Sunday, December 27, 2015

How Corporate Execs Got a Hold of the Red Cross and Drove It Into the Ground

Red Cross CEO Gail McGovern, who was hired to revitalize the charity, has cut hundreds of chapters and thousands of employees.

By Justin Elliott / Pro Publica December 15, 2015

WHEN GAIL MCGOVERN WAS PICKED to head the American Red Cross in 2008, the organization was reeling. Her predecessor had been fired after impregnating a subordinate. The charity was running an annual deficit of hundreds of millions of dollars.

A former AT&T executive who had taught marketing at Harvard Business School, McGovern pledged to make the tough choices that would revitalize the Red Cross, which was chartered by Congress to provide aid after disasters. In a speech five years ago, she imagined a bright future, a “revolution” in which there would be “a Red Cross location in every single community.’’

It hasn’t worked out that way.

McGovern and her handpicked team of former AT&T colleagues have presided over a string of previously unreported management blunders that have eroded the charity’s ability to fulfill its core mission of aiding Americans in times of need.

Under McGovern, the Red Cross has slashed its payroll by more than a third, eliminating thousands of jobs and closing hundreds of local chapters. Many veteran volunteers, who do the vital work of responding to local fires and floods have also left, alienated by what many perceive as an increasingly rigid, centralized management structure.

Far from opening offices in every city and town, the Red Cross is stumbling in response to even smaller scale disasters.

When a wildfire swept through three Northern California counties in September, the Red Cross showed up but provided shelter to just 25 of 1,000 victims at one site. Because of the charity’s strict rules and disorganization, many evacuees slept outside for over a week, even when the weather turned bad. “These families were sleeping in the rain with their children,” said Wendy Lopez, a local volunteer.

Local officials were so angry they relieved the Red Cross of its duties.

The Red Cross had closed chapters in the area last year. “You’re seeing a huge loss of experienced staff,” said John Saguto, a 15-year Red Cross volunteer in Northern California.

Some emergency planners around the country have concluded they can no longer rely on the charity.

“I essentially wrote Red Cross out of my Local Emergency Operations Plan and advised many other Emergency Managers across the state to do the same,” wrote Tim Hofbauer, an emergency management director in Nebraska, in a 2013 email to a Red Cross executive.

This year, the Red Cross quietly made cuts in the formula it uses to determine cash benefits to victims of home fires and other disasters. A family of four whose home burned down previously could have received around $900 in immediate assistance. Now they would get a maximum of $500.

Over the past two years, ProPublica and NPR have examined the charity’s flawed responses to major disasters, including the 2010 earthquake in Haiti and Superstorm Sandy in 2012. A broader look at McGovern’s seven years as chief executive shows her team has repeatedly fallen short of its own goals to secure the organization’s financial future and improve its delivery of disaster services.

McGovern declared in August 2013 — her fifth anniversary on the job — that she had executed a “turnaround” that made the Red Cross a “financially stable’’ organization with balanced budgets in three of the previous four years.

Behind the scenes, however, losses were mounting. The organization ran a $70 million deficit that same fiscal year and has been in the red ever since. Internal projections say the charity will not break even before 2017.

As part of her effort to run the Red Cross more like a business, McGovern recruited more than 10 former AT&T executives to top positions. The move stirred resentment inside the organization, with some longtime Red Cross hands referring to the charity as the “AT&T retirement program.’’

McGovern laid out a vision to increase revenue through “consolidated, powerful, breathtaking marketing.”

“This is a brand to die for,” she often said.

Her team unveiled a five-year blueprint in 2011 that called for expanding the charity’s revenue from $3 billion to $4 billion. In fact, Red Cross receipts have dropped since then and fell below their 2011 level last year.

McGovern declined to be interviewed for this story. Our account is drawn from interviews with present and former Red Cross staffers and volunteers, local disaster relief officials, and hundreds of pages of internal documents.

The Red Cross defended McGovern’s track record in a statement, saying she took over an antiquated organization that allowed each local chapter to create its own system for personnel, technology, and bookkeeping. The layoffs and shuttering of local chapters, the statement said, was painful but essential for an organization that was both inefficient and financially unsustainable.

The charity also said the cuts haven’t affected its ability to provide aid. “Our focus has always been to cut the costs of delivering our services — not the services themselves — and we believe we have achieved that.” It said there has been a small increase over the last three years in overall payments to disaster victims, though data does not exist going back to the start of McGovern’s tenure. Of the cuts in the formula for cash benefits, it said that preliminary data under the new system shows that victims are still getting the same level of assistance as in the past.

McGovern had a major accomplishment this month when a federal judge ended two decades of special government oversight of the charity’s blood-banking operation, which collects and sells blood to hospitals. The Red Cross, McGovern said in an internal announcement, had achieved “quality and compliance milestones that at one point seemed almost unimaginable.”

Still, the unit, which is the Red Cross’ largest division, is an increasing drag on the charity’s bottom line, in part because changes in medicine have sharply reduced the demand for blood. In its statement, the Red Cross pointed to those changes as the reason for the charity’s recent deficits.

But Red Cross insiders said the blood division has also been hurt because the charity bungled a software project and moved too slowly to respond to an evolving industry. Internal estimates obtained by ProPublica show that the blood business lost $100 million in the last fiscal year, a devastating drain on the charity’s finances.

Another key source of revenue, the sale of CPR classes and other training, has similarly struggled under McGovern. A plan to vastly increase the revenues of the division backfired as customers switched to less expensive providers.

Despite the failure of the plan, the former AT&T executive who McGovern brought in to run the division and other top managers were awarded bonuses last year, one former official recalled.

Employee morale has been damaged by the repeated layoffs — or “right sizing,” as McGovern calls it — as well as by the perception that the Red Cross is increasingly focused on image over substance.

A marketing department created by McGovern tried to lift spirits by crafting what it termed the Red Cross’ “internal brand essence.” The slogan, designed “to remind and guide us as we work,” was “Sleeves up. Hearts open. All In.” — an homage to the Friday Night Lights television show’s signature: “Clear Eyes. Full Hearts. Can’t Lose.”

The rallying cry hasn’t worked. An internal survey of Red Cross employees obtained by ProPublica found just 35 percent responded favorably to the statement, “I trust the senior leadership of the American Red Cross.”

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