The United Way of America, the preeminent charitable organization in the United States, celebrated its 100-year anniversary in 1987. It had evolved from local community chests, and its strategy for fund-raising had proven highly effective: funding local charities through payroll deductions. The good it did seemed unassailable.
Abruptly in 1992, the image that United Way had created was jolted by revelations from investigative reporters of free-spending and other questionable deeds of its greatest builder and president, William Aramony. A major point of public concern was Aramony's salary and uncontrolled perks in a lifestyle that seemed inappropriate for a charitable organization that depended mostly on contributions from working people.
We are left to question the callousness and lack of concern with the ethical impact on the public image of this major charitable and not-for-profit entity. After all, unlike business firms that offer products or services to potential customers, charitable organizations depend on contributions that people give freely out of a desire to help society, with no tangible personal benefits. An image of high integrity and honest dealings without any semblance of corruption or privilege would seem essential for such organizations.
Organizing the United Way as the umbrella charity to fund other local charities through payroll deductions established an effective means of fund-raising. As a not-for-profit entity, the United Way became the recipient of 90 percent of all charitable donations. It gained strong support from employers by involving them as leaders of annual campaigns. The extensive publicity would cause participating executives acute loss of face if their own organization did not go "over the top" in meeting campaign goals. As a result, employers sometimes used extreme pressure to achieve 100 percent participation by employees. A local United Way executive admitted that "if participation is 100 percent, it means someone has been coerced."[247]
For many years, outside of some tight-lipped gripes from corporate employees, the organization moved smoothly along, with local contributions generally increasing every year, although the need for charitable contributions invariably increased all the more.
The national organization, United Way of America (UWA), is a separate corporation and has no direct control over the approximately 2,200 local United Way offices. Most of the locals voluntarily contributed one cent on the dollar of all funds they collected. In return, the national organization provided training and promoted local United Way agencies through advertising and other marketing efforts.
Much of the success of the United Way movement in becoming the largest and most respected charity in the United States was due to the 22 years of William Aramony's leadership of the national organization. When he first took over, the United Ways were not operating under a common name. He built a nationwide network of agencies, all operating under the same name and using the same logo of outstretched hands, which became nationally recognized as the symbol of charitable giving. Unfortunately, in 1992 an expose of Aramony's lavish lifestyle as well as other questionable dealings led to his downfall and burdened local United Ways with serious difficulties in fund-raising.
During Aramony's tenure, United Way contributions increased from $787 million in 1970 to $3 billion in 1990. He increased his headquarters budget from less than $3 million to $29 million in 1991. Of this, $24 million came from the local United Ways, with the rest coming from corporate grants, investment income, and consulting. He built up the headquarters staff to 275 employees.[248]
Aramony moved comfortably among the most influential people in our society. He attracted a prestigious board of governors, including many top executives from America's largest corporations, but only three of the 37 came from not-for-profit organizations. The board was chaired by John Akers, chairman and CEO of IBM. Other board members included Edward A. Brennan, CEO of Sears; James D. Robinson III, CEO of American Express; and Paul J. Tagliabue, commissioner of the National Football League. The presence of these top executives brought prestige to United Way and spurred contributions from some of the largest and most visible organizations in the United States.
Aramony was the highest-paid executive in the charity field. In 1992, his compensation package was $463,000, nearly double that of the next-highest-paid executive in the industry, Dudley H. Hafner of the American Heart Association. The board fully supported Aramony, regularly giving him 6 percent annual raises.[249]
The Washington Post began investigating Aramony's tenure as president of United Way of America in 1991, raising questions about his high salary, travel habits, possible cronyism, and dubious relations with five spin-off companies. In February 1992, it released the following information on Aramony's expense charges:[250]
Aramony had charged $92,265 in limousine expenses to the charity during the previous five years.
He had charged $40,762 on airfares for the supersonic Concorde.
He had charged more than $72,000 on international airfares that included first-class flights for himself, his wife, and others.
He had charged thousands more for personal trips, gifts, and luxuries.
He had made 29 trips to Las Vegas, Nevada, between 1988 and 1991.
He had expensed 49 journeys to Gainesville, Florida, the home of his daughter and a woman with whom he had a relationship.
He had allegedly approved a $2 million loan to a firm run by his chief financial officer.
He had approved the diversion of donors' money to questionable spin-off organizations run by long-time aides and provided benefits to family members as well.
He had passed tens of thousands of dollars in consulting contracts from the UWA to friends and associates.
United Way of America's corporate policy prohibited the hiring of family members in the actual organization, but Aramony skirted the direct violation by hiring friends and relatives as consultants in the spin-off companies. He paid hundreds of thousands of dollars in consulting fees, for example, to two aides in vaguely documented and even undocumented business transactions.
The use of spin-off companies provided flexible maneuvering. One of the spin-off companies Aramony created to provide travel and bulk purchasing for United Way chapters purchased a $430,000 condominium in Manhattan and a $125,000 apartment in Coral Gables, Florida, for Aramony's use. Another of the spin-off companies hired Aramony's son, Robert Aramony, as its president. Loans and money transfers between the spin-off companies and the national organization raised questions. No records showed that the board of directors had been given the opportunity to approve the loans and transfers.[251]
When the information about Aramony's salary and expenses became public, the reaction was severe. Stanley C. Gault, chairman of Goodyear Tire & Rubber Co., asked: "Where was the board? The outside auditors?" Robert O. Bothwell, executive director of the National Committee for Responsive Philanthropy, said, "I think it is obscene that he is making that kind of salary and asking people who are making $10,000 a year to give 5 percent of their income."[252] At this point, let us examine the issue of executive compensation: Are many executives overpaid? See the Issue Box: Executive Compensation: Is It Too Much?"
As a major consequence of the scandal, some United Way locals withheld their funds, at least pending a thorough investigation of the allegations. John Akers, chairman of the board, noted that by March 7, 1992, dues payments were running 20 percent behind the previous year, and he admitted: "I don't think this process that the United Way of America is going through, or Mr. Aramony is going through, is a process that's bestowing a lot of honor."[255]
In addition to the decrease in dues payments, UWA was in danger of having its not-for-profit status revoked by the Internal Revenue Service because of the loans to the spin-off companies. For example, it loaned $2 million to a spin-off corporation in which the chief financial officer of UWA was also a director, this being a violation of not-for-profit corporate law. Moreover, UWA guaranteed a bank loan taken out by one of the spin-offs, also a violation of not-for-profit corporate law.[256]
The adverse publicity benefited competing charities, such as Earth Share, an environmental group. United Way, at one time the only major organization to receive contributions through payroll deductions, now found itself losing market share to other charities able to garner contributions in the same manner. For all the building that William Aramony had done, the United Way's status as the primary player in the American charitable industry was now in danger of disintegration due to his uncontrolled excesses.
On February 28, amid mounting pressure from local chapters threatening to withhold their annual dues, Aramony resigned. In August 1992, the United Way board of directors hired Elaine Chao, the Peace Corps director, to replace Aramony.
Chao's story was one of great achievement for a person only 39 years old. She was the eldest of six daughters in a family that came from Taiwan to California when Elaine was 8 years old and did not know a word of English. Through hard work, the family prospered. "Despite the difficulties . . . we had tremendous optimism in the basic goodness of this country, that people are decent here, that we would be given a fair opportunity to demonstrate our abilities," she told an interviewer.[257] Chao's parents instilled in their six daughters the conviction that they could do anything they set their minds to, and all the daughters went to prestigious universities.
Elaine Chao earned an economics degree from Mount Holyoke in 1975, then went on for a Harvard MBA. She was a White House fellow, an international banker, chair of the Federal Maritime Commission, deputy secretary of the U.S. Transportation Department, and director of the Peace Corps before accepting the presidency of the United Way of America.
Chao's salary was $195,000, less than half of Aramony's. She cut budgets and staffs: no transatlantic flights on the Concorde, no limousine service, no plush condominiums. She expanded the board of governors to include more local representatives, and committees on ethics and finance were established. Still, she had no illusions about her job: "Trust and confidence once damaged will take a great deal of effort and time to heal."[258] The Information Box: Public Image discusses the special importance of the public image for not-for-profit agencies.
In April 1993, for the second time in a year, United Way of Greater Lorain County (Ohio) withdrew from the United Way of America. The board of the local chapter was still concerned about the financial stability and accountability of the national agency. In particular, it was concerned about the retirement settlement for Aramony. A significant "golden parachute" retirement package was being negotiated with him by the national board; it was in the neighborhood of $4 million. Learning of this triggered the Lorain County board's decision to again withdraw from UWA.
There were other reasons as well for their decision. The national agency was falling far short of its projected budget because only 890 of the l,400 affiliates that had paid membership dues two years before were still paying. Roy Church, president of the Lorain agency, explained the board's decision: "Since February . . . it has become clear that United Way of America's financial stability and ability to assist locals has been put in question. The benefit of being a United Way of America member isn't there at this time for Lorain's United Way."[259]
Elaine Chao's task of resurrecting United Way of America would not be easy.
The lack of accountability to the donating public was a major factor in UWA's problems. The operation was so loosely run, with no one to approve or halt administrators' actions, that questionable practices were encouraged. It also opened the way for great shock and criticism, come the revelation. The fact that voluntary donations were the principal source of revenue made the lack of accountability all the more crucial. In a for-profit organization, lack of accountability primarily affects stockholders; for a major charitable organization, it affects millions of contributors, who see their money and/or commitment being squandered.
Where full disclosure and a system of checks and balances are lacking, the organization invites vulnerability on two fronts. The worst-case scenario is outright "white-collar theft," when unscrupulous people find it an opportunity for personal gain. The absence of sufficient controls and accountability can make even normally honest persons succumb to temptation. Second, insufficient controls tend to promote a mindset of arrogance and allow people to play fast and loose with the system. Aramony seemed to fall into this category with his spending extravagances, cronyism, and other conflict-of-interest activities.
The UWA theoretically had an overseer: the board, like the board of directors of a business corporation. But when the board members act as a rubber stamp, and are solidly in the camp of the chief executive, they are not really exercising control. This appeared to be the case with UWA during Aramony's "reign."
Certainly a board's failure to fulfill its responsibility is not unique to not-for-profits. Corporate boards have often been notorious for promoting the interests of the incumbent executives. Although the problem of compliant boards has received publicity and criticism of late, and is changing in some organizations, it still prevails in others. See the Issue Box: Role of the Board of Directors for a discussion.
William Aramony was convicted of defrauding the United Way out of $1 million. He was sentenced to seven years in prison for using the charity's money to finance a lavish lifestyle.
Despite this, a federal judge ruled in late 1998 that the charity must pay its former president more than $2 million in retirement benefits. "A felon, no matter how despised, does not lose his right to enforce a contract," U.S. District Judge Shira Scheindlin in New York ruled.[261]
Hurricane Katrina tested United Way in the fall of 2005, and it was not found wanting. United Way of Northeast Louisiana normally handled 7,000 calls a year. It fielded more than 111,000 calls across Louisiana during September and October 2005. Other United Ways throughout the Gulf Coast states as well as in communities with large numbers of Katrina evacuees responded to hundreds of thousands of telephone calls seeking such services as shelters, food, medical assistance, job training, post-disaster assistance, and recovery information (http://national.unitedway.org).
Invitation to Make Your Own Analysis and Conclusions
How do you think Aramony's misuse of his position could have been prevented? What controls and accountability would you recommend? How would you persuade the board to be more socially responsible?
As a potential or actual giver to United Way campaigns, how do you feel, about Aramony's "high living"? Would these allegations affect your gift giving? Why or why not?
What prescriptions do you have for thwarting arrogance in not-for-profit and/or governmental organizations? Be as specific as you can, and support your recommendations.
How do you personally feel about the coercion that some organizations exert for their employees to contribute substantially to the United Way? What implications, if any, do you see as emerging from your attitudes about this?
"Since there is no bottom-line evaluation for performance, nonprofits have no incentives to control costs and prudently evaluate expenditures." Discuss.
How would you feel, as a large contributor to a charity, about its spending $10 million for advertising? Discuss your rationale for this attitude.
Do you think the action taken by UWA after Aramony was the best way to salvage the public image? Why or why not? What else might have been done?
You are an adviser to Elaine Chao, who has taken over the scandal-ridden United Way. What advice do you give her for as quickly as possible restoring the confidence of the American public in the integrity and worthiness of this preeminent national charity organization?
You are a member of the board of governors of United Way. Allegations have surfaced about the lavish lifestyle of the highly regarded Aramony. Most of the board members, being corporate executives, see nothing at all wrong with his perks and privileges. You, however, feel otherwise. How would you convince the other board members of the error of condoning Aramony's activities? Be as persuasive as you can in supporting your position.
Debate this issue: No not-for-profit organization can ever attain the efficiency of a business firm that always has the bottom line to be concerned about.
What is the situation with United Way today? Are all local agencies contributing to the national? Have donations matched or exceeded previous levels? Has Elaine Chao restored confidence? What is Elaine Chou doing now?
[247] Susan Garland, "Keeping a Sharper Eye on Those Who Pass the Hat," Business Week, March 16, 1992, p. 39.
[248] Charles E. Shepard, "Perks, Privileges and Power in a Nonprofit World," Washington Post, February 16, 1992, p. A38.
[249] Joseph Finder, "Charity Case," New Republic, May 4, 1992, p. 11.
[250] Shepard, "Perks, Privileges and Power"; Kathleen Teltsch, "United Way Awaits Inquiry on Its President's Practices," New York Times, February 24,1992, p. A12; Charles E. Shepard, "United Way Report Criticizes Ex-Leader's Lifestyle," Washington Post, April 4, 1992, p. A1.
[251] Shepard, p. A38.
[252] Garland, p. 39; Felicity Barringer, "United Way Head Is Forced Out in a Furor Over His Lavish Style,"New York Times, February 28, 1992, p. A1.
[253] John A Byrne, "Executive Pay: The Party Ain't Over Yet," Business Week, April 26, 1993, p. A1.
[254] Carol Hymowitz, "Sky-High Payouts to Top Executives Prove Hard to Curb," Wall Street Journal, June 26, 2006, p. B1.
[255] Felicity Barringer, "United Way Head Tries to Restore Trust," New York Times, March 7, 1992, p. 81.
[256] Shepard, "Perks," p. A38.
[257] "United Way Chief Dedicated," Cleveland Plain Dealer," March 28, 1993, p. 24A.
[258] Ibid.
[259] Karen Henderson, "Lorain Agency Cuts Ties with National United Way," Cleveland Plain Dealer, April 16, 1993, p. 7C.
[260] Lester B. Korn and Richard M. Ferry, Board of Directors Thirteenth Annual Study, New York: Korn/ Ferry International, February 1986, pp. 1–2.
[261] Reported in Cleveland Plain Dealer, October 25, 1998, p. 24A