United Way — A CEO Batters a Giant Nonprofit
The United Way has been an "umbrella" charity that was created as a fundraising organization to support many smaller charities. As such, it has been supported by many business by fundraising drives and payroll deductions.
The fundraising practices, themselves, have often been called into question: many employers achieve 100% employee participation, which means that some degree of coercion has been used to convince employees to contribute.
In 1992, the United Way was rocked by stories from investigative reporters accusing its president for his high salary and uncontrolled perks. William Aramony had headed the organization, and under his tenure, the organization grew rapidly, nearly quadrupling donations between 1970 and 1990.
He was also the most heavily compensated, with a salary of $463,000, and annual raises averaging 6%. Salaries paid to nonprofit executives have often been called into question - though when they are compared to for-profit executives, it becomes clear that their salaries are fairly modest when compared to the revenue (donations) of the companies they run.
However, there were revelations of expense charges that raised some eyebrows: significant limousine expenses, international airfare for himself and guests, personal gifts and luxury items, travelling on the charity's dime for personal reasons, loans and diversions of funds to companies that are owned by family members, a $4 million "golden parachute, etc.
Clearly, Aramony was milking the organization, and he was eventually convicted of defrauding the organization of $1 million. He spent a few years in prison for this, but ironically, a federal judge later compelled the organization to pay out over $2 million in retirement benefits.
Naturally, when news of this broke, donors went postal, and many companies severed their ties with the charity, and IRS investigations threatened to revoke the nonprofit status of the organization.
Analysis
Salaries and expenses in the nonprofit sector are much more subject to public scrutiny than those of for-profit organizations - there is a clear sense of fraud when an individual asks for donations to a charitable cause, then squanders the money on personal interests. However, the same standard has often been held to for-profit executives, whose lavish compensation and "perks" are seen as a kind of white-collar theft from their investors.
It's also noted that the board of directors of a nonprofit organization is much more lax and disinterested than those of a profit organization, as the latter have a financial interest in controlling expenses.
Lessons Learned
Primarily, that a board of directors should be wary of top-level executives, rather than just giving them free reign. The board must be attentive to and protective of shareholder rights and the interests of parties such as vendors, customers, and employees.
In the nonprofi9t sector, it is doubly important that everything be above the board and on the level. The willingness of people depends on their perception that the funds that they donate are used responsibly, and any negative publicity can have a dramatic impact on their income and sustainability.