CASE 6
The Storm of Governance Reform at the American Red Cross
6-1
Author’s Teaching Note: By Jill Brown
I.CASE ABSTRACT
This case describes the challenges faced by the ARC Board of Governors in
2006–2007 as it prepared to revamp the governance structure of this federally
chartered not–for–profit organization. The decision to overhaul the ARC
governance structure was prompted by a U.S. Senate Finance Committee
investigation into the ARC Board following concerns over Hurricane Katrina
relief efforts, as well as concerns regarding board processes, including CEO
retention and board composition. The result was a slate of recommendations
from an Independent Governance Advisory Panel regarding how to overhaul the
Board.
This case is set in the Fall/Winter, 2006 when the ARC Chairman must decide
how many of the recommendations to endorse.
II. CASE ISSUES AND SUBJECTS
Governance
Social Responsibility
CEO Turnover
III. CASE QUESTIONS AND GUIDE
1. Leading up to 2007, many criticized the ARC for poor corporate governance.
What information in the case demonstrates poor governance?
The first step to understanding governance failure is to get a clear
understanding of the system and the media attention to the ARC that spawned a
Key points might include:
1. Definition of Governance. Governance in a not–for–profit organization is
defined as, “the board’s legal authority to exercise power and authority over
an organization on behalf of the community served.”
i
The board is the first
CASE 6
The Storm of Governance Reform at the American Red Cross
CEO. Additionally, political appointees to the Board appeared to shirk their
duties.
2. Importance of Mission. (In a not–for–profit organization.)
Students should see that “poor governance” means that the ARC Board failed to
3. The Board. Students should talk about the media scrutiny that is mentioned
in the case, as well as the high–level of scrutiny that the ARC received as a
Teams might use information from IM Table 1, which provides a comparison of
the characteristics of the ARC Board to that of a typical for–profit,
publicly traded firm, as well as other not–for–profits. Both Senator Grassley
and Chairman McElveen–Hunter made comparisons to for–profit organizations in
the case, and recommendations for the ARC included the development of more
for–profit–like governance mechanisms. These categories overlap to categories
of recommended board changes, including director term limits, CEO duality,
average CEO tenure, and board selection. After reading the case and reviewing
this analysis, the students should be able to identify the following
governance issues:
-The ARC board size was too large
–Board members did not have enough not–for–profit experience
The identification of these issues might lead to discussions regarding the
two main governance issues that Senator Grassley highlighted in the case: 1)
CEO turnover and 2) the relationship between Chairman McElveen–Hunter, the
CEO, and the Board.
1. CEO turnover. Separate from performance issues, CEO turnover is
problematic in governance. The CEO selection process is laborious and takes
time away from the other duties and obligations of a board. Additionally, the
CASE 6
The Storm of Governance Reform at the American Red Cross
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2. The relationship between the Chairman, the CEO, and the Board. Corporate
governance involves putting mechanisms in place to protect stakeholder
interests. In order to do this, the Chairman, CEO and the ARC Board must have
a relationship that fosters the open exchange of information and good
decision–making processes. In the case, Senator Grassley implies that these
Students should point out that Senator Grassley said that federally appointed
board members were shirking their duties by avoiding meetings and sending
substitutes in their place. Additionally, Senator Grassley indicated that
there were potential conflicts of interest for several board members, and he
implied a general lack of transparency when the ARC sent documents to his
office labeled, “confidential.” Shirking, conflicts of interest and lack of
Astute students will point out the conflict of interest in having Chairman
McElveen–Hunter reviewing recommendations and then endorsing (or not
endorsing) the recommendations to the Board will limit her job
responsibilities, relative to her responsibilities pre–Katrina.
CASE 6
The Storm of Governance Reform at the American Red Cross
Q2: Who are the stakeholders involved in the ARC case? How do these
stakeholders differ from those of for–profit organizations? What are the
implications of the stakeholder analysis for the decision facing Chairman
McElveen–Hunter?
Stakeholders. Students might begin to answer these questions by being asked
to define the “customers” of the ARC. Beyond the donors whose monies must be
managed by the ARC Board, the Board is also accountable to other
stakeholders. However, unlike for–profit organizations, shareholders are not
Additionally, students should identify which stakeholders are core, strategic
and environmental; this breaks down the primary/secondary categories to
assess who the Board must address, beyond those with whom it has a fiduciary
Students should identify that the federal government (and the President of
the United States as its leader) is a core stakeholder and essential to the
survival of the ARC under its charter, in addition to the communities and
volunteers, whom the ARC serves. Strategic stakeholders include the U.S.
Q3. Which, if any, recommendations should Chairman McElveen–Hunter put
forward for adoption by the ARC Board?
To this point, students have learned that effective governance at the not–
for–profit ARC involves creating an atmosphere of shared vision where donors
CASE 6
The Storm of Governance Reform at the American Red Cross
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However, one key SOX mandate is noticeably absent from the ARC’s expert
recommendations. This is the issue of potential conflicts of interest, which
the ARC faces as a conduit for federal agencies. Despite a revised board
structure, the President of the United States still has final say in
appointing the Chairman and various ARC Board members.
EPILOGUE
The American National Red Cross Governance Modernization Act of 2007 was
signed into law on May 11, 2007, and the ARC Board accepted all of the
proposed changes. However, even after CEO Evans resigned and governance
reforms were put in place, controversies over CEO succession continued. When
the ARC announced the appointment of Internal Revenue Service chief Mark
Everson to replace Evans as its newest President and CEO, one media blog
wrote, “the revolving door to the CEO’s office at the ARC has spun yet
again.”
ii
(Rafferty, 2007). After less than two years as president and CEO,
the Board fired Everson after learning that he had engaged in a personal
relationship with a female subordinate.
1
Sarbanes-Oxley (2002) – SEC.gov
CASE 6
The Storm of Governance Reform at the American Red Cross
organization, including massive layoffs and restructuring and the ARC was
once again financially positive. The new ARC Board seemed to be working, and
five years after Hurricane Katrina, the ARC released a report called,
“Bringing Help, Bringing Hope.” The theme of the report was that the ARC was
better prepared for future disasters. As CEO McGovern began her third year at
the ARC, she reiterated the theme of “rebuilding community” with “strong
families, strong communities.”
iv
This theme seemed to apply, as well, to the
ARC Board of Directors as it revisited its commitment to effective
governance.
i
BoardSource, p. 15.
ii
Rafferty, R.J. 2007. “Will New Red Cross CEO Help or Harm Confidence in
Disaster Agency?” May 31, 2007