The Armory on Manhattan's East Side at 26th Street and Lexington Avenue near Gramercy Park, is a grim, mostly windowless fortress of brick. A little over six years ago, after the terrorist attacks of September 11, the vast, 100-year-old former weapons warehouse became a sort of Ground Zero of the human heart. Sheltered from TV cameras, thousands of New Yorkers lined up inside in pain, hope, and desperation to find loved ones as bodies were still being pulled from the rubble. The distressed and distracted filled out long forms, provided dental records, recited wedding band inscriptions, tried to describe scars and tattoos — all of it more clues for the coroners. Some needed counseling; others simply needed an ear. All had to wait for hours.
Heat inside the building soared to above 100 degrees. Not a compassion center, thought Bernadine Healy, at the time the chief executive of the American Red Cross. Ellis Island circa early 1900s. Rows of bureaucrats, long waits, dingy, dour conditions — in short, a mass of people in need being treated callously.
In the chaos, Healy spotted Red Cross volunteers standing along the walls, doing nothing. Healy was sure they cared but after demanding an explanation, the volunteers just shrugged, saying they didn't know exactly what to do. To Healy, it seemed obvious that volunteers should mix with people in need of counseling, compassion and comfort. They shouldn't need permission to care. Victims were like patients, she reasoned, and she lost no time telling then-Mayor Rudy Giuliani that the armory was an abomination and that he had to do something.
It worked. Authorities moved the compassion center downtown, to Pier 94. Queues moved. Air conditioners started humming. Healy's example worked, too. Volunteers mixed.
Though no longer a practicing cardiologist, Healy had always tended to be a doctor in demeanor, no matter her situation. But her no-nonsense approach never seemed more pressing than on 9/11, during those hours of national emergency when she realized just how far from its sterling, well-earned reputation the nation's oldest emergency relief organization had strayed.
Controversies drain donor dollars
Dealing with the Armory was one thing. But dealing with the Red Cross, itself, would not be so easy. Within a month, Healy was ousted by her 50-member board.
Four years later, the Red Cross board also would force out Healy's successor, Marsha Marty Evans, a former Navy rear admiral, amid a similar echo chamber of bad press alleging poor preparation, failure to meet victims' needs, and unmet promises of reform. That time, the criticism came in the maelstrom of Hurricane Katrina.
Then it happened again. Last November, the board forced out newly appointed CEO Mark W. Everson, again amid controversy. Everson was hired away from his post as director of the IRS in May 2007, then sacked some six months later amid scandal surrounding an extramarital affair with a local chapter leader.
It's not usually the buzz of personal scandal that surrounds a departing CEO. Most often, it's been talk of bitter struggles between Red Cross management and its board of directors. And now, the Red Cross is at the center of another storm—a precipitous decline in donor dollars that it says will force the lay off of 1,000 people in March from the ranks of the ARC's national headquarters. Troubles continue to plague the nonprofit's blood bank organization, fined $4.6 million by the Food and Drug Administration on Thursday, bringing the total number of fines imposed by regulators to more than $20 million. The FDA is alleging that the Red Cross has failed to properly screen blood donations for pubic safety.
But troubles with blood banks and donor dollars tell only part of the story. In truth, the organization's problems are widespread — and strike at the core of its culture, as well as its mission and its plans for the future on a new philanthropic landscape where calls for doing more with less are the norm. Can the Red Cross heal itself?
Its leaders say yes. A year ago, in a massive public relations campaign aimed at reassuring potentially skittish donors that the Red Cross is now truly bent on reform, the nonprofit's leaders vowed once more to be ready and more responsive — not only to hurricanes but to the storms swirling around their own organization. They quickly curbed some shortcomings, launched an outside review of governance, and hinted at the possibility of eventual changes imposed by Congress.
‘We're eager ... to get this right’
"We are absolutely committed to making the Red Cross the best it can be," Bonnie McElveen-Hunter, the board's chairman, said at the time. McElveen-Hunter, a publishing company entrepreneur and former ambassador to Finland, has overseen the board shrink from 50 members to the current 28. That board, and its size, has itself encountered serious scrutiny and it may end up getting downsized even further in an organizational reengineering. "We're very eager as a board to get this right," she has said.
Some people, though, are not so sure. Peter Dobkin Hall, lecturer on nonprofits at Harvard University's John F. Kennedy School of Government, says: "I don't think they have a clue about the real nature of their problems or how to solve them. They're still somewhat deep in denial."
More clear is what the challenges being faced by the Red Cross suggest about the peril to all nonprofits of failing to fix key problems, stick to their core missions and make the long-term management and strategy changes required in today's era of heightened public and political scrutiny. What other nonprofits learn from the Red Cross and its struggles toward reforms, say nonprofit experts, could provide valuable lessons in survival and globalization for all.
A history of woes
To be sure, the American Red Cross has been dogged by controversy, even before 9/11. Healy, for example, had ample evidence that the nonprofit was seriously ailing long before the terrorist attack on the World Trade Center: A million dollars had been stolen in a New Jersey chapter, and still the chapter wanted to keep the person employed. An audit in Boston noted that money the ARC had been given there was not easily traceable. Local chapters from Boise to Buffalo, when they needed cash, had been dipping into a national disaster fund thousands of times a year, collectively, though most disasters were house fires, not catastrophic tragedies. Healy also had struggled, without success, to free the organization from a cloud of repeated violations of blood safety rules — some so serious that the Food and Drug Administration sought to levy millions of dollars in fines.
Meanwhile, the Washington, D.C.-based Red Cross could be strangely absent when needed the most. The September 11 terrorist attacks were a shocker for everyone, but even so, on that morning, after the planes hit, no volunteers had gone to the Pentagon — no specialized teams, no equipped emergency response vehicles, not even cots for the firefighters. Aghast, Healy urged her teams to the scene at the Pentagon. Then, to get needed supplies to New York City, Healy improvised. When Amtrak offered a few seats on a train, she asked for the entire train. She got five mail cars.
After 9/11, the situation only worsened. The organization had collected too much blood while valuable red cell supplies went unused. The Red Cross also seemed to have more money than necessary. Americans making donations after 9/11 thought, naturally enough, that their money would go to victims of the attacks. Instead, it turned out, the Red Cross routinely set aside money from big disasters in case of future little ones — money for use by local chapters to finance their many smaller needs.
The Red Cross also wasn't working well with others. A 2002 study by the General Accounting Office, the watchdog arm of Congress, concluded that collaboration could enhance charitable organizations' contributions in disasters — a not-so-veiled hit on the Red Cross for failing to cooperate with other humanitarian organizations.
A post 9/11 house cleaning
Then there was the post-9/11 house-cleaning that swept Healy out the door. It happened amid new promises, new reforms, and a pledge of complete transparency. Donors were assured that contributions would be used only as they were intended. "For the first time, a major charity resolved to use consistent language in all appeals, to double-check on an ongoing basis that donors understand and approve the use of their donations, and to discontinue soliciting funds beyond a determination that immediate needs are met," policy analyst Paula DiPerna noted in a report, "Media, Charity and Philanthropy in the Aftermath of September 11, 2001," for the Century Foundation. DiPerna wasn't the only one who thought things would change. Says Healy: "I thought 9/11 was going to transform the organization, I really did."
Then came Katrina. As the world looked on, the Red Cross, once again, stumbled badly. It had never had many chapters in the disaster area — a total of seven in Louisiana and seven in Mississippi, compared with 44 in Ohio and 31 in New York. And without a presence and a web of ongoing relationships with local groups prior to the disaster, collaboration with the locals during the rescue efforts again proved problematic. When nearly 245,000 Red Crossers arrived on the scene from all 50 states and D.C. — five times the highest number sent by the ARC to any previous disaster — very few of them had either the local knowledge or the connections needed to help. Masses of New Orleans residents jammed into the Superdome rather than into more habitable shelters. A black minister told The Washington Post of victims who felt like they were being herded like cattle.
Cultural insensitivity and a lack of language translators for the Hispanic and Asian immigrants living along the Gulf Coast — as well as for the French-speaking members of the United Houma Nation tribe of Louisiana — led to misunderstandings. People in need, meanwhile, overwhelmed Red Cross phone banks, which were ill-equipped to handle the rush of calls coming in, and many Gulf Coast neighborhoods were, in reality, simply out of reach.
Once more, victims had to wait hours, if not days, for help. Was it New York all over again? Meanwhile, the philanthropic giant among charities seemed unable to assure donors that the nearly $2 billion raised for Katrina victims was being targeted appropriately and used well. Once again, hints of poor accountability, impropriety, and even criminal conduct emerged.
The Red Cross had neither controls on costs nor reliable records of inventory, and nobody routinely checked volunteers backgrounds before they signed on. Rental cars disappeared as well as generators, air mattresses, and computers. And supplies sometimes had little relationship to need: Food would end up at places where it couldn't be cooked. Mops, paper towels and bleach would be handed out in neighborhoods that had been demolished. In Mississippi, victims wanted water to drink, but Red Cross volunteers only had bleach. "The basic needs of the beneficiaries are not being met," Mike Goodhand, a British Red Cross logistics executive who assisted U.S. counterparts in New Orleans, wrote in a September 2005 report.
‘A scope and scale issue’
In response to it all, past interim CEO McGuire told Contribute in a 2006 interview: "I know we worked hard to be prepared beyond 9/11 for major disasters and learned some lessons from 9/11," he said. "...In Katrina, our task was 1.41 million families. In 2004, we deployed about 35,000 volunteers. In Katrina, we had to deploy 235,000 volunteers. The scope of the disaster was beyond our capacity at the time to respond. Some of our systems did pretty well; some of our systems broke completely. It was a scope and scale issue that exposed anything about us that had any weaknesses."
Yet the organization's leadership and cultural problems — despite renewed efforts at reforms — continue to dog the nonprofit, and there remains frequent turnover at the highest ranks of the organization: The ARC has gone through a half-dozen CEOs and acting CEOs in as many years: Its latest CEO, former IRS Chief Mark Everson, was barely on the job for a half-year before the board asked for and received his resignation on Nov. 27 "for his engagement in a personal relationship with a subordinate employee" who was a married president of a Mississippi chapter, according to ARC Press Officer Carrie Martin.
Then, on Jan. 8, the Associated Press broke a story that a former executive at the Minneapolis chapter of the American Red Cross was suing the chapter and ARC national organization, alleging sex and age discrimination by colleagues. The case is pending.
Laments Healy, who still keeps an image of Red Cross founder Clara Barton in her Washington apartment (Barton is shown embracing a soldier while, hand held high, she keeps the Grim Reaper at bay): "It's a magnificent institution with a magnificent mission that it has failed to live up to for a long time."
The irony isn't lost on Red Cross executives, current and former. Barton, the Civil War-era heroine and a virtual one-woman relief agency, launched the Red Cross 127 years ago. Yet even Barton, a one-time Patent Office clerk, encountered resistance and needed grit to get things done. Her first famous act was improvised: She ripped sheets into towels and cooked for an exhausted Civil War regiment. Already on her way to celebrity and yet overcome by battlefield needs and running short of supplies near Bull Run in August 1862, Barton, like her 21st-century descendants, had trouble delivering. "All night, we made compresses and slings, and bound up and wet wounds when we could get water (and we) fed what we could," she says in The Life of Clara Barton, a 1922 biography by William Barton. "Oh, how I needed stores in that field!" Eventually, even Clara Barton was forced out, over a rival's charges of misused funds and mismanagement.
Size matters
What has changed since its inception is the mammoth size of the organization and its role as the nation's prime disaster humanitarian. Barton could never have imagined todays bureaucratic behemoth of 746 local Red Cross chapters, 35,000 employees, and a budget surpassing $3 billion.
Though the Red Cross counts on catastrophes to drum up most of its press and its donor contributions, today's volunteers are more likely to be engaged in local blood drives or responding to local fires. Most of the organization's 72,883 calamities last year involved fires; only 39 were larger-scale disasters. The group's annual convention and gala, meanwhile, are glamorous affairs on the social calendar in Washington and other big U.S. cities, events at which first ladies speak and pop stars perform.
Controversy may not be new to the Red Cross, but it has never been so noticed, nor so pronounced. "I discovered in my 9/11 research that there has been criticism of the Red Cross about its response to all major disasters at least since the 1906 San Francisco earthquake and fires," observes Tom Seessel, a social policy consultant with Thomas Edison State College in New Jersey, who studied Sept. 11 relief efforts for the Ford Foundation. In 1989, for instance, the Red Cross ran into trouble when mayors in the San Francisco Bay Area discovered much of the money collected after a major earthquake would go elsewhere. But it was largely a local story.
Most critics agree that what the Red Cross faces now are problems of its own making, and that in today's era of increased calls for more accountability and efficiency, it's time for the organization to reinvent itself. Indeed, close students of Red Cross activities say it may simply have too many layers, too many people or too much bureaucracy. It also may be experiencing the organizational ill-effects of a long-standing virtual monopoly, conferred by Congress, as the national voluntary disaster relief agency. In his research, Seessel concluded the Red Cross was "careless" about specifying the purposes for which it was going to use donors' money, forcing it to invent new programs and services to exhaust excess funds in response to extensive criticism.
Even remedies urged by former Senate Majority Leader George Mitchell as part of an institutional rehab after Sept. 11, laments Seessel, didn't seem to have produced any systemic change. They only bought a little more time until the fault lines were exposed again in Katrina.
Reforms and more reforms
For an organization viewed as resistant to change and outside advice, the Red Cross is now being forced to turn itself around in today's new climate of public opinion. Its leaders, after 9/11, began taking the first necessary steps: A thorough examination of mission, charter, structure, accountability, governance, staffing and the relationships between national and local branches as well as government agencies. It has increased the level of outreach to other local and national disaster groups. And in a culmination of the latest in-house examination of its methods and strategies, President Bush signed into law last May reform legislation aimed at downsizing the board and beefing up external governance.
While the Red Cross may be headed in the right direction, Seessel predicts no fix will be complete without more in-depth study and ongoing work at reform. Acknowledged past interim Red Cross CEO Jack McGuire: "We need to learn how to prepare for the unexpected." McGuire told Contribute in a 2006 interview that he intended to host war game-like scenarios involving simulated disasters, "so that we can test ourselves and really ask the question, how good are we?" McGuire stepped down on May 28 of last year without having completed many of his proposed initiatives.
Since Katrina, however, the ARC has accomplished some change. It has tripled warehouse capacity and has stocked those facilities with more supplies than victims of large-scale disasters are most likely to need. It also has nearly doubled the capacity of its call centers. And in a strategic break with how it had approached disaster operations for decades, the Red Cross also is reaching out to recruit more racial and ethnic minorities as volunteers: According to a March 2005 memo from former ARC Chief Evans to the Red Cross board and its local chapters, five percent of Red Cross volunteers are black, two percent are Hispanic and two percent, Asian. "These low numbers ... underscore the challenges facing the organization as we seek to reach out to diverse communities," Evans wrote. As a result, the Red Cross is now working with the NAACP to recruit more volunteers and is forming partnerships with churches, local nonprofits, and other community groups. And further, instead of relying on its own volunteers to set up shelters and deliver Red Cross meals, other local community organizations are being recruited to help.
Working to change its culture
The Red Cross also is working to change its culture. On its Web site, the Red Cross noted in April 2006: "Red Cross representatives need to be aware of their reputation for arrogance, bureaucracy and insensitivity." A checklist of reforms adopted by the ARC in the summer of 2006, for example, concluded by urging a culture more reliant on partnerships, more risk-tolerant, less bureaucratic and more adaptive.
Meanwhile, a committee of high-profile outsiders, including Ira Milstein, a New York corporate lawyer, set out in 2004/2005 to examine how the organization governs itself. It has helped Red Cross leaders focus on central questions relevant for all nonprofits: How large should the board be? Who should be on it? The Red Cross board had long been criticized for including eight presidential appointees who rarely attended meetings. Others repeatedly insisted that most of the board's members, from local chapters, had grown too dominant, hindering effective leadership by the ARC's chief executives. William Josephson, who ran the charities bureau in the New York attorney general's office after 9/11, had one word for the ARC's 50-member board: unmanageable.
And in a culmination of the latest in-house examination of its methods and strategies, President Bush signed into law last May reform legislation enabling a series of in-house reforms aimed at "modernizing" the way the Red Cross governs itself — including a plan to downsize its 50-member board to 12-25 members by 2009 and to 12-20 members by 2012. (As of Feb. 1, it had 28 board members.) Further changes legislated by Congress include recommendation to limit the board's focus solely to governance and strategic oversight and to set up a new Office of the Ombudsman to provide additional oversight and annual reports to Congress on how well the ARC is doing its job. "With these reforms," said Rep. Tom Lantos, D-Calif., a co-author of the reform legislation, "the (Red Cross) will be in a better position to maintain the good name it has developed through its good work."
But while many of those advocating change at the troubled nonprofit reforms applaud the legislation, they also suggest that the ARC's biggest problems lie elsewhere. The truth is, say observers, nonprofits can no longer conduct business as usual. In the nonprofit sector, the message appears to be loud and clear: You are not really out of sight anymore, nor even truly independent, says Olson. The public and the politicians are watching. Adapt — or risk a Red Cross-like PR calamity, over and over again.
Lessons for other nonprofits
Former Nature Conservancy President and CEO Steven J. McCormick says he feels as if he's reliving his own institutional experience: the scrutiny, the bad press, the large board, the difficulties with local chapters, the questions about whether the organization had strayed from its mission, the hiring of outside governance experts. What's happening to the Red Cross is so very similar, notes McCormick, recalling that the Red Cross looked to the Conservancy as a model for relief and repair. "They've taken a page from our experience in getting outsiders to make recommendations."
Disclosures in 2003 could not have been more disruptive to the Conservancy, also a star in the nonprofit firmament. Long dedicated to preserving animal species by protecting land and waters they need to survive, the organization had sold undeveloped land to trustees at reduced prices and allowed drilling for oil, or at least a local chapter did, without the knowledge of the national board. The nonprofits chairman at the time, Henry M. Paulson Jr., chief executive of Goldman Sachs Group Inc. and now treasury secretary in the Bush Administration, summoned his crisis-management team from Wall Street and assembled an independent governance team for a review.
Since then, the Conservancy has made numerous changes. One was to more than halve the size of its board, which had 40 members. "There were simply too many of them to operate as a modern, hands-on board," says Milstein, the New York corporate lawyer and chairman of the Red Cross governance advisory board, writing in an April 2005 progress report. "In all candor," acknowledges McCormick, "the tradition (at the Conservancy) was that the board was largely for fundraising and for positioning" the prominence that comes from having a high-profile board. Millstein, a leading expert on corporate governance who has advised boards of companies such as Disney and General Motors, spent this past summer advising the Red Cross on whether to redefine the organization's mission along with several other outside experts who also guided the Conservancy.
One big step for the Conservancy was to emulate developments in the business world. Like a growing number of nonprofits, the Conservancy has adopted some of the core principles of the Sarbanes-Oxley Act of 2002. Aimed at curbing corporate misdeeds, that law was never intended for nonprofits. Still, the Conservancy and its corporate-lawyer advisors took the legislation's notions of accountability and governance to heart. Finances are audited, just as are the books of corporations, and its staff is empowered to investigate how it uses money. There also is a policy that encourages and protects whistleblowers, something the Senate's chief charity critic, Senator Charles Grassley, has urged the Red Cross to do.
Assessing threats to reputation
The Conservancy also refuses to make loans to directors, officers, or employees, has stringent conflict-of-interest prohibitions, and aims for compliance that exceeds existing tax laws. And the Conservancy's changes go deeper, still. For instance, the board now routinely assesses the threat to reputation of every decision. A risk evaluation committee of people from throughout the organization — local field managers, scientists, marketing executives, and others—examines land deals and other decisions before the board. Where once such decisions were left to local chapters, risks are now assessed by the full board. Thus, the oil drilling arranged by the local Texas chapter would never occur today.
Meanwhile, a complex land and timber exchange involving a major paper company as a partner cleared all hurdles not long ago. "We're not trying to avoid all risks but to maximize the conservation we can attain," explains McCormick. "It's got to be a calculated risk." In addition, local chapters need to have a safe forum to bring up difficult subjects. "There's so much more candor between managers and the board now," he says. "Before, managers felt they had to impress the board."
Not that the Conservancy has solved all large nonprofit woes. With more than 50 chapters, and over 1,500 volunteer trustees each of whom is meant to be an advisor and most of whom want to feel involved in governing difficulties remain. A chief executive might feel he or she best understands what an organization needs, but the many operating units can still prevail—a chief source of friction within the Red Cross. Acknowledges McCormick: "That is a code we haven't cracked yet. We try to be inclusive and transparent, but then more people realize they can participate. You can get in a loop where you can't get to closure, because every time you make a decision, a segment doesn't like it, so you adjust it again and again."
Even so, having too many cooks can be critical to an organization's success. Daniel Curran, director of the Humanitarian Leadership Program at the Harvard Business School, is among academics now exploring the challenges of managing such multi-governed organizations — groups that must weigh imperatives of inclusion with good, centralized decision-making. Says the Conservancy's McCormick: "That's the fundamental struggle for the Red Cross. How do you align your operating interests around the fundamental aim of the enterprise? We sure haven't figured it out."
Donor skittishness
The Red Cross is not exactly oblivious to the impact of its turmoil on other organizations. "When you get stabbed, we bleed," nonprofit leaders have told Red Cross Board Chairman McElveen-Hunter, she told Contribute in a 2006 interview.
In sharp contrast to previous decades, bad publicity has become a way of life for some charities. Diana Aviv, chief executive of the Washington, D.C.-based Independent Sector, an advocacy group for nonprofits, tallied, in one recent 18-month period, 500 stories of nonprofit misdeeds. "Reporters are asking more questions, and so are members of Congress." Senator Grassley has, for months and months, engaged in scrutiny of nonprofits and has repeatedly threatened new legislation to police them. That has included investigations of the Red Cross. Add to the mix of prying eyes the Internal Revenue Service, which is busy scrutinizing how nonprofits govern themselves and compensate executives. "All of the groups I know of are taking this trend really seriously," says McCormick.
With each new revelation, fresh investigation or criticism from Washington, some donors grow more reluctant to give. They demand more accountability when they do, and hope their own philanthropy won't expose them to scrutiny. "Trust is the glue that holds the whole nonprofit sector together," observes Kathleen McCarthy, director of the Center for the Study of Philanthropy at the City University of New York. "There's a deep vein of cynicism in society now. With scandals like the Red Cross and what the United Way has gone through, there's a lot of concern about maintaining trust in the nonprofit sector. If people don't trust, they don't give."
Aviv, too, has been challenging nonprofits to be more open and accountable. The Red Cross story matters to every charity, says Aviv, whose organization has been championing such self-regulation as a way of warding off government rules and enforcement. When scandal happens, there's a concern among donors that the problems are just the tip of the iceberg. Her advice: take a hard look at current practices, encourage scrutiny, and, if trouble strikes, don't hunker down or draw around the wagons. She also urges nonprofits to question each other. "We are each others' keepers," she explains. "When something appears in the paper, we need to call up and ask, Is this true? This is making us all look bad. Group pressure is an enormously powerful influence on behavior."
The jury is out
As for the Red Cross, itself, the jury is still out. Will its latest remedies be far-reaching enough? Does the new legislation force the changes most needed to create lasting reforms? Harvard's Peter Dobkin Hall doubts much can happen at the organization without serious consideration of more fundamental issues involving organizational purpose, structure and culture. Others say the Red Cross simply has too much on its plate. Olson, the lawyer hired by the Red Cross to lead the governance audit, acknowledges the limitations. "Outsiders reviewing how nonprofits are run are only dealing with part of the picture."
This can be significant — as when considerable work by Olson led to changes at the Public Broadcasting System some years ago. PBS had to examine other critical issues such as its relationship with Congress, subscribers and funding.
To be sure, changes in governance and culture take a long time to accomplish anywhere. MacGuire, the immediate past Red Cross Interim CEO, acknowledges that transforming such American Red Cross won't be easy or quick. "That's going to take years," he says. "It's a journey over a very long time."
Cautions former CEO Healy: "This is not the time to win a PR game. This is the time to radically change the organization. If that happens, there may be hope."
Keith C. Epstein is a Washington, D.C.- based journalist who is a regular contributor for Contribute. Please send comments to editors@contributemedia.com.