(FORTUNE Magazine) – The Hyatt Regency Hotel at Chicago's O'Hare airport seems an unlikely place for a revolt. But when a few hundred leaders of United Way chapters gathered in a large meeting room there this past March, resentment was in the air. An influential minority of the 1,400 fiercely local United Ways in the U.S. had been agitating against their national umbrella organization, the United Way of America, and its president, Betty Beene. A handful had even begun withholding their dues to the national organization.

Now they wanted the national board, which had called this unusual meeting, to hear about it. For five hours, some ten board members listened as a dozen local presidents accused the board and Beene in particular of the worst sin in their lexicon: centralization. Historically, the United Way has been the loosest of confederations, with almost all power residing at the local level. Beene, some charged, was trying to usurp that autonomy. Among her sins: an attempt to streamline the processing of United Way pledge forms. This was a power grab disguised as efficiency, they charged--the first step toward taking control of the relationships with the big corporations that are the source of the United Way's lifeblood.

Some speakers defended Beene and her reforms. But others were out for blood, demanding her resignation. The normally ebullient Beene, meanwhile, sat silently in the back of the room as the factions traded blows. "It was just painful," recalls Mark O'Connell, a Beene backer who heads the United Way's Atlanta office, referring to the charges that some speakers lobbed at each other. "It felt personal."

It was. Three months later the national board decided to appoint a task force to look at how the organization governs itself. And it announced that Beene will step down. (She'll leave at the end of January.) The dissident locals started paying their dues again.

In many ways, though, their victory was no resolution at all. Yes, the United Way continues to help millions of people who desperately need assistance. But at a time when donors question the need for an organization that processes money to other charities, the organization has been convulsed by internal squabbling over how it will govern itself. Unless it can find a way to agree both on a destination and a manager who can take it there quickly, the United Way faces a future of slow decline. Says Brian Gallagher, who heads the United Way's Columbus, Ohio, office: "If we are to stay relevant, we'll have to transform ourselves. This is not a tweaking process."

On the surface, the United Way has made a dramatic comeback. It was left for dead in the early '90s after its national president, William Aramony, was convicted of fraud for misusing organization assets (he remains in prison until next year). Under his successor, Elaine Chao, and Beene, who took over in 1997, the organization's reputation has been restored, and contributions have risen smartly, with the annual campaign last year raising a record $3.8 billion.

But behind that eye-popping figure lurk gloomier numbers: Adjusted for inflation, the United Way's contributions have yet to equal its take for 1988. Worse, it has lost market share in an increasingly competitive philanthropic environment. In 1988 the United Way's share of all charitable contributions in the U.S. was 3.16%--a huge figure, given that there were 450,000 nonprofits competing for money. By 1999, however, there were 715,000 nonprofits, and the United Way commanded only 1.98% of donations.

The results are equally woeful if you compare United Way donations with the wealth created during the economic boom. Relative to U.S. personal and corporate income, United Way contributions have declined 29% in the past 12 years, even though overall giving as a percentage of income rose 8.2%.

More important, just as investors have taken control of their investing in recent decades, shucking off the brokers and institutions that made decisions for them, donors are thirsting for the same autonomy. The United Way's traditional function--parceling out the contributions it receives to local charities--was seen as efficient for the giver and effective for the recipient. Now people are more likely to dismiss the organization as a mere intermediary that slices out an extra percentage of the overhead as it passes a donation to a charity that will take a second cut before it helps the people who need it. Why not, many reason, just give it directly to the charity in question?

And that raises a question about the very existence of the United Way: In an age of technology that can eliminate the middleman, what role is left for an entity whose primary role has been as middleman?

Some local affiliates appear to have a solution. In cities such as Minneapolis, Atlanta, and Columbus, United Ways have redefined what they do. No longer simply conduits to existing programs, they're creating programs of their own. This approach has gained traction at some 40% of United Ways so far, and has the fervent support of the national United Way.

But other United Ways are resisting, and are unlikely to change anytime soon. That will leave the next national president in a very tough position: How does an individual with virtually no power transform a huge organization and, equally important, convince the world that change has occurred? Forget the old management cliche about how laborious it is to turn an ocean liner. The next United Way president has to stand in a dinghy with a megaphone and try to persuade 1,400 captains to reposition their ships.

When Betty Beene became president in 1997, the challenge was already daunting. While Elaine Chao had stabilized the national United Way, Beene's charge was to take the organization out of its defensive crouch and into the future.

Petite and chipper, the 54-year-old Beene exudes the energy of someone 20 years younger. She's got an accent and speaking style that conjure a Ross Perot--they both hail from Texarkana--albeit one who favors management slogans rather than back-porch aphorisms. And she's got some of that jaunty optimism, as when she tells a reporter that her CEO title stands for "chief encouragement officer" and hands him a United Way teddy bear as a parting gift.

Beene seemed to have both the temperament and the experience for the job. With a combined 12 years as the chief of large United Ways in Houston and the New York City region--not to mention 18 years working for a United Way-funded agency, the Houston branch of the Girl Scout Council--Beene clearly knew the system. She had been a successful fundraiser in New York and Houston, and was said to be a forceful, energetic leader who sometimes broke the United Way mold. (For example, when Beene ran the Houston local, she spent a night at a homeless shelter--a highly unusual act for a United Way official.) "When I was recruited for the [national] job," she recalls, "I made it very clear that if they wanted someone for a long-term ride, I was not the person. I think I said exactly to the search committee, 'I will come in and break a lot of glass, and then you'll need a new leader after me.'"

That may have been what the national board wanted. There were strong hints early on that it was not what some local presidents wanted. Larry Walton, head of the United Way's central Maryland affiliate and a 32-year veteran of the system, says he had doubts about Beene. "Betty was never one of us as she was coming up through the ranks," he says now. "She was not one of us." Walton says that Beene hadn't been on the national committees where relationships and alliances are forged. Walton expressed his reservations to Beene soon after she started. She asked that he give her six months to show what she could do, and he agreed.

Beene had asked for six months to change an institution that, through a series of predecessor organizations, traces its history back more than a century. The United Way assumed something close to its present form right after World War II. "Henry Ford II basically got sick and tired of having his assembly lines shut down several times a year for fundraising campaigns," says Kevin Ronnie, director of field operations for the National Committee for Responsive Philanthropy. So Ford, along with other business and union leaders, fashioned an agreement by which one entity would get exclusive rights to conduct a campaign once a year. The fund could then dole out the proceeds to the charities of its choice.

For years, this convenience--along with the assurance that a team of volunteers had vetted each recipient agency--was enough to ensure that the United Way was the monopoly donor of FORTUNE 500 companies, an enviable position indeed. But in the past couple of decades, trends turned against the United Way. "Bethlehem Steel used to have 35,000 workers in Baltimore," says Walton. "They now have 5,000. The other 30,000 are scattered around hundreds of small- to mid-sized companies." That means his operation has to work much harder to reach the same number of people. As a result, he says, "our overhead is probably three or four percentage points higher than it would've been ten or 15 years ago." Equally problematic is that corporate America has begun entertaining other givers. So-called alternative funds such as Earthshare, which directs employee contributions to environmental charities (which the United Way has traditionally steered clear of), have elbowed their way in. For example, Sears and American Airlines, two United Way stalwarts, opened up their employee-payroll campaigns to alternative funds just last year. The reason? Employees wanted more options.

And those are old-economy companies. There's a lot less loyalty to the United Way in the new economy. For every Microsoft, which is a giant supporter, there's an Oracle, which has no employee campaign, or a Cisco, which is launching a system to allow its employees to give to any of 700,000 different charities. (For more on giving in the new economy, see "The Man Who Sold Silicon Valley On Giving.")

In the years before Beene took over, the United Way had begun to respond to these changes, albeit at a glacial pace. A plan called "donor choice," which lets United Way givers specify which charity receives his or her donation, now accounts for nearly 25% of the money raised. But Beene saw the need for more radical changes. Ironically, she found her model in some of the local United Ways.

Under the leadership of Mark O'Connell, the Atlanta United Way had redefined itself. In 1995 it polled 184,000 Atlantans to find out what issues troubled them the most. Overwhelmingly, O'Connell says, it came down to one issue: crime.

Rather than simply handing the money to existing programs (though it still does that too), the Atlanta office decided to try something new. It began designing its own programs. For example, noting the link between home ownership and lower crime rates, the local instituted a home-buying program in five troubled neighborhoods. It offered the following deal: If a person could put aside $50 per month for two years, the United Way would match the savings four-for-one. The resulting $6,000 would be a down payment on a modest home. The United Way asked each person in the program to attend a 15-session economic-literacy course, which it created along with two social agencies. The local applied for, and got, $500,000 in Federal assistance. The program is currently helping 200 Atlanta families buy homes.

Meanwhile, Brian Gallagher was taking a similar approach in Columbus. Instead of funding countless programs and spreading its resources thin, the affiliate decided to zero in on seven areas: education, safety, housing, race relations, employment, health, and neighborhood development. The Columbus team had begun moving away from funding homeless shelters, based on internal research showing that the shelters can allow people to stay in a transient state for an extended period. Instead, the local turned toward long-term housing for low-income families and homeless men. In the case of one newly opened assisted-living facility, the local United Way put down the first $500,000, which it had raised from a private donor. It then marshaled $500,000 from the city of Columbus, and $1 million from the Department of Housing and Urban Development. So far, 50 units have been constructed, with another 250 expected to be completed by the end of next year.

Beene today calls Columbus "probably the model of the United Way of the 21st century." But given her organization's devotion to local autonomy, she could only gently steer the group in that direction. For example, she used her pulpit to proselytize for obtaining measurable results. This was a departure for United Ways, which typically defended their work by noting how much they spent. As a result, people like Gallagher can spout, say, employment figures off the top of his head for people in United Way housing.

Such philosophical changes, which weren't perceived as threatening, were generally accepted. But with every step Beene took, she risked opening up fissures in the organization. On the one hand, supporters like national United Way board member Kent "Oz" Nelson (the former chairman of UPS) believed fervently in the Atlanta/Columbus model. Citing one United Way chapter, he says, "Washington, D.C., is the old school. It's wrong." Similarly, Atlanta's O'Connell is willing to voice a heresy: He has no desire to be a conduit. "I tell donors," O'Connell explains, "'If you want to give a gift to a non-profit agency, don't give it to me.' Why pay the overhead [for both the United Way and the charity]?"

These sentiments are anathema to the likes of Oral Suer, who heads the Washington, D.C., United Way, the third largest in terms of money raised. Asked about O'Connell's comments, Suer says, "I think that's a big mistake. Our job is to serve the customer. The donor is king." Suer expresses pride that his local, which has embraced donor choice, offers its donors 1,100 options. "I don't know what they mean by 'old school,'" he says in response to Nelson's comment. "We're cutting-edge." Suer seems oblivious to the notion that donor choice hasn't been seen as innovative for 15 years.

The depth of resistance to change became clear at the organization's national meeting in Cincinnati in April 1999, when the board presented the findings of a special committee that had proposed revised standards for local United Ways. Most of the requirements--that each organization have a board, that it comply with legal reporting requirements--were benign and unobjectionable.

But one provision rankled some of the locals. Each United Way would be required to conduct a self-assessment every four years and "share a summary of the findings with United Way of America." Locals had always required such documents from the agencies they funded. But they bridled at serving up such findings to the national body. For some it raised the question of which entity was in charge. "Do they report to us--or do we report to them?" asks Joseph Calabrese, who heads the United Way of Greater Rochester, N.Y.

Discussion was heated at the meeting, Calabrese recalls. Many of the locals, he says, were angry. They'd been given no time to take the new rules back to their respective boards, and now they were being asked to vote. Despite the opposition, the board brought the rules up for a vote: It passed with a 58% majority.

Even though Beene didn't run the meeting, she was blamed for what some perceived as arrogant conduct. "She tried to run it down everybody's throat," says Walton of Maryland. "That blew up in her face."

And then there were the problems created by a seemingly innocuous initiative--streamlining the processing of paper pledge forms. At most companies, this kind of workaday back-office function had been automated years ago. At the United Way, it inspired a wave of opposition.

Large national companies had long complained about the paperwork hassles involved in processing United Way pledges. Typically, they'd gather all their employees' pledge cards and send them--shades of 1980--to a data-entry room where a team of clerks would type the numbers into the company's computer system. That was only the beginning. Once the donation data were in the payroll system, the company would have to adjust for countless variables. Imagine, for example, that a UPS worker in Atlanta gave half of his pledge to the Atlanta local but earmarked the other half to a Boys Club in his hometown of Chicago. The UPS system would have to adjust for the fact that the Chicago and Atlanta locals charge different processing and overhead fees. Multiplied by thousands of employees in dozens of offices, the challenge was immense.

Even before Beene arrived, the United Way had tried to organize a computer system that would scan all kinds of pledge forms and route the money to the appropriate local, thus relieving its corporate customers of that onerous task. Beene had supported the system while at the New York area United Way, and as president of the national United Way she pushed hard for it.

Some locals, which covet their relationships with big corporations, feared the plan. If a company was handing its money directly to the national United Way rather than to them, says Calabrese, "it would be more than likely that the company would want to deal directly with the United Way of America and cut out the local United Way." Calabrese was also concerned by a provision that would allow companies to send earmarked donations directly to the charity, bypassing the local United Way.

Beene knew she was venturing into dangerous territory, says Eleanor Brilliant, a Rutgers professor and author of United Way: Dilemmas of Organized Charity. "She said to me that she was prepared to make this change because she could take the heat and then leave." ("I knew it was high risk," says Beene.) Indeed, to avoid charging the locals for the controversial computer system, Beene put the United Way's national headquarters up as collateral for a multimillion-dollar line of credit.

Beene's only hope was that the system would work well and that locals would come to love its efficiency. But when it was finally tested last year, the system failed, leading the United Way to take a $12.1 million write-off for the cost of the project. Beene pronounced the initiative dead.

Beene herself was doomed. By early 2000, the Baltimore local had taken an unusual step: It had stopped paying its dues in protest. "It was the only option left for us to state how strongly the United Ways felt," says Walton.

In June, three months after the traumatic meeting at the Hyatt in Chicago, the national board meeting yielded two announcements: A task force would be created to explore how the United Way is run, and Beene would step down (she says her plan was to leave whenever the task force had completed its mission). The first date the board gave for her departure was the end of 2001.

But word of Beene's distant retirement only fueled the anger for some. "I think it was designed to try to put us at ease," Calabrese says. "And it backfired." Why, reasoned Beene's opponents, should the deposed president lead the organization for 18 critical months after her leadership had been rejected?

By July the Washington, D.C., chapter had joined the dues rebels. About a dozen locals now were holding back their fees. The group may have been small in number, but since dues are assessed as a percentage of money raised, those locals represented between 12% and 25% of the national organization's dues income, depending on whose numbers you believe.

Beene says she agonized over the summer. "It was clear that it had become very personal for them....It seemed that I was being used as a decoy or a distraction from the real issue: How are we going to make decisions together?" When the national board reconvened in September, Beene announced that she would leave at the end of January. That's when the recalcitrant locals began sending their dues in again.

It seems a Pyrrhic victory at best. The rebels have toppled a leader who was pushing for necessary transformation. Now the United Way has to find a way to patch the tear in its fabric.

And it still must begin a process of change. To win back donors, the United Way needs to explain its relevance to Americans today. But the United Way won't be able to effectively articulate that message until the whole organization actually has changed. And for that to happen, it will likely need some sort of increased central authority. Says Beene: "Are the levers there to make the kind of change I wanted to make? The truth is, no....What I have learned here is that the power of a good idea--and good will--is not enough."

Some, like O'Connell of Atlanta, aren't sure that the organization will ever speak of change with a single voice. "If the only way the United Way can do that is after a survey of all 1,400 locals," he says, "we're going to travel at the speed of a horse-drawn carriage." And mighty slow horses at that. The task force isn't slated to make recommendations--never mind acting on them--until December 2001. A search committee for a new president (who almost surely won't be a reformer, given Beene's ouster) hasn't even been announced yet. Beene will probably be long gone before her successor is installed.

What will she do next? She's not quite sure; before the national job presented itself in 1997, she had been planning to take a position teaching management of nonprofits at a Methodist seminary. But she'll definitely have time to finish her doctoral dissertation, which she's been writing during her limited free time. The subject of her thesis seems particularly telling: It examines how a nonprofit network's organizational structure affects its ability to "respond to decline, as defined by a loss of financial resources in absolute and market-share terms."

REPORTER ASSOCIATE Irene Gashurov

FEEDBACK: nvarchaver@fortunemail.com