In 1883, Bernice Pauahi Bishop, a member of the Hawaiian Royal Family, directed in her will, after naming heirs for gifts of money and land, that the remainder of her estate be held in trust to create the Kamehameha Schools. A majority of the Bishop estate was inherited from her parent and her cousin ʻelikōlani, who in turn had inherited a substantial amount from her first husband Leleiohoku I and her half-siblings Victoria Kamāmalu and Kamehameha V, all who were given substantial amounts of land in the Great Mahele of 1848 which had divided the land of the kingdom amongst the King, the ali'i and the common people. During her lifetime, she experienced and encountered the decline of her Hawaiian people. She was well aware that education was key to the survival of her people and culture; therefore, she left 375,000 acres of ancestral land, entrusting her trustees to use this gift to educate her people.
Bernice named Samuel Mills Damon, William Owen Smith, Charles Montague Cooke, Charles McEwen Hyde, and her husband, Charles Reed Bishop, as the original five trustees to invest her estate at their discretion, use the income to operate the schools, and also "to devote a portion of each year's income to the support and education of orphans, and others in indigent circumstances, giving the preference to Hawaiians of pure or part aboriginal blood." She also directed the Hawaiʻi (Kingdom) Supreme Court to appoint replacement trustees and required that all teachers be Protestant, without regard to denomination.
After Bishop's death in 1884, her husband Charles Reed Bishop carried out her will. Reverend William Brewster Oleson (1851–1915), former principal of the Hilo boarding school founded by David Belden Lyman in 1836, helped organize the schools on a similar model of European-American education.:46 The original Kamehameha School for Boys opened in 1887; after it moved to a new campus, that site was later taken over by the Bishop Museum. The girls' school opened nearby in 1894. The preparatory school, originally serving grades K–6, opened in 1888 adjacent to the boys' school. By 1955, all three schools had moved to the current 600-acre (2.4 km2) campus in Kapālama Heights. The schools became co-ed in 1965 In 1996, the school opened a 180-acre (0.73 km2) campus on Maui, followed in 2001 by the 300-acre (1.2 km2) campus on Hawaiʻi.
In 1991, The Equal Employment Opportunity Commission (EEOC) brought suit against Kamehameha Schools alleging that its requirement that all teachers be Protestant was religious discrimination in violation of the Civil Rights Act of 1964. Although Kamehameha Schools conceded the practice was discriminatory, the School maintained that it was bound by the provisions of Bernice Pauahi Bishop's will, which established the charitable trust creating the School as well as mandating that all the teachers "be persons of the Protestant religion." Accordingly, the School sought to be included within one of the applicable exemptions to the Civil Rights Act of 1964.
The United States District Court for the District of Hawaii found in the School's favor, ruling that the religious education exemption, the religious curriculum exemption, and the bona fide occupational qualification exemption were each applicable to Kamehameha Schools. The United States Court of Appeals for the Ninth Circuit reversed the decision of the District Court, holding that none of the exemptions to the Civil Rights Act was applicable since the School was essentially a secular and not primarily a religious institution despite certain historical traditions including Protestantism. As a result, the requirement that all teachers be Protestant was held to be a violation of the Civil Rights Act.
According to the will, the Supreme Court of Hawaiʻi appointed trustees. After the overthrow of the Kingdom of Hawaii in 1893 and the annexation of the Republic of Hawaii by the United States, the Territorial and State Supreme Court assumed that responsibility. However, many trustees were political insiders. By 1997 trustees were paid $800,000 to $900,000 annually. At that time, critics alleged that the trustees were micromanaging the schools and that they had vastly over-rewarded themselves in their pay. Trustees were appointed to positions as "lead trustee" of a particular part of estate operations. In particular,
Lokelani Lindsey, lead trustee for educational affairs, was blamed for low morale among students and faculty.
On August 9, 1997, ʻi (UH) Board of Regents Chair (and former Kamehameha Schools Principal) Gladys Brandt, retired judge Walter Heen, Msgr. Charles Kekumano, federal judge Samuel Pailthorpe King, and UH William S. Richardson School of Law professor Randall Roth published a report titled Broken Trust in the Honolulu Star Bulletin. They called on the State Attorney General to fully investigate KSBE management. The report alleged, among other things, that:
- the method of selecting trustees (appointment by the Hawaiʻi Supreme Court) was flawed
- the trustees did not fully understand their responsibilities
- the trustees were not accountable for their actions.
On August 12, 1997, Governor Ben Cayetano directed Attorney General Margery Bronster to perform a preliminary investigation into the allegations. In her report on September 10, 1997, she found that "the rights of the beneficiaries may be at substantial risk," and that there were "credible allegations that the intent of Bernice Pauahi Bishop is not being implemented." Another essay appeared in November, with Brandt, UH Professor Isabella Abbott, respected Hawaiian cultural educator Winona Beamer, and others as authors. Its headline was "Tyranny, distrust, poor decisions reign at Kamehameha".
The investigation continued through 1998, when Attorney General Bronster sought the permanent removal of Lindsey and fellow trustees Richard Wong and Henry Peters. On May 6, 1999, after a six-month trial, Lindsey was permanently removed as trustee (Lindsey later appealed her removal). A day later, trustees Wong, Peters, and Gerard Jervis were also temporarily removed. The fifth trustee, Oswald Stender, voluntarily resigned. An interim board was appointed by the Hawaii Probate Court to run the estate.
Bronster had been re-appointed as AG by Governor Cayetano, who was a Democrat. Since 23 of the 25 state senators were Democrats, some political observers thought approval of Bronster's renomination would be assured. However, the investigation proved costly for Bronster, whose confirmation was defeated by the Hawaii State Senate on April 28, 1999 by a vote of 14-11.:256–257
The US Internal Revenue Service retroactively revoked Bishop Estate's tax exempt status because of the trustees' breach of duties and unlawful use of tax exempt charitable trust assets for political lobbying. This action triggered charges of about $1 billion in back taxes and penalties.:254
Jervis resigned permanently on August 20, 1999. The trials for permanent removal of the remaining three trustees were set for December 13, 1999. Wong offered his permanent resignation on December 3, 1999; Peters did the same on December 13; and Lindsey voluntarily resigned on December 17. Many of the court files relating to Bishop Estate were ordered sealed by the court, citing the need for "closure and healing.":281
New Bishops Estate trustees were appointed; they continued to use the same attorneys and law firms as their predecessors. Deputy attorneys general advised the replacement trustees that these attorneys and law firms either had provided flawed legal advice to the previous trustees, or stood by silently while the trustees had ignored good advice. Some claimed "there had been no thorough housecleaning; instead, the old guard had been put in charge and handed the keys.":268
In 2002, the Hawaii Supreme Court threw out the criminal indictments against three Bishop Estate trustees on procedural grounds and ruled no new charges could be brought. In 2005 two of the authors of the newspaper series published a book exploring the issues in the full-scale investigation. The controversy was costly to the schools. In 2009, after a large decline in the endowment, trustee compensation ranged from $97,500 to $125,000 per year, and trustees turned down any pay increases.