility opened in mid-1996, about six months before Peggy Fischer became chair of the museum’s board.  In 1995, while construction was in progress, revisions to FASB accounting rules forced many nonprofit organizations across the nation to record pledges as income at the time of the pledge. This impacted the MCA greatly because in the past, pledges were not recorded until the actual transfer of money from donor to museum occurred. The new rule forced the MCA to take greater action in enforcing pledges; they needed to keep their accounts receivables low for financial purposes, such as construction loans or bond issuance, while constructing the new facility. Because of this FASB rule revision, lawsuits to collect unpaid pledges became a hot topic among nonprofit organizations across the United States. Edward Able, head of the American Association of Museums representing 8,000 institutions, told reporters,  We fought the changes made by the FASB to no avail, and the issue has been highly charged for nonprofit groups since that time. We have not polled our members to determine the amounts of the suits or their frequency, but people throughout the art community are hard pressed to cite any instances of museums suing over large pledges.  Today’s Board Meeting  Now, in late 1997, the MCA finds itself in a financial crisis because of a high debt load resulting from construction and because of the Smiths’ unfulfilled pledge, which by now was to have been fully paid. At a meeting today of the MCA board, Peggy Fischer sought advice from the board about how to proceed The board’s chief counsel, board member Richard Lang, suggested that Fischer take legal action against Peter Smith. Lang explained his reasoning:  From a legal standpoint, we have every reason to believe that the lawsuit will proceed in our interests. In 1990, Peter Smith made a written pledge on behalf of himself and his wife to give an endowment that would help build a new MCA facility. The pledge is legally binding since we relied on his donations for our financial security and had reasonable expectation that he would indeed fulfill his pledge. We would not have proceeded with the construction of the new building without his pledge. In the court of law, we can make a plea of the reliance  damages that we have suffered and, thus, seek remedies from the Smiths. 1 678 Case 5  Lang also cited a high-profile 1994 case involving the Philadelphia Museum of Art. Like the MCA situation, the Philadelphia Museum of Art received a $5 million pledge from one of its donors that was not honored. The donor in question passed away before the transfer of funds, and his estate refused to honor the pledge. Subsequently, the Philadelphia Museum sued the estate, and the two parties reached “an amicable settlement.” He recalled another similar case in 1996 where the University of California–Irvine won a lawsuit against a donor who refused to pay up his $1 million pledge. Lang argued that even though the MCA may never receive the $5 million in its entirety, the lawsuit would send a strong message to its prospective donors that the museum takes pledges seriously and relies on them.  Andrew Whitehorse, another board member, agreed with Lang’s suggestion. Whitehorse pointed out that it was unlikely for the MCA to gain other financial resources because a stagnant economy and stock market would not benefit the endowment fund and the amount of donations. “How are we supposed to pay for the new building and the MCA’s continuous exhibitions?” Whitehorse asked. He further expressed his concern that the board’s long-standing prestige might be hurt if the financial crisis was not handled properly and swiftly.  On the other hand, Rich Steiner, a member on the board, objected to Lang’s proposed legal strategy, and contended that the crisis would be best resolved through nonlegal avenues. Steiner argued that resorting to lawsuits will increase the MCA’s financial burden due to enormous legal fees from prolonged legal proceedings or failed attempts to win court cases. Jennifer Lee, a longtime MCA board member, concurred:  The lawsuit will not only irritate and anger the Smiths to the point that they will never voluntarily donate money to us again, but it will also cause other potential donors to view our actions as being insensible. Furthermore, we, the MCA—a nonprofit organization—should not behave like all other greedy businesses that resort to the court of law whenever there is a conflict. We can’t be so shortsighted as to focus exclusively on the $5 million. Besides, how would other donors perceive our legal actions? Would they think twice in the future before placing their trust in us? What kind of image will we be sending out to the community?  Another MCA board member and friend of the Smiths, John Stuart, sided with Lee and Steiner by asserting that it would be callous to sue the couple at this time. He  explained,  Although it’s Peter and Catherine’s moral responsibility to honor their pledge, we should not sue them. This is strictly confidential, but I have recently learned that Peter has been diagnosed with terminal cancer and is undergoing a series of chemotherapy treatments. Peter is now too weak to walk, and Catherine is physically and emotionally distressed to see her husband suffer. I strongly believe that it would be unwise and very insensitive to file a lawsuit against the Smiths. I am sure that they can be reasoned with; now is just not the time to approach them.  After the board meeting, Fischer reviewed the situation and became uncomfortable with several aspects of the legal route. Although she was concerned that the financial crisis may result in the museum’s bankruptcy, Fischer feared the implications of a possible lawsuit against the Smiths. Fischer was unable to predict the consequences of taking the legal  Midwestern::Contemporary Art 679 actions because, with the exception of Philadelphia Museum of Art, no lawsuit involving such a large amount of money had ever been filed by a nonprofit organization (the Philadelphia Museum signed a secrecy agreement barring both parties from discussing their settlement). Furthermore, even though Fischer was not a very close friend of the Smiths, she did work with them for a significant period of time, and was not particularly comfortable with the notion of filing a lawsuit against the couple during such an unfortunate time. Nonetheless, the financial pressure posed by the construction of the new facility was magnifying, and without income, the new facility might be unable to remain open.  As this intense day drew to a close, Fischer glanced at her calendar and noticed that the next board meeting was in five days. She knew that she had to make a decision by the next meeting, but Fischer suspected that decision making was only the first step in handling the situation.  

Discussion Questions for Part (B) 

1. What alternative approaches could Peggy Fischer use to collect the unfulfilled pledge? 2. Should Fischer involve the board in further discussions leading to a decision about whether or not to file a lawsuit? Or should she formulate a recommendation on her own for the board’s next meeting? 3. Do you think the museum should sue the Smiths? Why or why not?

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