The corporate takeover of the Red Cross

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.”

McGovern’s career began far from the world of nonprofits, as a computer programmer at the Bell Telephone Company of Pennsylvania. She grew up in suburban New Jersey and enrolled in Johns Hopkins University in 1970, a member of the first class to include women. “I was a quantitative sciences major and I was always one of the only women in my classes. It definitely prepared me for life,” she later told the Washington Post.

McGovern climbed steadily through the ranks at AT&T. By the mid-1990s, she was head of the company’s consumer markets division, where she used strategies like giving away free long-distance minutes to reward customers for sticking with the company. A trailblazing female executive, she was twice named one of Fortune’s 50 most powerful women in corporate America.

McGovern left AT&T in 1998, then spent four years at Fidelity Investments, where she was promoted to be the head of the retail mutual fund and brokerage business. Then came six years as a marketing professor at Harvard Business School, where she produced case studies on how companies like Kinkos sold their services and how Hasbro promoted its G.I. Joe brand.

Her academic writings spell out her theory of corporate leadership. “In many organizations, marketing exists far from the executive suite and boardroom,” she and her coauthors wrote in an article for the Harvard Business Review. Companies that make this mistake are doomed to “low growth and declining margins.”

While McGovern was training the next generation of business leaders at Harvard, the Red Cross was providing its own case study of an institution in crisis.

Between 2001 and 2008, the organization went through six interim or permanent leaders, several of whom departed amid allegations of mismanagement and misuse of donated funds. In 2007, the Red Cross board, led by Bonnie McElveen-Hunter — a wealthy Republican donor appointed by President George W. Bush in 2004 — recruited Bush administration official Mark Everson as the CEO who would bring stability to the organization.

Six months later, the board forced Everson out after the affair with his subordinate, touching off yet another round of embarrassing headlines.

McGovern, selected after a global search by a headhunting firm, was seen as a candidate who would bring private-sector methods to the nonprofit. “Isn’t it great that we have someone that really has had that business expertise in developing and working with a brand and recognizing the power of it?” McElveen-Hunter told the Washington Post at the time.

At the Red Cross, colleagues say, McGovern’s leadership style has been characterized by both a hands-on mastery of details and a commitment to the charity’s mission, even in the face of personal challenges. She is a two-time cancer survivor and in the aftermath of the 2010 earthquake, traveled to Port-Au-Prince, Haiti, just days after learning that her breast cancer had returned.

The red ink reflected some longstanding weaknesses in the Red Cross’ structure.

Congress chartered the charity in 1900 to deliver disaster relief to Americans in need but has never appropriated anywhere near the money it costs to do so. (The special relationship with the government does bring some valuable benefits, including prime Washington real estate for its headquarters, which the Red Cross got for free, and frequent public encouragement from the president to donate during disasters.)

The charity raises about $500 million annually with gifts that range from $10 sent by text message to multimillion-dollar donations from blue chip companies like Walmart and General Electric. Donations balloon in years with major disasters like the Haiti earthquake, but the money typically comes with a catch: Most of it is earmarked only for the headline-making disaster.

This leaves the organization scrambling each year to fund the little-publicized bulk of its mission — aiding ordinary Americans afflicted by everything from house fires to floods to more routine storms.

Soon after she joined the Red Cross, McGovern recruited executives who had worked with her at AT&T and Fidelity to address the weaknesses. Working out of the Red Cross’ headquarters on the National Mall, nicknamed the Marble Palace, they drew up plans for what amounted to a corporate turnaround that would touch every aspect of the charity’s finances and operations.

Some of the changes were long overdue.

Each of the Red Cross’ more than 700 chapters had its own bank account, tracked its own volunteers, and ran its own computer system. McGovern hoped to realize considerable savings by consolidating these back-office functions, creating what she dubbed “One Red Cross.”

She also got to work cutting costs: there was a round of layoffs; she killed the charity’s generous pension program and suspended matching contributions to employees’ retirement accounts. On the revenue side, she successfully lobbied Congress for a one-time, $100 million appropriation to close the budget deficit.

The Red Cross board had asked McGovern to eliminate the operating deficit in two years. By 2010, she had done that, an accomplishment she described as “an important turning point.”

In February 2011, McGovern and her executive team gathered Red Cross leaders from around the country to a meeting at Nashville’s Gaylord Convention Center. There, they outlined a five-year plan aimed at securing the charity’s financial future.

The plan, laid out in brightly colored PowerPoint slides, envisioned across-the-board improvements in performance. It projected a billion-dollar jump in revenue, powered by expanded fundraising and growing profits from fees paid for CPR classes, swimming lessons and training materials.

The Red Cross’ chief of fundraising, a former colleague of McGovern’s from Fidelity, told the assembled officials that the organization should attract far more than the $520 million in donations it was bringing in annually. “Strength of brand,” his PowerPoint said, “justify results in $1-2 billion range.”

Another former colleague of McGovern’s from her AT&T days, Jack McMaster, gave “one of the great rah-rah speeches of all time” in Nashville, as one official in attendance recalled. Hired by McGovern to supercharge the Red Cross’ CPR and training business, McMaster unveiled a plan to grow the unit from a $150 million-a-year business to a juggernaut with annual revenue of nearly $700 million.

“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,”- Tim Hofbauer

McMaster had a history of bold predictions.

After leaving AT&T, he took a job in 1999 as CEO of a Dutch telecom company called KPNQwest. In just a few years, he had run it into what Reuters called a “spectacular collapse,” prompting a bankruptcy, a storm of lawsuits, and comparisons to Enron. Just months before the company went under, McMaster publicly boasted that it was poised for dramatic growth.

Despite the blowup, McGovern hired him several years later, praising McMaster to Red Cross staff as a master marketer and a trusted former colleague.

McMaster laid out how the CPR unit would attract more customers while at the same time hiking prices for classes and training materials in CPR, swimming, and babysitting. He believed the Red Cross brand justified higher prices than were being charged around the country.

Customers voted with their wallets. When prices rose, many simply switched to lower-cost providers.

“We thought if we raised prices, American Heart [Association] would probably raise prices, and life would be good,” McGovern said at a 2013 employee town hall meeting, referring to the Red Cross’ competitor in the CPR class business. “Didn’t happen.”

Rather than revenue increasing over 350 percent, as the plan imagined, it has actually fallen since McGovern became CEO.

“A halfway competent market analysis would have told you that the bulk of our business was in selling to small businesses who viewed us as a business expense,” recalled one former chapter executive director. “When the massive price increases arrived, it was too much and customers bailed.” Many of those who taught classes — including volunteers who did the work for free — quit after being turned off by headquarters’ poor communication and insistence on centralized control.

Amid layoffs in the division last year, bonuses given to McMaster and his team raised eyebrows within the Red Cross, a former headquarters official said.

In a statement, the Red Cross said the bonuses were appropriate because the division hit “strategic milestones” including establishing “a national tele-service platform and national sales and service delivery models.”

“The compensation plan is tied to the achievement of those goals,” it said.

The statement further said the division’s decline in revenue was due in large measure to the decision to introduce “free digital downloads of all course materials, which greatly increased distribution of health and safety materials but depressed revenues from book sales.” It also provided figures showing that, while the division is still losing money, the size of the loss fell significantly in fiscal 2015.

A key driver of the Red Cross’ current financial problems is its struggling blood operation, present and former officials said.

The drop in demand for blood in the past several years has strained the entire industry, in which the Red Cross is the biggest player. But the charity’s share of the market has also shrunk over the course of McGovern’s tenure. Exact numbers aren’t public, but the Red Cross’ annual reports show a decline since McGovern took over.

The problems were partly due to the Red Cross’ failure to quickly adopt the industry’s updated labeling of blood products. McGovern acknowledged the issue in a town hall meeting for employees in 2012. “It’s very hard for us to win market share even on a price basis when you don’t have the industry standard for scannings,” McGovern said, according to audio obtained by ProPublica.

Her team also struggled to manage the switch to a new software and hardware system called BioArch. That project began before McGovern arrived but its most important component — the transition to standard labeling — was not completed until five years into McGovern’s tenure.

Even after an effort to cut costs in recent years, an internal Red Cross projection warns that losses from the blood business could reach $300 million annually by 2020 if the charity doesn’t reduce expenses further.

“They should have made these corrections a few years ago when the early signs of this market correction were appearing,” said one former senior official in the blood division. “They didn’t move fast enough.”

In a statement, the Red Cross said the decline in the overall blood market has hurt the entire industry, “causing many blood bankers to get smaller, consolidate, or, in one case, file for bankruptcy. The Red Cross has worked to restructure and right-size our biomedical operations. We have done this without risking our ability to provide quality, lifesaving blood products and without moving too quickly to a lower-cost operation.”

The statement also said that BioArch was a “massive, multi-year undertaking” and that McGovern had committed “the required time and resources to implement this large and complex new system successfully.”

Fundraising is another reason the Red Cross is falling short of its financial targets.

Soon after she became CEO, McGovern told an interviewer she wanted to bring in more donations by making “this brand a cult that everyone in America just wants to be a part of.”

The charity relies on heart-rending disasters like Sandy or the Haiti earthquake to drive in donations to support its daily work. While most of the disaster-driven donations are earmarked, they are usually accompanied by some increase in unrestricted contributions. Internally, this is known as the “halo” around a major disaster; documents refer, for example, to the “Haiti Halo.”

At a town hall meeting in 2013, McGovern said the charity had solved the problem of raising money in years without a big disaster. Referring to her fundraising team, she said: “If a tree falls down, they go, ‘Look at this poor tree, we need funds.’”

The Red Cross said in a statement that donations were up 14 percent outside of major disasters, but it declined to provide details for that figure, including over what period the increase occurred.

Internal documents paint a different picture, showing the Red Cross remains hugely dependent on major disasters to propel fundraising. In an email to executives in 2014, McGovern said that fundraising “fell short of our target in a year without any huge national disasters.”

Last month, McGovern gave a PowerPoint presentation at a town hall for employees that stated: “Fundraising revenue declined due to lack of huge disasters.”

And in a new edition of the Chronicle of Philanthropy’s annual ranking of which charities raise the most dollars, the Red Cross fell to 21st place — its lowest position since the survey began in 1991. The Red Cross explained the drop by saying, again, that fundraising had suffered without a major disaster like Superstorm Sandy.

When McGovern was hired as CEO, there were over 700 Red Cross chapters across the country. Today, there around 250, though some former chapter offices stayed open even as they were folded into other chapters. The Red Cross declined to say how many offices it closed.

Over the course of McGovern’s tenure, the number of paid employees fell from around 36,000 to around 23,000 and the Red Cross today spends several hundred million dollars less a year than it did in 2008. (Most of the staff cuts were from local chapters, not the blood business, though the Red Cross declined to provide a breakdown.)

It’s difficult to quantify the effects of these cuts, and in some areas services have not been affected. But interviews with dozens of Red Cross staffers and emergency management officials around the country document a pullback from many towns and cities, particularly in rural areas.

When Rick Tuggle, the chairman of the board of directors of the Red Cross’ Nebraska Panhandle chapter, got word in 2011 that the chapter would be shuttered, he felt betrayed. An executive at a small bank in Scottsbluff, Tuggle had spent years building up the chapter, recruiting donors and volunteers who responded to home fires in a 44,000-square-mile area in the west of the state.

Tuggle and the rest of the local board fought the decision, questioning why their financially self-sufficient chapter was being closed. The chapter’s full-time executive director was told a visit from a regional executive was a performance review, only to be laid off and escorted out of the office in tears, according to Tuggle.

“We lost volunteers, we lost local support, no one comes and helps these people,” said Tuggle, who is also a longtime donor.

“They lost my money for the rest of my life. I was so frustrated with the Red Cross. I couldn’t believe how far from their charter they had gone.”

The United Way of Western Nebraska pulled funding, fearing that its money would no longer be used locally. The nearest chapter is now four hours away, in Grand Island. A Baptist church is helping families displaced by home fires, filling a gap left by the Red Cross cuts, said Tim Newman, the emergency management director in Scottsbluff.

“Our chapter office now covers 62 of the 93 counties in Nebraska. That is two-thirds of the state!” Newman. “That is like a waiter going from serving four tables to twenty-five tables. What is going to happen to your quality of service?”

In a statement, the Red Cross said the chapter cuts were intended “to further reduce costs and improve collaboration in the field.”

“Many of these changes were difficult, especially when they cost the jobs of dedicated, hard-working members of the Red Cross family,” the statement said. “We did everything possible to minimize layoffs by reducing costs in other ways.”

In West Virginia, where several chapters have been shuttered, emergency management officials said the group’s response to recent disasters has been anemic. After a recent water shortage caused by a chemical leak, the charity declined to provide any help to residents, the Register-Herald of Beckley reported. Local officials described that as business as usual for the charity. When a tornado hit in the southern part of the state, the Red Cross’ inadequate response left scores of victims without enough food, according to the newspaper.

In Northern California last year, the Red Cross shuttered the Napa County chapter and laid off disaster relief staff, according to an internal PowerPoint presentation. Then, in September, a drought-fueled fire swept through the area, consuming more than 75,000 acres and 1,200 homes.

Because of the issues with the Red Cross’ shelter, nearly all of 1,000 displaced people at the Napa County Fairgrounds — including the elderly, new mothers and children, and anyone with a pet — ended up sleeping outside in tents, cars or RVs. The problems were first reported by the Press Democrat newspaper.

“There was a woman who was 92 and she was outside because she had a dog,” said Viri Agapoff, a founder of an ad-hoc volunteer group that arose to respond to the Valley Fire. “She had already gone through so much trauma. Now, on top of that, she’s outside.”

Local officials were furious. They say the Red Cross showed up lacking basic supplies such as Band-Aids, portable toilets, and tarps to protect against the rain. Instead the group’s volunteers handed out Red Cross-branded bags of items that weren’t urgently needed like lip balm and tissues.

The Red Cross responders were inexperienced and, according to residents, not enough of them spoke Spanish, the language of many of the fire victims.

After three days of problems, Napa County Fairgrounds CEO Carlene Moore said she went to the Red Cross official in charge and said, “I am relinquishing you of your duties and responsibilities. I’m taking over the site.”

Residents, not Red Cross workers, were doing the necessary work of supplying tents, food, and other basic needs. After fielding complaints from donors, the city of Calistoga set up its own relief fund so people had an alternative to the Red Cross.

In a statement, the Red Cross pointed out that the Valley Fire was extremely fast-moving and “this made the first few hours and days of our response particularly difficult, and we recognize we were not as well-coordinated at the start as we could have been.”

“Today, the Red Cross continues to work with local Long-Term Recovery Groups in Lake and Calaveras Counties to develop and execute long-term plans to help victims of the wildfires recover,” the statement said.

Linda Davis, CEO of the Center of Volunteer and Nonprofit Leadership, recalled driving to the Napa fairgrounds every day, seeing signs along the highway asking for donations to the Red Cross. On Wells Fargo ATMs, there was an option to donate to the Red Cross.

“They were everywhere,” she said. But after the fire response, she said.

“I view them more as a fundraising and marketing organization than a disaster relief or charity group.”

McGovern has spoken often of her goal to make the charity “the best place in the country to volunteer” — all the more important because her team wants to sustain services levels by replacing paid employees with more volunteer labor.

But much like the organization’s paid staff, many of its volunteers appear deeply disillusioned. An internal survey obtained by ProPublica found volunteers around the country had a satisfaction rate of 32 percent this year — down 20 points from last year.

Driving the alienation, longtime employees and volunteers say, is a gulf that has opened up between McGovern’s executive suite and the rank and file who have spent decades in the mission-focused nonprofit world.

She has surrounded herself with a tight-knit group of former telecom colleagues, they say. “They’re all people from the period when AT&T imploded,” said one former senior official. “The priorities seem to be a reflection of what that team is comfortable with: sales and marketing.”

An internal assessment previously reported by ProPublica and NPR said national headquarters’ focus on image slowed the delivery of relief aid during Hurricane Isaac and Superstorm Sandy. Officials engaged in “diverting assets for public relation purposes,” according to the assessment.

When McGovern was hired in 2008, the Red Cross had just done a round of layoffs and she expressed hope it would be the last. But as cuts kept coming, staffers were repeatedly told to do more with less.

The discontent was often intensely personal.

“I have agonized over posting my thoughts for many months now … because I truly love the American Red Cross, and I am so proud of my involvement with such a great group of people,” wrote longtime volunteer Mark Million in a September post on a Facebook group for Red Cross volunteers. “It is time for our leadership to go. We have squandered a century of public trust, good will and support in ten years.”

That and other critical posts later disappeared from the Facebook page. Moderator Ryan Kaltenbaugh reminded participants that the group was intended to be “a POSITIVE forum sharing ideas, stories, pictures, links, videos and more across our great country.

“[P]lease (please) refrain from posting your negative personal views,” he continued.

Becky Maxwell of Loganville, Georgia, describes herself as a “diehard Red Cross person for 25 years.” In March, after her frustrations built up for several years, she finally resigned from her volunteer position. “McGovern has fired almost all of the trained and experienced volunteers and staff,” Maxwell told ProPublica, replacing them “with people who have absolutely no knowledge of what the Red Cross is or does in a disaster. Not only is she setting these people up to fail but she is compromising the service delivery that is so important to the clients.”

While McGovern has angered many employees and volunteers, she has maintained the support of the constituency that matters most for her job: the Red Cross’ board of governors, which hires and can fire the CEO. The board includes current and former executives from Goldman Sachs, Eli Lilly and Home Depot along with the chairwoman, McElveen-Hunter, a successful businesswoman and former ambassador to Finland.

McGovern has warm personal relationships with board members, recalls Beverly Perez, a former headquarters staffer who helped prepare for board meetings. “If at the last board meeting someone’s mother was sick, at the next board meeting three months later McGovern would ask, ‘How’s your mother in the hospital?’”

In a recent letter to ProPublica, McElveen-Hunter praised McGovern’s “extraordinary leadership” in taking over a troubled organization.

“Over the last seven years, Gail — a recognized business leader with proven success running large organizations — has worked tirelessly to develop and direct the plan of action that has reduced expenses, strengthened service delivery and brought the Red Cross into the 21st century so we can reach more people and continue to fulfill our mission for decades to come,” McElveen-Hunter wrote.

If you have information about the Red Cross — or any other tips — please email justin@propublica.org.

Additional reporting by Nina Martin, Derek Kravitz, and Andrea Hilbert. Production by Emily Martinez.

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