Reputational Crises Profiled - Part 4

Copyright (c) 2010 Peg Jackson

American Red Cross

- The nature of the crisis.

Following the September 11 attacks on New York and Washington, the American Red Cross, ARC, launched a phenomenally successful fundraising drive. The Red Cross claimed that all of the monetary donations were going to be used to assist the surviving families of people who were killed in the attacks. The Red Cross President, Dr. Bernadine Healy, established the Liberty Fund to consolidate these donations.

The structure of the Liberty Fund was intended to shield a closely guarded Red Cross secret. Historically, money collected from disaster-related fundraising efforts was put into the overall budget of ARC Disaster Services. Traditionally, there was never any assurance to the American public that all of the money collected for a specific disaster would be used exclusively for that purpose. The intent was to utilize whatever the current disaster was as a means of raising funds to support future disaster scenarios. Red Cross insiders were outraged that Dr. Healy, who was a relative newcomer to the Red Cross and thus an outsider, chose to segregate the enormous sums being donated as a result of the September 11 attacks. As pressure began to mount to integrate the Liberty Fund donations with the rest of the disaster relief funds, Dr. Healy delayed the payment of gifts to the victims families.

- The quality of the response. The Red Cross refused to take any action until Senator Grassley began his investigation. The September 11t victims families complained to Congress and soon Senator Charles Grassley, R Iowa, then Chair of the Senate Finance Committee, took action. The Red Cross changed its position and stated that all of the Liberty Fund monies would be distributed to victims families.

- What were the results?

The media coverage of the complaints from the September 11 victims families raised public awareness that the funds from the Liberty Fund were not being distributed as advertised and there was significant pressure being put on Dr. Healy by the ARC Board of Governors to integrate the money into the overall Disaster Services funds. Eventually, some of the families did receive cash gifts, but only after Congressional inquiry and continuing media coverage. The Red Cross Board of Governors retaliated by forcing Dr. Healy to resign as ARC President.

- What were some of the underlying issues that triggered the crisis?

The marginal quality of the internal controls of the American Red Cross at the corporate and local chapter levels have been a continuous source of problems for the organization. Fiscal mismanagement was something of a common occurrence. As part of his investigation of the Liberty Fund, Senator Grassley learned that the Red Cross board had ignored the embezzlement of $1 million by Hudson County, New Jersey, chapter officials. Although Dr. Healy attempted to have the Chapter Executive fired, she was stymied by the Board of Governors. Grassley determined that other issues which surfaced included the lack of accountability of chapters for annual performance; a reluctance of Red Cross Headquarters to exercise hiring and firing authority over chapter executives; and a tendency of Headquarters to relegate its authority to an advisory role as it relates to chapters. The Red Cross had limited organization-wide systems to ensure compliance.

- What can your organization learn from this reputational crisis?

The Liberty Fund crisis was one component among several concurrent crisis scenarios occurring at the American Red Cross National Headquarters during that timeframe. The overriding theme of all of the crises was a failure to tell the truth and a failure to ensure that donations were being used as the donors intended.

One of the most significant elements in reputational risk management is the value of institutional integrity. Your organization, regardless of the circumstances of a crisis, must tell the truth and must be transparent. Your clients, customers, donors for nonprofits, students and families for academic institutions are counting on you to tell them the truth! It is just that simple. Waiting until a member of Congress and the media force you to tell the truth will damage your reputation.