Acts of Charity : Furious Donors Blamed a Lax Board After a Funds Scandal Toppled the Lavish-Living Head of the United Way. Now Can the Blue-Chip Agency Regain the Public’s Trust?

SURREAL ATMOSPHERE PERVADED THE STATE-OF-THE-art television-production studio at United Way of America offices in Alexandria, Va., last February as volunteers and employees of the nation’s largest charity beamed in for a video-conference.

The meeting had been hastily called in an attempt to contain damage from press reports that suggested president William Aramony, an energetic social worker whose vision and drive had built the organization into a $3-billion colossus of fund raising during the past 22 years, had misused the charity’s funds. Aramony’s credibility had crumbled almost overnight from allegations, first published earlier that month in the Washington Post, that he had turned United Way of America into a private empire to feed a prodigal taste for luxury and to shelter cronies and relatives.

Seated on a dais that resembled a set for a TV talk show, a subdued Aramony, 64, board of directors legal counsel Berl Bernhard, executive committee chairman Dr. LaSalle D. Leffall Jr. and Washington television newscaster Rich Adams attempted spin control by chatting brightly about the dismal events.

Asked about the charges, which were reprinted in newspapers and replayed on TV throughout the country, Aramony gamely responded, “I’ve never been through anything like this before in my life, and I’ll tell you, it’s a learning experience.”

Moderator Adams asked: Would he have done anything differently? Aramony replied, “Well, you bet. I didn’t pay enough attention to detail, or the way some of my actions could have been perceived or my personal style could have been perceived by people.”

Leffall then addressed the issue foremost on everyone’s minds: Aramony, he announced, had offered to retire immediately, and the board had agreed to search for a successor. He would remain until an orderly transition could be arranged.

As the implications of Aramony’s ouster sank in, Leffall invited questions from listeners. The chairman of the Atlanta United Way board asked Aramony if he thought an apology was in order. Surprised, Aramony said, “I do apologize for any problems that my lack of sensitivity to perceptions has caused this movement.”

A Des Moines volunteer followed up with a blunt warning: “Your message is not selling well here,” he said. “Some of your independent investigators sound . . . like PR people. We need full disclosure or we are going to be severely hurt in our marketplaces.”

Full disclosure. Although it is the only strategy capable of rebuilding shattered public confidence--and case studies prove that sustained sunlight exorcises darkness--it was a step the proud and worried United Way officials dreaded.

Their concern was understandable. Stories by Post reporter Charles E. Shepard, whose series on the television ministry of evangelist Jim Bakker won a Pulitzer Prize in 1988 for the Charlotte Observer, disclosed that Aramony had lavished hard-gathered charitable funds on first-class travel, limousines, Concorde transatlantic flights and a $463,000 pay package for 1991. Moreover, a retirement plan for Aramony was designed to provide $4.4 million in pension benefits.

Even more troubling, he revealed that Aramony had spun off seven affiliated companies by using United Way of America funds, two of which were for-profit enterprises, the Partnership Umbrella and Sales Service/America. Several of the affiliates were structured so independently that the charity exercised no control over them. Designed to offer money-saving services such as volume discount buying to charities, the spinoffs were supervised by interlocking directorates made up of Aramony, close associates and his 35-year-old son, Robert D. Aramony.

The exposures raised alarming questions, notably whether some of the companies had been set up for Aramony’s personal enrichment. The most suspicious, Partnership Umbrella, had funneled United Way of America funds into the purchase and furnishing of $1.2 million of real estate in Alexandria, Miami and New York, including a $459,000 condo in New York City used mainly by Aramony.

United Way of America and its 37-member board of governors--whose roll call reads like a Who’s Who in corporate America and big labor--at first tried to tough out the revelations. Shepard had made his initial inquiries to United Way of America last November and his questions had prompted the board to hire an independent investigative firm, Washington-based Investigative Group Inc., to look into the issues.

Investigative Group’s preliminary findings minimized Aramony’s transgressions as inattention to detail and sloppy record-keeping, but recommended further inquiry. Although a relieved executive committee issued a “resounding vote of confidence” for their chief, the board was troubled enough to hire the Washington law firm Verner, Liipfert, Bernhard, McPherson & Hand in February to further examine the spinoffs as well as United Way of America’s governance and personnel systems.

Immediately after the first press reports broke, United Way of America refused to provide details about the affiliates’ operations, claiming disclosures could jeopardize their competitive edge. But donors across the nation, strained by recession, job insecurity and a sickening fear that America’s standard of living was in more-or-less permanent decline, were incensed by the brushoff.

In their view, slick public relations couldn’t explain away the damaging facts: America’s leading corporate chiefs had allowed a scandal to develop on their watch. They had been taken in not by a sly con man, but a flamboyant character whose arrogance and extravagance had disturbed the charitable world for years.

An explosion of indignation from United Way chapters--whose monthly dues support the national office in return for marketing, training and lobbying services--spiraled into furious threats to withhold payments if the board didn’t remove Aramony immediately.

United Way workers buried the national office in an avalanche of outraged faxes and phone calls after the video-conference. The board had no choice: Aramony had to go immediately or the entire federation was in danger of breaking apart. He departed the next day.

ALTHOUGH THE CHARITABLE SECTOR HAS produced scandals aplenty over the years--from fraudulent television ministries to the shocking allegations of sexual molestation of runaway youths at New York-based Covenant House--United Way has always stood apart. Headed by corporate volunteers and professionals in communities across the country, United Way is no collection of amateur do-gooders. This is a pin-striped charity that prides itself on businesslike operations.

Last year, the United Way system funneled more than $3 billion to about 46,000 local and national service agencies in health and human services, including such apple-pie-and-mom recipients as the American Red Cross, Girl Scouts and YMCAs. Local United Way organizations, all nonprofit, manage their portfolio of causes the way a company evaluates blue-chip investments. Aramony once said, “What the United Way system provides is a rational review of how to use money.” Adopting a business style, United Way chapters sponsor functions in posh locales, train professional managers and offer them lofty executive salaries.

Now the question was: How could United Way of America’s celebrated directors, who manage complex multibillion-dollar empires, have been hoodwinked by Aramony? One thing was certain: Most weren’t about to explain. From John F. Akers, United Way of America’s chairman of the board and chief executive officer of International Business Machines, to William R. Howell, J.C. Penney’s chief executive officer who succeeded Akers in April, they declined to comment.

They never bargained for trouble when they accepted the responsibility for overseeing big business’s favorite charity. Set apart by a virtual hammerlock on collection of funds in the workplace, the United Way system is a federation made up of 2,100 local, independent organizations that solicit donations nationwide. About 90% of the money is garnered in campaigns every fall in which chapters solicit companies, private institutions, government agencies, professional firms and businesses. Corporations donate money and gifts, while workers pledge payroll deductions.

Companies encourage workers to support United Way because they like the efficiency and economy of a single campaign. By pointing to a successful United Way drive, they can hold off incursions at the workplace by charities pressing for change in areas such as civil rights, the environment, gay and lesbian rights and women’s issues.

United Way’s streamlined system has won it the fealty of big corporations from coast to coast. CEOs from American Express, BankAmerica Corp., Johnson & Johnson, Microsoft and Sears, Roebuck, as well as presidents of the Communications Workers of America, National Assn. of Letter Carriers, Service Employees International Union and United Steelworkers of America, lend their names to fund raising and their officers to the board of directors.

United Way of America directors willing to talk made it clear that over the years the board confidently delegated operations to Aramony. Ragan A. Henry, a director, reported that because Aramony was an executive the board trusted, his word was generally accepted. Others complained that nonprofit organizations are difficult to evaluate because they don’t offer specific measures such as profits and stock prices by which to judge performance the way businesses do. New York attorney Daniel L. Kurtz, who regulated charities when he was assistant attorney general for New York, says it is considered rather bad manners for charity-board members to ask probing questions.

The buzz in the nonprofit world, however, blames United Way efforts to clone the charity on the corporate model. Says Kenneth L. Albrecht, president of the National Charities Information Bureau, which publishes a code of ethics: “In the ‘80s, charities were told to be more businesslike, which is wrong. Business is not the only role model, they don’t do everything right.”

In part, suggests Dwight F. Burlingame of the Indiana University Center on Philanthropy, “Aramony was the board’s creation. A board from the for-profit world transfers the same set of operational standards they go by in their daily business. They didn’t see anything wrong with the salaries, perks and spinoffs because those are accepted practices in business.”

Only three of the 37 directors came from the nonprofit world. Brian O’Connell, president of Washington-based Independent Sector, a group that studies the impact of philanthropies, says, “It was, in effect, taxation without representation. They weren’t helping keep United Way of America on target. The board didn’t even know the right questions to ask.”

In any--or all--of these scenarios, the scandal translates into another 1980s saga of greed. To this day, no one knows whether Aramony crossed the line that separates poor judgment from more serious offenses. Federal investigators, including the U.S. attorney for the Eastern District of Virginia and agents for the FBI and Internal Revenue Service, are examining a blizzard of records from United Way of America and its spinoffs. Authorities will determine whether federal criminal laws were violated.

The Verner, Liipfert investigation that was commissioned by United Way directors grew into a nine-week effort that culminated in a 59-page document submitted to the board in April. The report lays out in crushing detail a scenario of five years of financial manipulation by Aramony and two close aides, Thomas J. Merlo and Stephen J. Paulachak. Both are former United Way of America chief financial officers and longtime Aramony chums.

Declaring a “story of excess and of values lost,” the attorneys describe Aramony funneling hundreds of thousands of dollars in consulting fees and pensions to Merlo and Paulachak; Partnership Umbrella buying a second condo in Florida for $135,000 to be used inexplicably by a woman retired from United Way; Aramony making unilateral management decisions that led to “instability and low morale” among executives; Aramony spending $100,000 on questionable travel expenses, including personal trips to Las Vegas; a staff of 27 executive officers for a total of 250 employees; Aramony directing the affiliate United Way International to discard five filing drawers of financial records and other documents.

Merlo was fired in March for “past activities” unrelated to his work at United Way of America, although details were tantalizingly withheld. He subsequently sued United Way of America and the board for defamation and wrongful discharge. The suit is still pending. Paulachak left United Way of America’s payroll in 1988 to become president of Partnership Umbrella. The Verner, Liipfert investigation charges that Partnership Umbrella “can be found somewhere in the chain of nearly every questionable activity discovered.”

After receiving the report, the board voted unanimously to follow its recommendations, one of which was to withhold payment of Aramony’s pension until all legal questions were settled. The board members also commissioned a detailed audit to determine a precise total of personal expenses improperly charged. Lawyers for the board and Aramony were negotiating a settlement of these issues.

The amicable separation of February’s video-conference became enraged divorce with the Verner, Liipfert report. Aramony threatened to sue the board and heatedly defended his actions in a long letter to Akers. He argued that personal expenses were incorrectly billed to United Way of America despite procedures he had set in place to avoid such problems. He contended that affiliates, condos and consultants saved money for the organization. Aramony pointed out that United Way of America’s finances had been audited by the firm of Arthur Andersen & Co., and that the audits--as well as all his management decisions--had been approved by the board.

Complaining that he had not been given an opportunity to meet with the board before the report was released, Aramony declared, “I reject categorically any suggestion of misappropriation or breach of trust during my tenure.” Through his Washington attorney, Thomas H. Boggs Jr., Aramony declined to be interviewed for this story.

AMONG THE CONSERVAtive ranks of nonprofit professionals, Bill Aramony cut a colorful--some would say risque--swath. Even his swarthy looks suggested a Damon Runyon character, and that image was amplified by a penchant for beautiful young women, love of late-night poker games played for $2 to $5 a chip, and forays to Las Vegas and the racetrack.

“He was always extravagant,” says an executive who worked with him for more than a decade and spoke on the condition of anonymity. Aramony hated the image of poverty that social workers project, working in shabby offices surrounded by borrowed furniture. He wouldn’t countenance complaints about lavish spending, arguing that to keep pace with corporate donors, United Way of America needed to market itself stylishly.

Traditionally many social workers have felt inferior to their corporate patrons, says a young woman who worked at United Way of America for several years. “But in Aramony’s world, we were just as valued and smart as the business people. My knees didn’t buckle when I went to corporations to present briefings.” She adds, “Aramony’s personality filled a room. He was interesting, energetic. He could be visionary and bright.”

Aramony’s self-confidence allowed him to move with ease through the corporate world, and he adopted its symbols of power and wealth. For example, in his fifth-floor penthouse office with views of the Potomac River, he installed a kidney-shaped mahogany-veneer table of Brobdingnagian proportions. Staffers joked that a swinging crane must have been required to hoist it through windows that wrapped around two of the office’s four walls.

A native of Connecticut, Aramony, earned a master’s in social work from Boston College in 1951 and went to work shortly thereafter at United Way chapters in Columbia, S.C., South Bend, Ind., and Miami. When he was appointed chief executive of United Way of America in 1970, his charge was to develop a strong voice in Washington.

For the first 17 years he fulfilled his mandate admirably. “Bill Aramony did an extraordinary job in the early years of pulling the organization together,” says Independent Sector’s O’Connell. “He was a positive force in articulating the needs of the most vulnerable. He had passion, heart and guts.”

By joining together a disparate collection of charities that previously operated under 137 different names, Aramony created a cohesive national powerhouse under one name and one logo. But although they respected Aramony’s clout with corporations, local organizations increasingly fretted that their voices were ignored. He brought them to heel by tapping loyalists to head a majority of the 14 largest and most influential United Way chapters, a group known as “Aramony’s plants.”

In perhaps his grandest gesture, Aramony organized an extravagant centennial celebration in the spring of 1987. Purists argued it required a little historical license to conclude that collective giving had a 100-year history, but the $2-million birthday party held at various Washington landmarks was a four-day success anyway.

Had Aramony retired shortly thereafter, some say, he would undoubtedly have been honored as an eminence grise of philanthropy. Instead, former employees maintain, his ego swelled, and his behavior grew more grandiose.

Staffers had long gossiped about his private life. Insiders worried that word of his reputation as a ladies’ man might harm what they call “the movement.” But they needn’t have fretted; tales of Aramony’s peccadilloes circulated throughout the charitable sector without serious consequences to United Way.

Even so, Aramony raised eyebrows in 1987 when, at age 60 and married for 36 years, he began to date 18-year-old Lori Lynn Villasor (Aramony and his wife subsequently separated). He met Villasor through her sister, Lisa, who was a receptionist at United Way of America. According to a former employee, Lisa was upset when Aramony took up with her younger sister, and Aramony had Paulachak phone to placate her.

Lori later moved to Gainesville, Fla., where, the Verner, Liipfert investigation discloses, Aramony made 49 air trips courtesy of United Way of America from 1988 through 1990 at a cost of about $34,000. United Way officials in Gainesville say Aramony did not call on them. The report also details a 1989 trip to Egypt by Aramony and a female companion at a cost of $6,100. Sources close to the investigation identified the woman as Villasor. Aramony recently reimbursed United Way of America for the trip.

Villasor, whose telephone has been temporarily disconnected, could not be reached for comment. She told the Washington Post in January that her relationship with Aramony had ended, but that they remained friends.

More unsettling was talk that Aramony may have sexually harassed women at the office. The investigation reveals that women employees said Aramony had made sexual advances. None, however, had filed complaints. Aramony denied the charges to investigators. Asked about the sexual-harassment charges in an interview, chief investigator Berl Bernhard said, “There is unfinished business which could have a negative impact. I would hope there will be no further revelations. The U.S. attorney’s office and regulators continue to gather and analyze information, and will determine if any charges are to be brought.”

Whatever Aramony’s shortcomings, a lack of devotion to United Way was not one. He threw all his energy into the charity, working endless hours to shape its drive for greater size and prestige. Perhaps his total immersion in the job was both strength and weakness, because the report concludes: “While we have found no evidence to cast doubt on the sincerity of his commitment to the goals of UWA, evidence does indicate that Mr. Aramony exceeded his authority in some areas with lamentable consequences to the very causes he promoted.”

KENNETH W. DAM WAS asleep in his Melbourne, Australia, hotel March 4 when the phone jolted him awake. Dam, an IBM vice president and a director of the Pittsburgh metals company Aluminum Corp. of America, had just dozed off from an exhausting day touring Alcoa’s mines.

His wife, Marcia, groped for the phone, then handed it to her husband with a sleepy warning: “It’s John Akers.” The IBM chief wasted no time in apology. “Ken, United Way of America is in serious trouble,” he said tersely. Dam, 60, an attorney and former deputy secretary of state with an elegant appearance and polished demeanor, says, “It took me about one nanosecond to figure out where I came in.” When Dam arrived in Alexandria as interim president two days later, he found the United Way system in rancorous disarray. Anger that had been bottled up during two decades of Aramony’s rule spewed forth from the chapters. Nearly two-thirds followed through on their threats to withhold dues, causing Dam first to borrow funds, then to cut staff and budget by about one-third.

Astoundingly, local chapters had never been allotted even one seat on the United Way of America board. As Dam crisscrossed the country cooling tempers, volunteers and professionals demanded a voice at the national level. They were terrified that upset donors might boycott United Way in the fall fund-raising campaigns, which kick off this month.

Tension had been building throughout the United Way system during the past five years because the charity’s share of total contributions was in steady decline. The reason: a crush of so-called “alternative” charities has been competing for ever-more-scarce funds.

At one time, United Way of America presided over a monopoly on payroll deductions in the workplace. Over the past decade, however, groups composed of African-Americans, Latinos, women, environmental activists, health groups, child-welfare advocates, arts supporters and international service volunteers, to name a few, have tripled their 3.5% share to about 10%. Those inroads resulted from increasing employee demands for wider choice.

Alternative charities chalked up their first success in the 1960s, when they won limited access to the hugely profitable annual solicitation of federal employees. But the big breakthrough came in 1987, when Congress enacted legislation that grants all non-United Way charities the right to participate in the annual solicitation of 2 million government workers.

Aramony directed a Custer’s-last-stand battle to prevent the crushing defeat, but when he failed, big dominoes in the form of American Telephone & Telegraph and IBM fell. More recently, Apple Computer, Kaiser Permanente, Polaroid, Nike and Sun Microsystems have allowed new groups to solicit alongside United Way on their premises.

To shore up the eroding monopoly, Aramony introduced a concept called “donor choice.” Where donor choice has been instituted--Los Angeles will begin this fall--employees specify on payroll-deduction forms to which specific areas or charities they want their donations to United Way directed.

Critics view Aramony’s intransigence on the alternatives as perhaps his greatest failure in leadership. Asks Robert Bothwell, head of the National Committee for Responsible Philanthropy, an association of alternative charities, “Why didn’t Aramony co-opt the alternatives? The best thing he could have done was to shelter them.”

Aramony, of course, held the line partly because his backers wanted him to. Corporations appreciate United Way’s noncontroversial and community appeal, and today they are circling the wagons to show just how highly they value the agency’s service. Says Earl Plummer, manager of community relations at Southern California Gas, where more than 100 employees canceled their 1992 pledges after the scandal, “We are committed to United Way. We’re sorry some people chose to respond emotionally, but we’re not going to pull out.” Other companies on the United Way bandwagon include K mart, General Electric and General Mills.

United Way’s sturdy corporate link was underscored by the selection of Dam. He continued to draw his IBM salary during his six-month interim presidency, an arrangement that dismayed nonprofit executives. They contended that Dam’s appointment demonstrated that the United Way of America board still hadn’t grasped the most important lesson of the whole affair: just how definitively the nonprofit world differs from the for-profit.

Says Albrecht of the National Charities Information Bureau: “This sector has to stand for more than business. It must stand for values, ethical behavior, truth, openness, willingness to discuss issues. It has a higher standard.”

Independent Sector’s O’Connell, who has called on all nonprofit boards to develop an ethical code, said the choice “shows how little awareness the United Way of America board has of its legal and moral responsibility. Dam could not be altogether objective looking at (former chairman Akers’) accountability.”

Straddling both worlds, Dam displayed considerable diplomatic skill. In an interview, he defended the board as “diverse, with members from labor unions and businesses such as public relations, trade associations and the press. Sure it was a national board, with people coming from other parts of the country, looking at their watches, having to catch airplanes. That is not a terrific situation to talk about expense accounts. But I don’t fault individual members.”

Dam blames “structural problems” for the laissez-faire oversight. United Way of America was governed not only by the full 37-member board but also by a 14-member executive committee. The full board met only twice a year and between meetings, the executive committee handled sensitive problems. “This may have led to some manipulation of the board. (United Way officials) could choose which board to take problems to. There is some question whether the full board knew what was going on,” Dam concludes.

Moreover, the organization had only one oversight committee, which examined audits. Most organizations have at least five to deal with such issues as compensation, operations and public responsibilities.

Though his criticisms were muted, Dam’s actions were swift. He communicated cold anger when he released the Verner, Liipfert report: “These conclusions are disturbing and will certainly outrage people who have given their hard-earned money week by week to help the United Way help those in need. They will, and should, feel betrayed.”

With gestures big and small, Dam organized new systems and promulgated policies to provide checks and balances for the future. In a power shift that restores the original United Way concept, he implemented a restructuring that reflects a grass-roots emphasis. An expanded and newly constituted board awards 15 of its 45 seats to representatives from local chapters. Assured that their interests henceforth will be protected, many resumed paying dues, though often at a reduced rate that reflects their desire for a smaller national office.

The board also established six new committees to provide greater scrutiny, set up an internal auditing system and created an independent ombudsman. New bylaws, including one calling for four full board meetings a year, and cost controls such as a ban on first-class travel, were established. The activities of three spinoffs were brought back under United Way of America’s supervision. In a tense standoff with United Way, Aramony and Paulachak remain in control of Partnership Umbrella. United Way of America is locked into at least three agreements with Partnership, including one that gives the affiliate the right to use the United Way trademark until 1996. The board voted for United Way of America to cease all business dealings with Partnership.

Elementary management systems were mandated and nepotism was prohibited. Under pressure from local chapters, Aramony’s son resigned his $85,000 position as president of the spinoff Sales Service/America. Repudiating the Aramony years, the board adopted an ethical code that calls on employees to “refrain from violating the spirit of volunteerism” by paying excessive salaries or spending extravagantly. Dam, whose presidency ended last month, replaced the grandiose desk, which had to be dismantled into four parts for its removal, with a modest table.

AN EXECUTIVE-RECRUITing firm cast a wide net for a new president, and in late August the board selected Peace Corps Director Elaine L. Chao, 39, to succeed Dam. A native of Taiwan, Chao grew up in Los Angeles, graduated from Harvard Business School, and was deputy secretary of transportation before taking over the Peace Corps last December. Her salary will be $195,000.

The selection of Chao, who managed a $197-million Peace Corps budget, met with approval by executives in the charitable sector. Said Joanne Hayes, president of the American Assn. of Fund Raising Counsel, “I welcome the fact that the board looked so broadly, and believe Ms. Chao possesses the management experience United Way of America needs. But she’s in a hot seat; she’ll have to move fast.”

Dam’s goal had been to resolve all outstanding issues before his departure, and in time for the fall campaigns. “I want,” he said, “to be crystal clear that local campaign chairmen and professionals are convinced that the past is behind us. I want them to believe we have in place a control-and-governance system that assures contributors their hard-earned dollars will be used as they intended.”

It’s too early to tell whether the damaging revelations and uncertainty over federal officials’ wide-ranging criminal investigation will cut deeply into donations. Many observers believe that United Way is in for several lean years.

A bellwether spring drive in Rochester, N.Y., completed in June fell $3.1 million short of a $38.5-million goal and $2 million below last year’s total. Disappointed officials attributed the drop to a loss of 7,000 manufacturing jobs in the area.

The Los Angeles campaign completed in June totaled $85 million, down $3.4 million from the previous year. Says Herbert Carter, president of the United Way of Greater Los Angeles, “I’m sure the scandal hurt us, but so did the worst recession since World War II, unemployment and a downturn in defense spending.”

If the United Way’s money-gathering machine should sputter and stall, alternative charities will surely press for greater access to corporate solicitations. Ironically, executives who were once Aramony’s greatest supporters may find themselves forced to pay closer attention to the quarrelsome demands of competing interests from which United Way has shielded them.

They will not easily or quickly forget the hard-earned lesson encoded in the Verner, Liipfert report: “Trust and confidence are fragile commodities. Once tarnished, they are difficult to restore.”