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Board stiffs.

How William Gates and Paul Tagliabue helped William Aramony bilk America

The United Way of America's Board of Governors may have been asleep at the wheel for a couple years while the world's largest charity was billed for limousines, exclusive condominiums, and flights on the Concorde, but at least it knew what to do when its $3.1 billion bus wandered off the road and hit a telephone pole: Quick-to the press release. After an initial stalling gambit, William Aramony, United Way's embattled president, was sacrificed on the national media altar as the board came up with a comprehensive plan for public image renewal.

"The perception created by [Aramony's] poor judgments has been damaging to the institution," allowed United Way board member Robert E. Allen, CEO of AT&T, in an electronic letter to AT&T managers, as other board members scrambled to assure the public and potential donors that the cleanup was in effect. To the casual newspaper reader, the post-scandal scenario seemed fairly reassuring: The renegade manager who duped his well-meaning board had been caught and duly punished.

But wait a second. Who made these myriad "poor judgments" that so damaged the integrity of the United Way? Aramony's salary and benefits had been set annually by the board. His travel and expense records were periodically available for board review, along with every other piece of relevant information about the management of United Way of America. The three for-profit spinoffs, responsible for much of the public outcry, had been explicitly approved by the board. And those board members, incidentally, were fully capable of reading a spreadsheet. They included the CEOs of Microsoft, Exxon, Johnson & Johnson, J.C. Penney, and Sears; the chairman of IBM; the presidents of several unions; and the commissioner of the National Football League.

While Aramony may have been a sloppy president with expensive tastes, by law the buck was supposed to stop with that high-profile board. Unfortunately, in the nonprofit world, the buck often doesn't stop anywhere. Instead, it drifts around aimlessly until it's buried in a basement filing cabinet or shredded A la Aramony. Why? A great number of nonprofits are entrusted to boards of directors populated by over-extended executives and status-seeking lawyers or financiers who have neither time for, nor interest in, real oversight.

"Board people like that only want to hear good news," explains former United Way staffer Pat Barrett. "They're here to feel good, and they don't want to deal with tough problems. They've got plenty [of problems] in their regular jobs." And she's not just talking about the national headquarters of the United Way. In a recent survey of local United Way affiliates, the Not For Profit Leadership Project at Baruch College discovered that only a third of the nonprofits' executive officers believed that their board members fully understood the mission of their particular organization. Imagine how little they knew about the travel expenses of their executive directors.

Such board detachment makes for a volatile situation. Because neither the government nor the media displays much of an interest in the nuts and bolts of nonprofits, the entire nonprofit sector, which controls hundreds of billions of dollars, is left in the hands of a few administrators charged both with spearheading their organization and auditing their own actions. If those administrators aren't honest-and the temptation not to be is considerable when no one's watching-you've got Aramony all over again.

The expectation that nonprofits will perform their charitable purposes scrupulously is what earns them their public trust and massive tax exemptions. But a review of board behavior in some of the eighties' great nonprofit scandals-United Way, Stanford, Covenant House-suggests that turning that expectation into reality involves a lot more than the occasional removal of profligate leaders. It requires changing the structure-and the culture-of the boardroom.

It worked for all of them

For the jet-setting CEO whose real job is generating quarterly corporate profits in tens of millions of dollars, the nonprofit world might seem a little like the Land of Make Believe. While his official work is compensated with six or seven figures, the nonprofit job is volunteer. A for-profit corporation has attentive shareholders who want a quick return; nonprofit donors expect only satisfaction and/or tax deductions in return. Real jobs require hands-on interaction eight or ten hours a day, five days a week. Nonprofit boards meet once a month at most.

Thus nonprofit boards tend to become paragons of laissez-faire management-worse, even, than the notoriously incestuous and disinterested boards of major corporations. After all, that's the way the incentives are rigged. In addition to receiving no compensation and having no shareholders to answer to, board members are routinely indemnified against liability for potential neglect or abuse. So, aside from personal virtue, there's often no incentive whatsoever for a board member to act responsibly.

Of course, board members shouldn't get all the blame for their hands-off behavior. The tradition of benign neglect is fostered by the staffs of the nonprofits they sit on. What starstruck nonprofit executive wants to criticize William Gates or Paul Tagliabue for not giving enough? It's easier to stroke them for giving at all.

The meetings of the United Way board, which occurred three or four times a year, were marked not by intense scrutiny of tax forms, but rather by good meals, a self-congratulatory sense of philanthropy, and a cursory review of the books and major issues. Indeed, the point was to have a good time. "Basically it was Aramony's board," says Pablo Eisenberg of the Center for Community Change, a longtime critic of United Way. "He put it together for his buddies."

"In all these big boards, the executive selects the board," says Nelly Hartogs, director of the Not For Profit Leadership Project. "They run like a secret society, and they all agree with each other." If things appear to be going well, it's tacitly understood that the board will not interfere.

And if something does go wrong, the initial instinct is to circle the wagons. Which is exactly what happened at United Way. At the first hint of the scandal, the board commissioned an investigation by a friendly firm and then quickly issued a unanimous vote of confidence for Aramony. Only after the story erupted onto the front pages did the board accept his resignation.

There is a certain board-staff protocol, and players are expected to stay on their side of the line. "There were executives," Hartogs recalls from her survey, whose motto was, [Board members] don't bother me, and I don't bother them.' " When California lawyer and former energy secretary John Herrington came onto the board of the nonprofit East-West Center in Hawaii, he wasn't exactly impressed by the board's oversight of $30 million in federal funds entrusted to its charge. "My impression of my first board meeting was that it had no substance whatsoever," he told Hawaii Business magazine. "I tried to raise some questions in the board meeting with the chairman. He would not entertain the questions, he was very defensive, and he was not interested in talking about the center itself...[T]he governors were kept away from anything substantive." The executive director may have had reason for his resistance; he eventually resigned under a cloud.

"The more successful an organization is at raising money," says Robert Bothwell, executive director of the National Committee for Responsive Philanthropy, "the more corporate the board is going to act-in other words, the more it's going to let the charity alone. The corporate model says that the board chooses the next executive and then steps back unless things aren't working out right."

But, clearly, even when things aren't working right, boards don't always notice. Consider the Community Foundation of Greater Washington, which boasted the support of Barbara Bush, Elizabeth Dole, and dozens of other Washington powerbrokers. While the executive director and his tiny staff spent a quarter of a million dollars on travel and meetings-figures stated clearly on the foundation's IRS filings -the foundation's fundraising well was running dry. But none of the board members noticed until stories about the spending appeared in the press. "When you meet maybe twice a year, you don't do a lot of micromanagement," laughed board member Eleanor Holmes Norton when asked about the foundation's budget, while another board member, a Washington Post Co. executive, admitted he hadn't been to a meeting in more than a year.

"Oh, am I still a board member there?" he asked innocently. "I thought they took me off."

Krafty

One of the great impediments to adequate board oversight is the very magnet that lures bigwigs to boards in the first place: social status. "In general, people see sitting on a board as a real plum and don't think about the work," says Don Wilson, who raises money for several nonprofits. "That pervades the entire nonprofit sector." While real jobs are generally doled out one-per-customer, nonprofit board seats are coveted honorifics snapped up by the half dozen.

For proof, just track down any of United Way's board members in Who's Who. Ralph Larsen, by day the CEO of Johnson & Johnson, currently sits on five other boards. Monsanto's Earle Harbison Jr.-six other boards. The National Association of Letter Carriers' Vincent Sombrotto-ten others. The Limited's Leslie Wexner-thirteen others.

For some in business, seat-stacking is a way to advance a career. Thomas M. James, a partner in Gorsuch, Kirgis, Campbell, Walker & Grover, a Denver law firm, explained to The New York Times not long ago why he spends an average of 25 hours a month on five nonprofit boards. "Sure, I'm committed to volunteer service," he said. "But let's be honest -exposure to the business community certainly helps in developing clients." In the same story, Lyn Corbett Fitzgerald confessed that while she was an advertising project manager for Kraft Inc., she sat on the board of the nonprofit Future Homemakers of America as a way to test-market some of her ad ideas. As soon as she left that job she lost interest in the nonprofit, subsequently leaving the board.

But seat-stacking poses a far greater problem for nonprofits than abuse by crass career climbers. Logic dictates that a person with half a dozen board commitments could hardly cast more than an occasional glance at the books of any one organization, and that a board composed of seat-stackers would, de facto, be hands-off. "The time spent by board members is a major factor" in the crisis of nonprofit accountability, says Eisenberg.

Of course, board members don't think they're spreading themselves too thin. United Way board member Charles Peebler, CEO of Bozell Inc., estimates he's on "seven or eight" different boards, but cautions that it might be more. He also admits he was much too busy to attend about half of his United Way board meetings. Still, he thinks CEOs like himself fulfill their commitments in a perfectly responsible manner. "Some people are doers," he explains.

Banc One CEO and Stanford University trustee John B. McCoy takes a similar stance. "I'm not just lending my name to nonprofit boards," he says of the five or six (he also couldn't be exactly sure) others to which he currently belongs. "I like to get into the nitty gritty." But after a few minutes' discussion, he seems to reconsider. "Basically, you're only meeting three or four times a year, and they send you a few things in the mail. You're not going to get involved in the day-to-day business of running the organization."

Blind trust

That's too bad, because McCoy's university was recently caught defrauding the federal government out of millions of dollars in grant money. But like the United Way governors, all members of Stanford's board of trustees contacted for this story denied responsibility for that scandal. And Stanford is an example of a board with relatively stringent requirements for its members, including a limit on the number of boards they can sit on.

"All of those [improper] expenses add up to a total of maybe one million or two. That's not a lot of money.... There's no way to smell something like that," says board member J. Fred Weintz, a Goldman Sachs executive.

"We were dependent on a process," says McCoy, and the process was flawed."

Adds San Francisco lawyer and board member Roger Clay, "I don't think there's anything in the world that anybody could have done to avoid the Stanford cost controversy. So I don't think that's a matter of accountability." (Clay, it should be pointed out, came to the board only a month before the scandal broke).

But who can blame them? In the Land of Nonprofit Make Believe, you needn't worry about rules until you bump into them. After it was discovered that the Southern California Montebello Baseball Association, a regional little league group, had failed to file required financial statements from 1986 to 1990, Association Commissioner Larry Salazar said, "We have to admit those forms were not turned in. [But] if nobody tells you that you need to do it, you don't think about it."

It's fascinating to note how some of the most inspiring and reputable leaders by day in this country turn out to be world-class lemmings during nonprofit play time. Consider the megascandal at Father Bruce Ritter's Covenant House in New York. Ten months before financial and sexual shenanigans made headlines in New York, the Los Angeles Times' Kathleen Hendrix reported that rumors about Father Ritter's indiscretions had floated around for years. And board members concede now that they had inklings of them. Still, admits board member and Chase Manhattan Executive Vice President Edward L. Shaw, the board didn't take them seriously. "I don't think there were any [real charges] floating around," Shaw adds.

Why so trusting? "Bruce Ritter was the founder, the entrepreneur, the leader," Shaw says. "It was his creation, he raised most of the money, and like most entrepreneurs, he was the one who really ran things." The prestigious board also let its admiration for Ritter obscure its fiscal acuity, passing right over astronomical staff salaries, a secret Ritter-controlled trust (that even the IRS knew about), personal loans to board members, and loans and jobs to Ritter's family. Board member Ellen Levine, editor-in-chief of Redbook, notes that before the scandal broke, board meetings were "infrequent."

At least Ralph J. Pfeiffer, Jr., the chairman, was penitent when the story came out. "Obviously, we failed," he said of his board. "What we don't know is monumental."

Beware the hypnotic spell of the zealous nonprofit director. When Low-Cost, a Boston low-income housing organization, ran into financial difficulties last year and its president Rutledge A. Waker was suspected of negligence and fraud, The Boston Globe documented how its board members, won over by Waker's dynamism, had essentially served at his beck and call, refusing to question his actions.

Board member Janet Phinney said of Waker, "If that man isn't the most honest man I ever met, I don't deserve to live another day." Thomas B. Kennedy, a former chairman of the board, called Waker "a modern-day saint."

Not all boards are simply laissez-faire when it comes to fraud and corruption-some get right in on the action themselves. In 1987, Texas governor Bill Clements admitted that as chairman of the Board of Governors of Southern Methodist University, he had for years encouraged illegal boosterism-private support of individual athletes by wealthy benefactors.

Dentured servants

Sadly, when boards blow it, there's no secondary defense, either governmental or private, to safeguard the public trust. As the Monthly has long noted, the IRS treats nonprofits with kid gloves, requiring only a smattering of financial disclosure and seldom following up even when it suspects malfeasance. And the press? "The media is generally very inattentive to charities except when a big scandal comes along," notes Robert Bothwell, adding that "all the press ever does is ask about [administrative costs]."

As for nonprofit-sector umbrella groups, they're almost as laissez-faire as the board members. The two traditional independent watchdogs, the National Charities Information Bureau and the philanthropy division of the Better Business Bureau, rarely scrape underneath the gloss. Here, for example, was the official word from the Better Business Bureau in the wake of the United Way fiasco: "In past years, the national office, United Way of America, has met our standards, based on the reviewed materials they provided." That guard dog needs a set of dentures.

Even less interested in substantial reform is the organization that should be most concerned, the National Center for Nonprofit Boards, which is dedicated to advising board members of their responsibilities. What kind of advice do those board members get? Relax. According to Director Maureen Robinson, there is "nothing wrong with the system" as it stands. She has no problem with nonprofits' tendency to pack boards with busy executives, and finds nothing lacking in their oversight. In fact, most board members already provide "excellent service-not perfect but pretty damned good." Well, what about the United Way? "An aberration," Robinson says. The real problem there was actually one of "appearance."

How to make board members get serious about their philanthropic obligations? The first step might be to consider putting different kinds of people on boards. While CEOs and lawyers are valued for their rainmaking capabilities, the priority in the search to fill a board seat should be quality and commitment. "You need good working people," says Pablo Eisenberg. "Some can be prestigious, but the board is not just there for fundraising." Beth Daley of the National Committee for Responsive Philanthropy adds: "If the board isn't diverse, giving won't be significant for unrepresented [constituencies]."

In addition, board chairmen and directors should do their utmost to make the level of commitment required of all board members clear. Board bylaws should include a rule against serving on more than one other nonprofit board simultaneously. Boards might also want to consider creating separate honorary titles to confer social status upon those who seek only that instead of responsibility. That way, Who's Who retains its thickness, and nonprofits regain their integrity.

But perhaps there's a more dramatic, less sugar-coated way to keep nonprofits in line. Following the "Black Sox" scandal of 1919, baseball team owners, desperate to revive the game's credibility, took the drastic step of establishing a virtually omnipotent post of commissioner. The United Way debacle might be the impetus for analogous action in the nonprofit world. Taking Robert Bothwell's suggestion, the independent sector could form a new national independent watchdog organization whose sole purview would be nonprofits, and that would have unprecedented access to financial records of participating groups and real punitive power.

Such strictures might offend those elites who feel the gracious donation of their time should come with no strings attached. But if public good is really their interest, they'll realize the urgent need for reform. Without it, next year's Aramony will have his Concorde rides on America's charitable donations too, and no one will be responsible when he crashes.
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Title Annotation:United Way of America's Board of Governors
Author:Shenk, David
Publication:Washington Monthly
Date:May 1, 1992
Words:3152
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