Many CFOs can point to a major disaster or two in their careers, but Bob McDonald measures his performance by them. As CFO of the American Red Cross, he has confronted the most daunting 12-month period in the organization’s history: beginning with the Florida hurricanes of 2004, a series of world disasters — the Asian tsunami; hurricanes Katrina, Rita, and Wilma; and the recent earthquake in Pakistan — have struck with unprecedented frequency and force. The magnitude of the suffering has elicited an outpouring of support from Americans, but even as the money flows in, some wonder if charities such as the Red Cross need more financial oversight. McDonald, 61, insists that current controls are sufficient, and believes the Red Cross must stay focused as it confronts multiple large-scale disasters. A former investment banker, McDonald worries less about which way the regulatory winds are blowing than which way the actual wind is blowing. “I don’t know if we’re in for a weather pattern like this for the next 10 years,” he says, “but if we are, God help us.”
This is clearly a very challenging year for disaster relief. How does the demand compare?
This year falls outside the scope of any we’ve had. To give you a sense of it, we are dealing with 1.2 million potential cases [families] for financial assistance for Katrina and Wilma. In the four Florida hurricanes, we dealt with 73,000 cases, and that, at the time, was the most we’d ever done. So we’re facing a challenge 12 to 15 times greater than we’ve ever dealt with.
You had to borrow money for the first time to cover costs for the Gulf Coast disasters. What was the trigger?
We made some decisions early on in Katrina when we realized that we would have to put money out the door before pledges and commitments turned into cash. Those decisions — [to accelerate financial-assistance payments to the victims] — turned out to be correct.
How quickly did you put the revolving-credit facility together?Katrina hit on August 29, but we had started conversations with our banks the previous Thursday. Fortunately, we had redone our banking relationships at the national organization three years ago to ensure that we had access to large money-center banks in addition to the smaller banks that the chapters work with. So we built our liquidity, redid our banking relationships, and as Katrina bore down on New Orleans, we had an extra billion dollars of liquidity. At the high point, we had used $340 million of availability, but we’re now beginning to reduce the outstanding loan amount as pledges turn into cash.
In the past, hasn’t the Red Cross gone to Congress to supplement shortfalls? Why did you decide to go to the big-money banks this time?
The Red Cross is not a government organization. It’s congressionally chartered, and we work closely with some government agencies, but the overwhelming amount of our revenue — 97 to 98 percent — comes either from [revenue generated by] blood donations or from donations from individuals , corporations, and internationally. Only 2 to 3 percent comes from government grants, although in one unusual circumstance — the [four back-to-back] Florida hurricanes in 2004 — we received a special appropriation. The lesson learned in dealing with large catastrophes is that you never have enough liquidity.
Estimates are that it will take $2 billion to provide relief to the Gulf Coast. What elements go into such forecasts?
We’ve been at this for 125 years, so we have a very good forecasting capability that is based on historical trends regarding where storms, wildfires, and tornadoes hit. We take into consideration everything from aerial views of damage to demographics. Nationally, for example, the average family size is 2.5 people, but in the Katrina disaster area the average family size is 3.5 people, so that became an important assumption in the expense forecast.
Did you do anything differently regarding Katrina, from a finance point of view?
This time we actually put finance staff out in local chapters to assist in accounting because the scope of the disaster was so large. The expense associated with the Florida hurricanes, for example, was about $125 million, But that was 5 to 6 percent of what Katrina and Wilma will be. In addition, we’ve gone to debit cards and client systems cards, some of them cash-enabled, [so victims can] go to a Wal-Mart or a cash machine. That’s much easier to account for than the dispersal orders we’ve relied on in the past, and it gets money into the hands of victims more quickly.
Congress wants to bring more transparency to nonprofits, akin to what Sarbanes-Oxley did to for-profits. Is legislation necessary?
I would not want to say whether it should be legislated or not. But I can tell you that we decided even before Sarbanes-Oxley was on the books that we would follow its spirit. And many of the things we are doing — for example, our external auditors actually report to the audit committee — were implemented well before Sarbanes-Oxley.
But should there be a greater level of scrutiny for the Red Cross because of your ties to the government?
We are, in a sense, a national response plan, so we have a role with FEMA, Homeland Security, and Health and Human Services. But we’ve got so much oversight. Not only do we have an internal audit department and an external auditor, but we’re also audited by the Army as part of a congressional oversight system, and congressional committees sometimes request hearings.
So how do you respond to those who advocate for independent monitors for charities?
Trust me: in a world where the CFO is in the hot seat for just about everything, if I didn’t feel there was sufficient scrutiny I would be leading the charge for an additional layer. But between the Better Business Bureau, congressional oversight, the auditors, and the various constituencies that have an interest in not-for-profits, another layer would just take time away from our mission.
—Interview by Lori Calabro