by William Josephson
photo by Chris Lee
William Josephson
William Josephson is former
assistant attorney general in
charge, Charities Bureau, New
York State Law Department;
retired partner, Fried, Frank,
Harris, Shriver & Jacobson
LLP, New York. This article is
based on my submission to the
Senate Finance Committee and
on testimony at the committee’s
March 3, 2006, roundtable.
© 2006 by
William Josephson
All rights reserved
❖ ❖ ❖
For the second time in four years, each time coincident
with congressional hearings, two presidents of the
American Red Cross have resigned. The first was Bernadine Healy, a renowned physician, in November 2001, in
the aftermath of the September 11, 2001, terrorist attacks.
The second, in December 2005, was Marsha Johnson
Evans, a retired Navy rear admiral and former chief
executive officer of the Girl Scouts.
The Washington Post reported February 25 that the Red
Cross has had five presidents or acting presidents in the
last five years and has paid more than $2.8 million in
various severance payments.1
In March 2006 the Red Cross established an independent governance advisory panel, and on November 3 its
board of governors released a 127-page report, ‘‘American Red Cross Governance for the 21st Century.’’2 This
article will discuss how well that report responds to good
corporate governance concerns and standards.
I. Introduction —
The Red Cross and Disaster Relief
New York State Attorney General Eliot Spitzer exercised extraordinary leadership in the days and weeks
following September 11, 2001. He established a database
for survivors and a database for the frontline charities.
1
Salmon, ‘‘Red Cross Gave Ousted Executive $780,000 Deal,’’
The Washington Post, Feb. 25, 2006, at A9.
2
http://www.redcross.org (hereinafter governance report).
On October 30 the Red Cross posted a press release and other
summary documents, distributed them to the press, and held a
telephone conference call about the coming report.
The Exempt Organization Tax Review
Shortly afterward, a coordinating agency, the 9/11
United Services Group,3 was established.
Initially, some of the frontline charities declined to
participate in the coordinated effort, including the Red
Cross. Nancy Anthony and other representatives of Oklahoma charities, who created a coordinating group after
the 1995 Oklahoma City bombing, told us that initially
the Red Cross also refused to participate in its work.
Ultimately, the Red Cross participated in New York’s
efforts. It should be added that the participation of the
Federal Emergency Management Agency, at least initially, also left much to be desired. The Charities Bureau’s
research revealed that not all money raised by the Red
Cross for specific disaster relief was spent for that relief.
For example, there was a critical 1998 report by the
attorney general of Minnesota on the Red Cross’s response to the Mississippi River floods in 1997,4 and 60
Minutes did a program on funds raised by the San Diego
Red Cross Chapter for wildfire relief.5 The Red Cross’s
9/11 Liberty Fund, overseen by former Senate Majority
Leader George Mitchell, was established in response to
donors’ concerns that their gifts be used for 9/11 relief.
Many of the points in this article will be keyed to
statements made by Senate Finance Committee Chair
Chuck Grassley, R-Iowa, in a February 27, 2006, letter to
the principal officer of the Red Cross.
3
National Voluntary Organizations Active in Disaster
(NOVAD) has useful member tools and other information on its
Web site, http://www.nvoad.org.
4
Minnesota Attorney General Herbert H. Humprey III, ‘‘After the Floods: Unmet Needs and Unspent Donations,’’ (1998)
(copy on file with the author).
5
Copy on file with the author. The San Diego chapter’s chair
apologized for misleading the public about use of donations for
victims of the January 2001 Alpine fire. Santana, et al. ‘‘Red
Cross Chairman Issues Apology for Alpine Fire Missteps,’’ San
Diego Union-Tribune, Nov. 9, 2001, at A1. More than half a year
later the head of the chapter received a quit-or-be-fired letter.
Santana, ‘‘Local Red Cross Leader Refuses to Exit Quietly,’’ San
Diego Union-Tribune, May 31, 2002, at A1.
According to Dr. Healy, a factor in the ending of her Red
Cross employment was the investigation of a Jersey City, N.J.,
chapter embezzlement. Strom, ‘‘Red Cross Quietly Settles Case
for $120,000 Theft,’’ The New York Times, April 25, 2006, at A16.
She also believed, after reading a September 2001 audit report,
that the San Diego chapter head should be removed. Santana,
‘‘Red Cross Chief Firing Spotlights Clout of Chapters,’’ San
Diego Union-Tribune, Dec. 23, 2001, at A1.
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American Red Cross Governance
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Grassley wrote:
Thus, in the aftermath of Hurricane Katrina, despite the
Red Cross’s experiences before and after September 11,
2001, questions were again raised about the effectiveness
of the organization’s participation in federal, state, local,
and private disaster relief efforts.7
II. Congressional Reforms
Red Cross oversight reform should start with the
congressional committees that have legislative jurisdiction over the Red Cross, disaster relief, the Food and
6
On February 28, 2003, President Bush issued a homeland
security presidential directive that ordered the Department of
Homeland Security to create a national incident management
system and a national response plan. According to ‘‘The Federal
Response to Hurricane Katrina: Lessons Learned’’ 49 (2006)
(hereafter Lessons Learned), transmitted to the president by
Frances Fragos Townsend, assistant to the president for homeland security and counterterrorism:
The Federal response should better integrate the contributions of volunteers and non-governmental organizations into the broader national effort. This integration
would be best achieved at the State and local levels, prior
to future incidents. In particular, State and local governments must engage NGOs in the planning process,
credential their personnel, and provide them the necessary resource support for their involvement in a joint
response.
Under the national response plan, at least one of the Red Cross’s
responsibilities is mass care and sheltering. Lessons Learned at
60.
On February 15, 2006, the Select Bipartisan Committee to
Investigate the Preparation for and Response to Hurricane
Katrina issued H.R. Rep. No. 109-377, 109th Cong., 2d Sess.
(2006). The Red Cross’s response is discussed throughout the
committee’s report.
In June 2006 the Government Accountability Office issued a
report to congressional committees titled ‘‘Coordination Between FEMA and the Red Cross Should Be Improved for the
2006 Hurricane Season’’ (GAO-06-72).
Section 300102(4) of Title 36 of the United States Code states
that a purpose of the Red Cross is ‘‘to carry out a system of
national and international relief in times of peace, and to apply
that system in mitigating the suffering caused by pestilence,
famine, fire, floods, and other great natural calamities, and to
dispense and carry out measures for preventing those calamities.’’ This Red Cross responsibility may be unique among the
approximately 185 national Red Cross and Red Crescent
societies. Under chapter 68 of Title 42 of the United States Code,
which relates to public health and welfare, the president is
authorized to enter into coordination agreements with the Red
Cross and other disaster assistance organizations. 42 U.S.C.
section 5152(a); cf. 42 U.S.C. section 5143(b)(2).
7
See Strom, ‘‘Red Cross Sifting Internal Changes Over Katrina Aid,’’ The New York Times, March 24, 2006, at A1, col. 6;
Strom, ‘‘Red Cross Fires Two Managers in New Orleans Amid
Audit,’’ The New York Times, March 25, 2006, at A9.
8
Lessons Learned supra note 7 at 74 implicitly recognizes
this, but no legislative or executive branch proposals have been
forthcoming.
9
Senate Rule XXV in Senate Manual, S. Doc. 106-1, 106th
Cong., 1st Sess. section 25.1(j)(1)6 (2000).
10
Id. at section. (l)(1)8.
11
H.R. Rule X, cl.1(i)(15) in Constitution Jefferson’s Manual
and Rules of the House of Representatives, H. Doc. No. 103-342,
103d Cong., 2d Sess. section 678, p. 390 (1995).
12
36 U.S.C. section 300102(1)-(3).
13
American Red Cross 2003 Form 990 Part I line 2 (copy on
file with author); Beaty, ‘‘Red Cross Clarifies Its Governance,’’
The Wall Street Journal, Oct. 31, 2006, at A11, col. 3.
14
Form 990 supra note 14 at line 1d.
15
See letter dated June 10, 2005, to John R. McGuire, executive
vice president, Biomedical Services, American Red Cross, from
Evelyn Bonnin, acting director, Baltimore District, Food and
Drug Administration (copy on file with author).
16
Salmon, ‘‘Red Cross Tightening Command,’’ The Washington Post, Oct. 31, 2006, at A6; Harris, ‘‘FDA Adds $4 Million Fine
for Red Cross Blood System,’’ The New York Times, Sept. 9, 2006,
at A11; Stein, ‘‘FDA Fines Red Cross $4 Million for Blood Safety
Lapses,’’ The Washington Post, Sept. 9, 2006, at A2. Wilke, ‘‘Red
Cross Receives New Scrutiny — As Blood Unit Faces Suit, Focus
Turns to Violations That Set $5 Million in Fines,’’ The Wall Street
Journal, April 27, 2006, at D3.
17
Specific provisions in 36 United States Code often require
the corporation to maintain its federal income tax exemption
under the Internal Revenue Code. E.g., 36 U.S.C. section
202.08(b). Title 36 does not explicitly so provide for the Red
Cross, but the Red Cross is exempt from federal income taxation
as an organization described under section 501(c)(3).
The Supreme Court held in Dep’t of Employment v. United
States, 385 U.S. 355 (1966), that the Red Cross is an instrumentality of the United States for purposes of immunity from a state
unemployment compensation tax. Accord, United States v. Spokane, 918 F.2d 84 (9th Cir. 1990), cert. denied, 501 U.S. 1250 (1991).
(Footnote continued on next page.)
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For the Red Cross to succeed in its mission of
disaster relief, it must work in concert with the
entire charitable community. I have been concerned
about comments I’ve received from local charities
in the Katrina area that have expressed frustration
about their relationship with the Red Cross.6
Drug Administration, national defense, and foreign relations issues.8 In the Senate that jurisdiction is divided
between two committees: Foreign Relations9 and Health,
Education, Labor and Pensions.10
In the House, the International Affairs Committee
seems to have sole jurisdiction.11 Presumably, that reflects
the historical origins of the Red Cross in its relationship
to the International Red Cross under various treaties and
other international acts.12
But except in time of war, nearly all the money earned
or raised by the Red Cross is spent to maintain the
domestic blood supply13 and then for domestic disaster
relief.14 The blood supply issues are worthy of special
mention. Because of Food and Drug Administration
concerns over the Red Cross’s management of the blood
supply, the United States sued the Red Cross. To settle the
suit, the Red Cross entered into two consent decrees; it
entered the second, the Amended Consent Decree, only
after the United States moved in federal court to punish
it for contempt of the first decree. The Red Cross had on
June 10, 2005, to pay $3.4 million in penalties for violating
this consent decree,15 and in September 2006 it paid a
third fine of $4.2 million.16
The Senate Finance and House Ways and Means
committees, with jurisdiction over tax-exempt organizations like the Red Cross, also have substantial interests.17
Special Report
Perhaps what is required for effective Red Cross
legislative reform and authorizing committee oversight is
a joint or special committee reflecting the interests of all
the concerned congressional authorizing committees.
III. Transparency
As a federally chartered corporation, the Red Cross
and its endowment fund18 are exempted from registration and annual disclosure filings by most, if not all, of
the 39 states that have those requirements for charities
that have assets or fundraise in their states.19 Perhaps
those exemptions reflect a legal opinion that the states
cannot regulate federally chartered corporations, as a
United States district court recently held regarding national banks.20 However, national banks are nationally
regulated. The Red Cross21 is not.
Given the more than 90 organizations federally chartered under Title 36 of the United States Code, ranging
from the Former Members of Congress and the National
The Red Cross was represented by the Justice Department in
both cases. As we shall see, apparently when the Red Cross
wishes to invoke a federal shield, it is represented by the United
States. When it wishes to blunt a federal sword, it is privately
represented. See infra note 26.
18
36 U.S.C. section 300109.
19
Marion R. Fremont-Smith does not state the extent to
which the 39 states that now require charitable registration
exempt congressionally chartered charities. Fremont-Smith,
Governing Nonprofit Organizations: Federal and State Law and
Regulation 370-73 (2004). But she agrees that generally they are
exempt.
During the September 11, 2001, crisis, the New York State
Law Department’s Charities Bureau assumed that the Red Cross
was statutorily exempt from New York’s charitable asset and
fundraising registration statutes. A close look at those exemptions suggests that that assumption may not have been well
founded, because the Red Cross was not required to report to
Congress. See N.Y. Estates, Powers & Trusts Law section
8-1.4(b)(1); N.Y. Executive Law section 172-a. In a 1954 opinion,
the New York attorney general conceded that what is now the
executive law fundraising exemption did not embrace the Red
Cross, but he nevertheless opined that the Red Cross, as an
agency under federal supervision, and its chapters were exempt
from such registration. 1954 Ops. N.Y. Att’y Gen. 201. Because of
the lack of supervision, that opinion should be revisited. See
infra text at note 43.
Indeed, with the repeal by Public Law 104-66 of most of the
Title 36 congressional reporting requirements for other federally
chartered corporations, all of the 39 charity registration and
reporting states should take another look at exemptions for the
Red Cross and the other Title 36 organizations, especially those
whose state of incorporation Title 36 specifies.
20
Office of the Comptroller of the Currency v. Spitzer, 396 F.
Supp.2d 383 (S.D.N.Y. 2005); cf. Dep’t of Employment v. United
States, 385 U.S. at 360 (dictum).
21
See infra note 43.
The Exempt Organization Tax Review
Yeoman F to icons like the Boy Scouts and Girl Scouts,22
state exemptions are questionable also as a matter of
public policy. Congress should consider legislation that
would make clear that the states in which those organizations operate or raise funds have registration, reporting, and antifraud jurisdiction over the organizations’
activities, just as those states have jurisdiction over other
state-created charities, at least until Congress enacts a
national law as some have advocated.23 Even then good
arguments can be made that the Red Cross’s local
chapters should comply with their states’ fundraising,
registration, and disclosure laws, so that donors, the
press, and the public will have ready local access to the
chapter’s current financial information.
Reporters tell me that getting information from the
Red Cross is very difficult. Congress should consider
making the Red Cross subject to the federal Freedom of
Information24 and Open Meetings25 laws. The Red Cross
has successfully resisted being subject to the Freedom of
Information Act.26
IV. Governing Body
Grassley: ‘‘I have found again and again in my oversight work that many organizations can trace their problems to board governance.’’
The Red Cross’s governing body is far too large for
effective management and for fixing fiduciary responsibility. By statute it has 50 members.27 In June 2004 the
Senate Finance Committee’s staff proposed a limit of 15
members for the fiduciary boards of tax-exempt organizations.28 For 11 of the corporations federally chartered in
Title 36, Congress has specified the number of governing
body members — generally from 9 to 15,29 although 1
corporation may have 10 to 23. Publicly held company
boards of more than 15 members are rare.30
Whatever is the right limit, 50 is surely too large for
effective fiduciary responsibility. Grassley noted that the
troubled Nature Conservancy is reducing its board from
41 members to 18.
The Red Cross’s bylaws indicate that the organization
understands how difficult it is to govern with a board of
50. Its quorum under section 2.17 of the bylaws is not the
22
36 U.S.C. (passim)
Cf. Independent Sector, Panel on the Nonprofit Sector,
Strengthening Transparency, Governance, Accountability of Charitable Organizations, a Final Report to Congress and the Nonprofit
Sector 83 (2005).
24
5 U.S.C. section 552.
25
5 U.S.C. sections 551, 552, 552b, 556 & 557; 5 U.S.C. App.
section 10; 39 U.S.C. section 410.
26
The Ninth Circuit held the Red Cross exempt from the
Freedom of Information Act in Irwin Memorial Blood Bank v.
American National Red Cross, 640 F.2d 1051 (9th Cir. 1981). The
Red Cross was not represented by U.S. government counsel in
that case.
27
36 U.S.C. section 300104.
28
Staff discussion draft, Senate Finance Committee 13 (2004).
29
36 U.S.C. (passim).
30
Cf. Paul E. MacAvoy and Ira M. Millstein, The Recurrent
Crisis in Corporate Governance 131 (2003). Governance Report,
supra note 2 at 45 & nn. 221-25; cf.
23
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The Senate and House Homeland Security committees
have jurisdiction over the Department of Homeland
Security and its Federal Emergency Management
Agency, which works with the Red Cross on disaster
relief.
Special Report
The governors’ authority can also be exercised by an
executive committee of at least 1131 — about one-fifth of
the board — of which the chair and the chairs of 7
standing committees are members under section 3.1.2 of
the bylaws. Section 3.10.3 of the bylaws provides that a
majority vote of the committee members who are at a
meeting at which a quorum is present and who are
entitled to vote is required for any actions taken. So major
Red Cross issues can be, and have been,32 decided on by
only six governors.
Fundamental to internal corporate affairs matters is
the source of law. State-chartered corporations operate
under comprehensive statutory and common law rules,
but Congress has not provided comprehensive federal
rules of decision for federally chartered corporations.33
However, for 58 of the congressionally chartered corporations, Congress has specified the District of Columbia
or other named states as the states of incorporation.34
Under section 300101(a) of United States Code Title 36,
the Red Cross is ‘‘a body corporate and political in the
District of Columbia’’ (emphasis added), as it was so
described in section 8 of the Act of May 8, 1947, Public
Law 80-47, 61 Stat. 83 (1947), which amended the original
act of January 5, 1905, 31 Stat. 599, which had not been
previously amended. Does this mean that the District of
Columbia’s nonprofit corporate and other statutes and
regulations and decisions thereunder apply to the Red
Cross? Given the clarity with which Congress has addressed this issue in the 58 cases mentioned above, the
answer is unclear. The many cases interpreting section
300101(a) have focused on whether the Red Cross is a
citizen of the District of Columbia for federal court
diversity jurisdiction purposes.35
Originally, the Red Cross was incorporated and reincorporated in the District by Congress under the corporation laws of the District of Columbia.36 While that
might lead one to assume that the District’s laws govern
the Red Cross’s internal affairs, that is hardly certain.37 If
the Red Cross is a District of Columbia corporation, then
34
31
The executive committee is statutorily authorized. 36
U.S.C. section 300104(c)(1). The board of governors is specifically authorized to appoint and remove Red Cross officers and
employees, the only exception being the principal officer, who is
appointed by the president of the United States. 36 U.S.C.
section 300104(a)(1)(A). The executive committee also can ‘‘provide’’ for the appointment and removal of officers and employees. Section 3.1.1 of the Red Cross’s bylaws states that the
executive committee generally has the powers of the board of
governors when it is not in session.
This would not seem to include the power to remove the
president and chief executive officer. Under section 6.3 of the
bylaws, the president and CEO is ‘‘elected’’ by the board of
governors. Section 6.10 states: ‘‘The officers of the Corporation
appointed with the approval of the Board of Governors shall be
subject to removal by the appointing officer with the approval of
the Board of Governors.’’ The appointing officer of the general
counsel (section 6.4), chief financial officer (section 6.5), and
secretary (section 6.6) is the president and CEO with the
approval of the board. So there is no appointing officer for the
president and CEO, and that officer’s appointment would not
seem to have been approved by the board of governors who
elected her. While the president and CEO can be removed by the
board, whether the board has provided for any other removal of
that officer is not at all clear.
The Red Cross’s proposals state that its executive committee
will have a ‘‘reduced role in light of the smaller Board [of
Governors] size.’’ See governance report, supra note 2 at 88.
32
The New York Times reported that Evans was removed by
five members of the Red Cross executive committee. See Strom,
‘‘Senator Urges Red Cross to Overhaul Its Board,’’ The New York
Times, Feb. 28, 2006, at A12, col. 5. Of course, the size and
composition of the Red Cross’s board can be overhauled only by
federal legislation. See supra note 27.
33
L. H. Tribe, American Constitutional Law section 6-33 (3d ed.
2000); R.C. Moe and K. R. Kosar, CRS [Congressional Research
Service] report for Congress, Congressionally Chartered Nonprofit
Organizations (Order Code R.L. 3040 2006).
74
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36 U.S.C. (passim).
See annotations to 36 U.S.C.A. section 300101; M.T. Maloan,
Federal Jurisdiction and Practice: The American National Red Cross
and the Interpretation of ‘Sue and Be Sued’ Clauses, 445 Okla. L. Rev.
739 (1992); cf. American Nat’l Red Cross v. S.G. & A.E.: Open Door
to the Federal Courts for Federally Chartered Corporations, 45 Emory
L. J. 771 (1996).
36
W.A. Sturges, The Legal Status of the Red Cross, 56 Mich. L.
Rev. 1, 10 (1957).
37
See Osborn v. Oklahoma Tax Comm’n, 1954 Okla. 315, 279 P.2d
1096, 1098 (Sup. Ct. 1954).
Section 3 of the Act of June 6, 1900, ch. 784 31 Stat. 279,
provided in relevant part:
Third. To succeed to all the rights and property which
have been hitherto held and to all the duties which have
been heretofore performed by the American National Red
Cross as a corporation duly organized and existing under
the laws of the United States relating to the District of
Columbia, which organization is hereby dissolved.
(emphasis added) As a recent Congressional Research Service
report notes, the Red Cross’s ‘‘ambiguous public-private nature
has led to legal conflicts.’’ K.R. Kosar, The Congressional Charter
of the American Red Cross: Overview, History and Analysis 7 (Order
Code RL 33314 2006).
The Red Cross’s general counsel and corporate secretary
submitted to the March 3, 2006, Senate Finance Committee
roundtable a paper, Corporate Governance and the American Red
Cross. It did not address these issues. Nor does the Red Cross’s
governance report, even though the issues were raised at the
roundtable.
The District of Columbia Model Nonprofit Corporation Act,
originally enacted by the Act of August 6, 1962, Public Law
87-569, 76 Stat 265, provides in section 29-301.02 that a ‘‘foreign
corporation . . . shall not include a corporation created by special act of Congress,’’ but the definitions of corporation and
domestic corporation in that section do not expressly include
special act corporations. Sections 29.301.101-104 of the act
authorize special act corporations to avail themselves of its
provisions.
35
The Exempt Organization Tax Review
(C) Tax Analysts 2006. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
customary majority, but only 20, and 15 under section 4.4
in case of emergencies. Section 2.17 of the bylaws says the
vote of a majority of the board of governors who are at a
meeting at which a quorum is present and who are
entitled to vote is required for the adoption of any
matters voted on by the governors except as otherwise
provided. Does that mean a majority of a quorum,
established at 20 or 15 or a majority of the board, 26?
Almost certainly a majority of 20, which means only 11
votes could take an action.
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IV. Presidential Responsibility
Grassley: ‘‘I am troubled by the number of the board
of governors, particularly government-appointed board
members, who rarely attend board meetings and often
send [non-voting] representatives who do little more
than sit in a chair.’’
By statute the president appoints the Red Cross’s
principal officer and seven other members of its governing board, all of the latter of whom must be officials of
U.S. government departments and agencies and at least
one of whom must hold a position in the armed forces.38
They were, as of October 31, 2004, the chair of the Joint
Chiefs of Staff and the secretaries of commerce, education, state, veterans affairs, homeland security, and health
and human services.39 It is hard to believe that these
officials have much time to devote to Red Cross issues.
As Grassley said, rarely do they attend governing board
meetings, and representatives cannot vote.
Nevertheless, the Red Cross’s bylaws do not seem to
require that any of the presidential or public members
constitute part of a quorum or part of a vote of the board
or any committee.
As long as the current governing board structure
remains in place and the Red Cross remains the chief U.S.
private agency responsible for disaster relief, the president must take far more seriously his responsibility for
appointing Red Cross governing board members, and his
appointees must take seriously their responsibilities as
members of the governing board.
V. Responsibility of the Red Cross Governing
Board Chair to the President
The statute does not specify any qualifications or
duties for the principal officer. Section 2.10 of the Red
Cross’s bylaws contains a strange provision: ‘‘The Chairman shall raise with the President of the United States
any conflicts with governors appointed by the President
which the chairman feels are detrimental to the board of
governors or the American Red Cross.’’ Surely this provision has it backwards. Conflicts with the president’s
governors will almost certainly involve the interests of
the United States. Most people would think the interests
of the president and his appointed governors are more
important than the interests of the rest of the governors
or of the Red Cross itself and that that is the issue the
presidential appointees, including the principal officer of
the Red Cross, should raise with the president.
VI. The Tail Wags the Dog
Grassley: ‘‘I encourage you to consider the issues of
independence . . . and whether the chapters’ involvement
seems to ‘protect’ individuals or chapters.’’
38
36 U.S.C. section 300104(a)(1)A.
American Red Cross, 2004 Report to the American People 10
(2004); Lipman, ‘‘President’s Appointees Shun Red Cross Board
Meetings,’’ The Chronicle of Philanthropy, March 23, 2006.
39
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Thirty of the 50 governing board members are elected
by the chartered units, i.e., the chapters and the blood
services regions.40 The 30, with the 8 presidential appointees, if voting, also elect 12 members at large.41 So the
chartered units with 60 percent of the board can effectively govern themselves. This structure may not be
uncommon in federated nonprofit corporations. But they
do not have the national and international responsibilities of the Red Cross.42
And, as indicated above, the bylaws require neither
the president’s appointees nor the public governors to
constitute any portion of any board or committee quorum or majority. This is not in the public interest.
VII. Accountability
By statute the Red Cross annually reported to the
secretary of defense, another historical artifact of its
wartime relief origins.43 The secretary is to audit its
report,44 but in reality the U.S. Army Audit Agency
‘‘review[s] the principal auditor’s work’’ and expresses
what securities lawyers would call a cold comfort
opinion.45
The Red Cross has an annual audit by an independent
certified public accountant. But the auditor’s 2004 report
states:
We did not audit the financial statements of certain
chapters, which statements reflect total assets constituting 26 percent and total revenues and gains
constituting 16 percent, respectively, of the consolidated totals. Those statements were audited by
40
36 U.S.C. section 300104(a)(1)(B). Originally, the Red
Cross’s Central Committee, under its 1905 congressional charter,
consisted of only 18 persons. Six were appointed by the president. Another 6 were appointed by the 55 ‘‘incorporators’’
under the 1900 congressional charter. The final six were representatives of the state and territorial Red Cross societies. Act of
Jan. 5, 1905, section 4a, 33 Stat. 600. This seems to have been a
sensible arrangement.
The current governance structure was created by the Act of
May 8, 1947, ch. 50, Pub.L. 80-47, 61 Stat. 83, and codified in
1998. See H.R. Rep. No. 105-326, 105th Cong., 2d Sess. (1998).
The cryptic 1947 Senate Foreign Relations Committee report
said:
Among other things, the membership of this governing
board is enlarged and the method of electing it is made
more democratic. The local chapters of the Red Cross are
officially recognized as the local units of the corporation
in the States and Territories of the United States and the
importance of their role in the organization is augmented.
S. Rep. No. 80-38, 80th Cong., 2d Sess. (1947), printed in 1947
U.S.C.C.A.N. 1029.
41
36 U.S.C. section 300104(a)(1)(C).
42
See supra note 7.
43
36 U.S.C. section 300110(a). This requirement was repealed
effective May 15, 2000, by Pub. L. 104-66, section 3003. See
Historical and Statutory Notes, 36 U.S.C.A. section 300110, 2006
Cumulative Annual Pocket Part 20 (2006). The Red Cross now
reports to no one.
44
36 U.S.C. section 300110(b).
45
See independent auditor’s report A-2005-0061-FFG, dated
December 2004, from Joyce W. Morrow, CPA, auditor general,
U.S. Army Audit Agency (copy on file with author).
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are some of the bylaw provisions discussed above, such
as the quorum provisions, valid?
Special Report
The accounting profession permits such reliance, but
who knows how consistent or thorough the many audits
of the chartered units are?
VIII. Red Cross’s Proposed Governance Changes
On October 30, 2006, the Red Cross issued a press
release; its principal officer, Bonnie McElveen-Hunter,
issued a message; and it issued a document, ‘‘Transforming Red Cross Governance,’’ summarizing its governing
board actions. On November 3 it posted on its Web site a
127-page report entitled ‘‘American Red Cross Governance for the 21st Century.’’
The report said the Red Cross will seek legislation to
reduce the size of the board from 50 members to a
minimum of 12 and a maximum of 20 by March 31, 2012.
No explanation is given for the date or why there should
be any delay.47
In their 2003 book, The Recurrent Crisis in Corporate
Governance, Paul W. MacAvoy, an economist, and Ira M.
Millstein, a lawyer, summarize current corporate governance reforms required by the Sarbanes-Oxley Act of
2002, the Securities and Exchange Commission, the national stock exchanges, and their own proposals. Although the authors focus on publicly held for-profit
corporations, their principles for internal corporate governance are pertinent to major nonprofit institutions like
the Red Cross. Those principles are:
1. a majority of independent directors;
2. rigorous standards for director independence;
3. compensation, nominating, and governance
committees wholly independent of management and specific responsibilities for these
committees;
4. regular board and committee self- and independent evaluations;
46
See KPMG LLP independent auditor’s report, dated Oct. 1,
2004 (copy on file with author). The 2005 KPMG LLP Report
(copy on file with author) is to similar effect, but the total assets
not audited is 24 percent. It also contains the following sentences which did not appear in the 2004 report:
An audit includes consideration of internal control over
financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the American Red Cross’s internal controls over
financial reporting. Accordingly, we express no such
opinion.
Were the Red Cross a publicly held corporation, section 404(b)
of the Public Company Accounting Reform and Investor Protection Act (popularly known as the Sarbanes-Oxley Act of
2002), Act of July 30, 2002, Pub. L. 107-204, 116 Stat. 789, the
auditor would have had ‘‘. . . to attest to, and report on, the
[internal control] assessment made by the management. . . .’’
47
A New York Times editorial raises the same question. The
New York Times, Nov. 4, 2006, at A18.
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5.
periodic reports disclosing whether a code of
ethics for the board, CEO, and senior financial
and other officers has been adopted or
amended, and if not, an explanation for not
doing so, what the code provides, and what
steps have been taken in response to any
violations;
6. separate and defined roles of chair and CEO;
7. board responsibility for strategy, risk management, compensation arrangements, and financial reporting based on sufficient knowledge of
the corporation’s environment, challenges, and
opportunities;
8. board meetings structured to ensure that issues
central to the corporation’s performance are
given sufficient attention and that management
presentations on those issues present options;
9. assurance that board agendas prioritize and
carry out the foregoing rules of practice; and
10. internal auditors that are hired by and report to
the board.
The Red Cross’s October 30 statements and November
3 governance report say there will be only one category
of governing board members, who will be elected by
delegates at the Red Cross annual meeting. Obviously, a
board of governors, all of whom are still to be elected by
the chartered units whom the board is supposed to
govern, does not meet the standard of a majority of
independent directors or rigorous standards for director
independence. It is as if General Motors’ wholly owned
subsidiaries elected the General Motors board to manage
them.
The Red Cross’s documents say a new Governance
and Board Development Committee will replace the
current nominations process. That is a step in the right
direction as far as it goes, because the board’s current lack
of independence is perpetuated by section 7.6 of the
bylaws, which make the Nominations Committee consist
of 19 members, 17 of whom are elected for two-year
terms by the chartered units, and 2 of whom are appointed by the chair from among the governors elected
by the chartered units whose terms are ending. Thus, the
‘‘subsidiaries’’ can perpetuate their control of their governance. Moreover, the documents do not state how the
new Governance Committee will be constituted, nor do
they state what will be the qualifications for the prospective governors the committee is to ‘‘actively recruit and
nominate.’’
An important innovation advocated by Millstein and
MacAvoy is the responsibility of the board chair or lead
director, as follows:
1. ensuring the board’s effectiveness and setting
its agenda;
2. ensuring the provision of accurate, timely, and
clear information to directors;
3. ensuring effective communication with stakeholders — in the Red Cross’s case the president, Congress, and the American people;
4. arranging regular evaluations of the board, its
committees, and individual directors; and
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other auditors whose reports have been furnished
to us, and our opinion, insofar as it relates to
amounts included for such chapters, is based solely
upon the reports of the other auditors.46
Special Report
5.
IX. Whistle-Blowing
Grassley: ‘‘I am particularly troubled that several
volunteers have told me that when they tried to raise
concerns or issues about possible misuse of donated
funds and property — including suspected criminal
activity — the volunteers were ignored, told to leave or
otherwise made to feel like the skunk at the picnic.’’
The Red Cross’s documents state that ‘‘whistleblower
processes will be publicized more widely among Red
Cross employees, and the appointment of an ombudsman will be considered.’’ They say nothing about records
retention.
Records retention and whistle-blower protection from
retaliation are key Sarbanes-Oxley corporate governance
principles. Although they may create difficulties, in the
long run they make for a healthier corporate culture.
X. Other Presidential Appointees
The Red Cross’s proposals would eliminate the presidential appointees to the board of governors except for
the principal officer chair. Instead, a cabinet council
composed of senior governmental officials appointed by
the president would provide the board of governors with
governmental input. That would require legislation.
The Red Cross has important international and national disaster relief blood supply responsibilities. It
would make more sense to keep on the board of governors the secretaries of state, defense, homeland security,
and health and human services and give each of them
authority to appoint specified, high-level voting deputies
to the board whose attendance would be statutorily
required whenever their principal officers cannot attend.
The Exempt Organization Tax Review
The governance report perhaps suggests that the presence of these cabinet officers on the Red Cross board
might constitute a conflict of interest.48 It does not
indicate whether or not any conflict arises as a consquence of the federal statutes regulating the conduct of
United States officers and employees,49 officers or as a
matter of common law principles. In the former case the
Department of Justice’s Office of Legal Counsel has
opined that the attorney general’s service ex officio on the
board of the National Trust for Historic Preservation50 is
not objectionable.51 The opinion also considered whether
or not the Code of Professional Responsibility was implicated and concluded that it was not. The opinion finally
considered common law fiduciary duties and concluded,
‘‘When Congress established the National Trust, it could
have foreseen that the Attorney General might be placed
in a position in which there could be a conflict of interest
between the interests of the Trust and the interests of the
United States.’’52 Thus, any conflicts concern would appear to be without merit.
48
Governance Report, supra note 2 at 40-41 & 50.
18 U.S.C. sections 202-08 (2000).
50
16 U.S.C. sections 468-468d (2000).
51
6 Op. Off. Legal Counsel 443, 446-47 (1982):
Section 208 is premised on the concern that a federal
officer or employee who is also an officer, director, or
trustee of an organization may act in the interests of that
organization, rather than in the interests of the United
States, in any matter that he, acting as a federal officer or
employee, can influence. An ex officio member of an
organization, however, serves only by virtue of his holding a particular office. When the office from which his
service derives is not an office in the organization itself,
and is in fact a public office of trust, the reasonable
inference to be drawn is that the ex officio member serves
only in the interest of his outside office, and not in the
interest of the organization, except to the extent that those
interests are consistent. Therefore, it is the position of the
Office of Legal Counsel that ‘‘officer, director, [or]
trustee,’’ as used in section 208, should not be read to
include an ex officio member of an essentially private
body, whose service in that body derives only from a
public office of trust.
That is, the Attorney General, as an ex officio member of
the National Trust, is charged with the responsibility of
representing the interests of the United States in matters
that come before the Trust. If the Trust’s interests and
those of the United States are the same with respect to a
particular matter coming before the Board, the Attorney
General can, in effect, further the interests of the Trust.
However, if those interests conflict, the responsibility of
the Attorney General is clear; he must represent the
interests of the United States in accordance with his
responsibilities as chief federal law enforcement officer.
No question of divided loyalties is presented, and we
believe therefore that the proscriptions of section 208 do
not apply.
(footnote omitted)
52
Id. at 448; accord, Beverly Ross Campbell and William
Josephson, ‘‘Public Pension Trustees Pursuit of Social Goals,’’ 24
J. Urb. & Contemp. J. 43, 69-75 & nn. 142-180 (1983).
49
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aiding the effective contribution of nonexecutive directors and ensuring constructive relations between executive and nonexecutive directors.
Under the Red Cross’s proposals, the chair or principal
officer of the board of governors will continue to be
appointed by the president, and the responsibilities of the
chair and the chief executive officer will be clarified. But
the document does not say what those responsibilities
will be.
The Red Cross’s bylaws separate, and purport to
define, the roles of the chair (the statutory principal
officer) and the president and CEO, but the provisions of
section 6.1(c) of the bylaws that define the duties of the
chair include the function of ‘‘reporting to the board of
governors the conduct and management of the affairs of
the entire organization.’’ Neither section 6.3, which provides that the president and the CEO shall be the CEO of
the corporation, nor any other provision of the bylaws
gives that officer necessary access to the board of governors, and the role of the president and CEO is also
circumscribed by other provisions of the bylaws, particularly in relation to the chartered units, and may even be
circumscribed by the board regarding the appointment of
administrative officers.
Special Report
XI. Audit Committee
XII. Actions the Red Cross Could Take Now
The Red Cross could take many actions to improve its
governance that do not require legislation. The governance report acknowledges this.53
The Red Cross’s bylaws do not seem to require that
any of the presidential or public governors constitute
part of a quorum or part of a vote of the board or any of
its committees. The Red Cross could amend its bylaws to
require that, for example, its 12 public members —
roughly one-quarter of the board — constitute onequarter of the membership of each committee, statutory
or special, including the nominating committee.
Similarly, the Red Cross’s bylaws could require that
two of the seven presidential appointees be members of
each committee, and it could recommend to the president
that he appoint government officials who will actually
participate or at least require that some of the existing
cabinet officers participate.
The Red Cross’s bylaws contain no qualifications for
elected governors. The Red Cross could adopt bylaw
53
November 1, 2006, letter from the chair of the American
Red Cross, fifth paragraph, page 2.
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January 2007 — Vol. 55, No. 1
While section 2.19 of the bylaws requires the board of
governors periodically to assess the Red Cross’s performance and effectiveness, nothing requires the board or
any of its committees to have self- or independent
evaluations, and obviously the assessment of the Red
Cross’s performance and effectiveness by a board elected
by the chartered units is not independent.
To the extent elected governors do not participate, the
principle that if a fiduciary misses three meetings, the
office is vacant enjoys wide support. Although the statutory term of office of a Red Cross governor is three years,
nothing in the statute prevents the board from defining
when a vacancy arises or from providing for a vacancy if
an elected governor has poor attendance. The statute
authorizes the board ‘‘to make a temporary appointment
to fill a vacancy occurring in an elected position on the
board.’’ Section 2.9 of the Red Cross’s bylaws also authorizes the executive committee to fill vacancies temporarily.
The Red Cross could adopt audit committee, whistleblower protection, and records retention bylaws, consistent with Sarbanes-Oxley and other accepted corporate
governance standards, and it could appoint an ombudsman or inspector general without waiting for legislation.
XIII. Red Cross Reform and the
International Federation
Governance reform must also be consistent with the
seven fundamental principles of the International Federation of Red Cross and Red Crescent societies. Fortunately, those principles are flexible.
Among them is independence, i.e., ‘‘autonomy so that
they may be able at all times to act in accordance with the
principles of the Movement.’’ The other principles are
humanity, impartiality, neutrality, voluntary service, and
unity.
As to independence:
In its broadest sense, the principle of independence is
understood as meaning that the Red Cross and Red
Crescent must resist any interference, whether political, ideological or economic, capable of diverting it
from the course of action laid down by the requirements of humanity, impartiality and neutrality.
The federation’s discussion of independence acknowledges that:
The degree of autonomy necessary to a National
Society cannot be defined uniformly and absolutely, since it depends partly on the political,
economic and social conditions of the country.
Independence does not only relate to the relationship
between the Red Crosses and Red Crescents and their
nations. It
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The Red Cross’s documents state that a chief audit
executive would report to the audit committee and
would be recruited ‘‘vigorously.’’ But as we have seen, by
statute the Red Cross submits annual financial reports to
the secretary of defense, who audits the report, and that
‘‘audit’’ by the U.S. Army Audit Agency is only a review
and not an audit.
It would make more sense for the Red Cross to submit
its entire audit to the Government Accountability Office,
and separately to submit the audits of its blood supply
regions to the secretary of health and human services for
audit by that department’s internal auditor. Unfortunately, the Red Cross’s proposals do not address these
independent audit issues.
Nor do the Red Cross’s bylaws contain any specific
charter for the audit committee or any requirement that
its members be independent or even qualified by
Sarbanes-Oxley standards, except that the committee
cannot include the chair or any governors who are also
members of the Finance or Governance committees.
Millstein and MacAvoy call for rigorous independence
standards for audit committee directors, including the
authority to hire and dismiss independent auditors and
to preapprove all nonaudit services to be provided by the
independent auditor. The audit committee must also
establish a mechanism for addressing complaints concerning accounting and compliance. Disclosure is required concerning committee activities and responsibilities, including all nonaudit activities the audit committee
may allow the independent auditor to provide and
disclosure of the auditor’s management letter, management’s response, and material reportable events.
The Red Cross’s bylaws could be amended to implement those requirements. The governance report, however, is silent on those issues.
qualifications for both the public members and the
governors elected by the chapters and blood services
regions.
Special Report
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is also related to its independence vis-à-vis other
forms of power whether religious, political, economic, etc. So the Red Cross Red Crescent needs to
be independent from religious, political parties,
companies and so on.54
(emphasis added)
XIV. Conclusion
At the November 2001 congressional hearing, Spitzer
said, ‘‘I think it almost necessarily the case that there is
some appropriate not only Federal oversight but potentially a legislative role . . . should it become clear that
there is a larger structural problem ‘‘55 It was clear then,
and now it is abundantly clear.
Unfortunately, H.R. 6343, introduced on December 5,
2006 by Rep. George P. Radanovich, R-Calif., with Rep.
Jane Harman, D-Calif., meets far too few of the standards
discussed in this article.
54
http://www.ifrc.org/what/values/principles/qa.asp
On April 14, 2006, Secretary of State Condoleeza Rice wrote
that ‘‘ the Magen David Adom Society of Israel is not being
denied participation in the activities of the International Red
Cross and Red Crescent Movement.’’ 71 Federal Register 21089
(April 24, 2006). The basis for that determination was not stated.
As late as June 21, 2006, the issue was still in doubt. ‘‘Israelis
Blocked on Red Cross Emblem,’’ International Herald Tribune,
June 21, 2006, at 3. Not until June 22 was a plan to allow Israel
to join approved. ‘‘Red Cross Admits Israel, Though Muslim
Group Objects,’’ The New York Times, June 22, 2006, at A8;
Goldfarb, ‘‘For Israel Aid Group, Long Road to Inclusion,’’ The
Washington Post, Aug. 31, 2006, at A23.
55
Serial No. 107-42, Response by Charitable Organization to the
Recent Terrorist Attacks, hearing before House Ways and Means
Subcommittee on Oversight, 107th Cong., 1st Sess. 64 (2004).
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79