The American Red Cross and the Nation's Blood Supply

Today, the American Red Cross (ARC) is a 2.6-billion-dollar nonprofit specializing in blood collection, military assistance, disaster assistance, and safety training. However, it experienced a major crisis in the mid-1980s which continued well into the 21st century. As a result of poor blood screening and record keeping, numerous individual blood recipients were infected with hepatitis, AIDS, and other harmful diseases. (Reitman, 1996). This created an existential problem to the ARC's blood collection and distribution system. Throughout the 1990s and 2000s the Red Cross was investigated by the government (Food and Drug Administration (FDA)), was sued by numerous victims alleging harm due to tainted blood, and subjected to many unflattering Congressional hearings. Also, a court ordered consent decree gave the FDA power to fine the ARC for additional or continued safety and record keeping failures (Consent Decree 2003). This was a failure of management to respond properly and damaged the reputation of the organization.[G1][G2][G3]

As a result of this crises, the ARC took some actions to manage their risk. It focused on[G4][G5] a strategic realignment of Its business to centralize oversight of the blood collection system, it engaged in innovative risk financing, undertook risk mitigation, and restructured the organization's governance. The goal was to minimize the cost of risk to the ARC's reputation and its ability to operate a blood collection enterprise that had the trust of donors, recipients and the medical professions.[G6][G7][G8][G9]

Risk Financing

In 1988, in part due to AIDS-related litigation and a spike in liability insurance prices (ARC, 1988), the ARC set up a Bermuda captive insurance company to cover the lower level[G10]s of losses. This is a change from risk transfer to risk financing. Instead of insuring with a third party which was becoming more expensive, the ARC retained the risk to lower premiums though the use of its captive. The premiums could be based upon long-run expected losses, and [G11]while there are some administrative expenses with a captive, it[G12]did not have to pay the mark-up for profit or other expenses to the third party insurer. Essentially, a captive is a vertically integrated subsidiary that can receive insurance premiums, earn investment income, and recognize expected liabilities immediately rather than when a loss occurs. The captive can also purchase reinsurance to cover higher level risks. The ARC captive covers general liability, professional liability, automobile liability, workers' compensation, directors and officers, and employment practice risks. (ARC, 2013) A good rationale for the use of a captive is to avoid the ups and downs of the liability insurance market and base premiums on the company's own experience. However, a large claim that bankrupts the captive is still the obligation of the American Red Cross.[G13]

Strategic Management and Governance

Over the period from the 1980s to the present the ARC restructured the blood collection and distribution system.

The ARC operated as a confederation of chapters, and that made it difficult to oversee activities across the country. The Red Cross separated the blood collection operations from the disaster assistance, military assistance and safety training operations. [G14]The blood collection process was decentralized and was prone to errors. As a result of FDA regulations, as well as the actual risk to the blood supply, the ARC centralized its blood collection operations, increased the ability to test for problems in donated blood, and increased the ability to track an individual donation through innovations in information technology.

The ARC (2006) noted that Sarbanes-Oxley Act of 2002 which resulted from Enron's and WorldCom's accounting scandals specified certain governance practices for publically traded firms. The Act influenced the ARC's to employ best practice governance policies. It adopted some the practices including specifying the board's role i[G15][G16]n oversight of the organization, director independence, oversight of ethical and legal compliance. Further, emphasizing the board member's fiduciary duty helps to focus the board, and as a result, increases the ability to provide a proper level management oversight[G17] to reduce the current and future costs of risk.

1) How should risk tolerance be thought about for a non-profit? For example, we can afford to lose at most .... Where was the risk failure in this case? From an ERM quadrant perspective, how would you classify it? Could it fall into more than 1 category? What type of risk financing would the organizations need for the future? What types of risk control might be beneficial? Would it make sense for the organization to become a for-profit entity? Give a reason for your answer.