In the Wake of Disaster

Facing criticism, Red Cross addresses governance issues.

By James C. Hyatt

The American Red Cross announced major governance changes as it seeks to recover from criticism of its performance after Hurricane Katrina and other recent disasters.

Critics, led by U.S. Sen. Charles Grassley (R-Iowa), assert the 125-year-old charity labors under an unwieldy organizational structure as well as a culture that discourages criticism.

In late October, the Red Cross released a 156-page report from a special governance committee outlining a wide variety of proposed changes to its structure and practices, from amending its Congressional charter to strengthening its whistleblower processes. The proposals were adopted by the Red Cross board.

The governance report didn’t address specific allegations of theft, mismanagement or fraud—several of which are being investigated in various jurisdictions—but does reflect the kinds of pressures non-profits are feeling in the governance area. Many have taken steps to make sure their policies reflect changes Congress imposed on corporations with the Sarbanes-Oxley Act.

The organization, which received a Congressional charter in 1900, is a vast business with annual revenues of almost $6 billion a year. It is run by a 50-member board including 8 members appointed by the President, 7 of whom are U.S. officials.

(The federal appointees have come in for criticism as well. Often, Sen. Grassley has observed, they “rarely attend board meetings and often send representatives who do little more than sit in a chair.”)

The Red Cross proposed to cut the size of its board to no more than 20 members, and to ask Congress to amend the charter by creating a non-governing Cabinet Council composed of the Presidential appointees.

Sen. Grassley has raised particular concerns about the Red Cross’s response to handling complaints, noting that volunteers raising concerns have been “ignored, told to leave or otherwise made to feel like the skunk at the picnic.”

In addressing the whistleblower system, the governance committee noted that in 2005, the Connection Concern Line system handled 621 cases, a 22 percent increase, and approximately one third of those cases involve allegations of fraud.

The committee also noted that the Red Cross has taken several steps to beef up its complaint handling, including setting up a disaster response unit within its Investigations, Compliance and Ethics Office to be deployed to national disaster sites to help oversee responses to complaints. It is also hiring an ethics officer and improving training in use of its whistleblower system. The committee recommended that the Red Cross consider establishing an ombudsman position, and conduct periodic audits of its whistleblower process.

Commenting on the proposal, Sen. Grassley called the whistleblower changes “good steps… that will make the Red Cross a stronger institution” but added that “going forward, I want to make certain that the Red Cross also has in place reforms that will contribute to greater transparency and openness to the Congress and the public.”