Lessons from United Way.

Aramony's conviction is worth nothing.

Earlier this [year] in a courtroom in Alexandria, Virginia, a deeply symbolic event took place. William Aramony, former president of United Way of America, was found guilty of 25 counts of fraud, conspiracy, and money laundering.

This event was symbolic on two levels. First, it bracketed a turning point in the general perception of public charities. No longer will they be able to count on automatic public support, and it will be the Aramony case that people will vaguely remember as the foundation for any mild mistrust they may feel.

This level of symbolism speaks for itself. But there is a symbolism of a different kind here that nonprofit executives and their boards of directors should heed because it will tell them a great deal about how to operate in the nonprofit world of the 21st century.

The message for these groups comes from the fact that news of Aramony's conviction in 1995 was buried on page five and reduced to sound bites halfway through newscasts, whereas details of the allegations first emerged in 1992 in a prolonged media frenzy chronicling lavish salaries and flights on the Concorde. The outcome of the trial was a mere technicality, a legal footnote to history. The real damage was done by the allegations, and this is the source of the message for those active in the nonprofit world.

Media coverage of the allegations notwithstanding, William Aramony's offense was not an expensive lifestyle but the creation and maintenance of an intricate network of related-party transactions which had the not coincidental side effect of making him a bit richer.

Related-party transactions in a nonprofit setting occur when a high-ranking person, such as a member of the board or senior manager, in some way influences a transaction in a direction in which he or she has a real or potential personal interest. For example, if the chief executive officer awards a contract to a company owned by her husband, it is a related-party transaction.

At its best, a related-party transaction is nothing more than the innocent outcome of unique economic circumstances. At worst, it is the not-for-profit equivalent of insider trading.

The trouble with related-party transactions, especially from the perspective of businesspeople on the board, is that in a for-profit setting, they can be seen as good business. As a quasi-public entity, however, nonprofit public charities must adhere to more of a governmental standard than a private one. The rules for them are simply different.

What will make this whole area more complicated in the coming years is that many entrepreneurial nonprofits are merging, creating alliances, and joining networks. Whole new service organizations are being formed as nonprofits seek strategic advantage just like their for-profit counterparts. The opportunities for creating sophisticated linkages which could occasionally exceed the bounds of acceptability are multiplying.

Aramony argued that faulty oversight by his board of directors played a role in the scandal, and it's hard to argue with that common-sense interpretation. But present and future board members of any nonprofit should not conclude that the proper dose of prevention in the future is longer meetings and more briefing papers. Rather, what's needed by directors and executives alike is a deeper level of insight into the nature of nonprofit management.

Some specific guidelines:

* Recognize that a nonprofit organization is a fundamentally political entity. Tax exemption is a government-granted status which at any time can slingshot an organization into a public dialogue, like it or not. As a political creature, a nonprofit's rules are different from most private economic activity.

* Subject every transaction to a smell test. Never mind whether it's legal; how does it look? Aramony's high-priced lifestyle wrapped around his business dealings, which few understood.

If it doesn't look right, don't do it. Appearances are everything. If it appears to be a conflict of interest or a related-party transaction, it doesn't much matter what the legal and financial technicians say about it.

* When in doubt, disclose. Often, funding source regulations or auditing guidelines stipulate that transactions be disclosed. These requirements, when they exist, are largely non-negotiable, but the first stage of disclosure is internal. At the very least, the board should know about the situation before it becomes formalized.

* Prepare to defend your decisions. As the national agenda turns increasingly to domestic affairs and local economies, media and social attention will follow. Many organizations eventually are going to have to justify their decisions. It's best to assume that that challenge could come as soon as tomorrow, because it may.

* Public trust costs. Many perfectly legal related-party transactions come about because they are genuinely the least expensive alternative. But unless they are beyond reproach, decisions of this kind can cost more in long-term credibility (and in revenue) than they save through short-term bargains.

The new era began in a courtroom in Alexandria, Virginia. How it gets played out will be determined in the boardrooms and executive suites of nonprofits all around the country.

Thomas McLaughlin is a manager in the division of tax exempt and governmental services at BDO Seidman, Boston. He is the author of Streetsmart Financial Basics for Nonprofit Managers.