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| The Rock River Times | December 16-22, 2015
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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. Bushin2004—recruitedBushadministrationofficial 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 headhuntingfirm,wasseenasacandidatewhowouldbring 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 leadershipstylehasbeencharacterizedbybothahands-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 organization McGovern inherited had serious financial problems. It had been forced to borrow money to meet its payroll and, by 2008, the Red Cross was losing about $20 million a month, according to a former official. 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,poweredbyexpandedfundraisingandgrowing profits from fees paid for CPR classes, swimming lessons and training materials. The Red Cross’ chief of fundraising, a former colleagueofMcGovern’sfromFidelity,toldtheassembled 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. ••• cMaster 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
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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.”