Modern organizations are facing tough challenges. Only ethical organizations can remain competitive in the long run. The goal of this paper is to analyze the case of the American Red Cross and deliver recommendations to improve its ethical performance. The paper includes a detailed analysis of the organization’s ethical problems. A list of possible solution alternatives is provided. Each solution alternative, and its strengths and weaknesses are analyzed. Recommendations to develop and implement a new ethical strategy are provided. Criteria and procedures for the program evaluation are developed.
Keywords: American Red Cross, ethics, compliance, board of directors, strategy
Case Decision Making Paper
In a world of intensive competition and numerous marketing challenges, maintaining trust in the organization-stakeholder relationships is an extremely difficult task. Numerous organizations have failed to achieve the desired strategic goals, mainly due to the lack of ethical culture and poor stakeholder orientation. In light of the growing marketing competition, social responsibility and professionalism have become a serious competitive advantage; organizations that can develop and sustain an ethical climate have better chances to outperform their rivals. The past years witnessed an unprecedented increase in the frequency and scope of ethical organizational failures. The American Red Cross was also plagued by a number of strategic and cultural problems. However, poor financial performance, volunteer failures, questions regarding the use of donated blood, and other controversies are merely the symptoms of other, larger problems. In reality, the American Red Cross must fully restructure its business operations in order to develop an ethical culture, improve its stakeholder orientation, and ensure that its relationships with stakeholders are built on trust.
Definition of Problems
The case of the American Red Cross specifies a whole range of difficulties facing the organization. Among others, the American Red Cross experiences high levels of executive turnover, monetary donation mismanagement, and poor communication during disasters (Ferrell, Fraedrich, Ferrell, 2012). However, these are just the symptoms of the broader problems. These problems currently include:
- the lack of ethical culture;
- the lack of stakeholder orientation;
- low professionalism of the executive board;
- the lack of trust in stakeholder relations;
- excessive emphasis on marketing and financial expectations.
The Lack of Ethical Culture and Stakeholder Orientation
The lack of ethical culture and poor stakeholder orientation are the two problems, which are closely related, and which are currently plaguing the American Red Cross. It is due to the poor ethics and misbalanced stakeholder relationships that the organization is blamed for monetary donation mismanagement, poor communication during critical incidents and events, and other failures (Ferrell et al., 2012). In any business context, it is the stakeholders that predetermine the direction of the business. Ethical organizations act in the ways that respond to the needs and interests of their stakeholders. A stakeholder orientation is the degree, to which the organization understands the needs and demands of its stakeholders (Ferrell et al., 2012). Unfortunately, the most recent failures at the American Red Cross indicate that the organization either does not understand or is obviously blind to the needs and expectations of its stakeholders.
In the aftermath of 9/11, the American Red Cross organized a massive relief operation and developed a broad campaign to provide all possible types of assistance to the victims of the terrorist attacks. According to Gilliard and Khandekar (2006), the organization had set up a sophisticated network of relief and family assistance centers, providing huge financial resources to sponsor volunteers’ traveling and work and help the families, whose relatives were missing. The flow of donations was unprecedented, and the American Red Cross even had to organize a separate Liberty Disaster Relief Fund (Gilliard, Khandekar, 2006). Within the first two weeks following 9/11, the American Red Cross managed to collect $202 million in donations (Gilliard, Khandekar, 2006). Still, it was surprising that of all the money given through donations, less than 50% was spent on the victims’ needs; the remainder was used to develop and implement various organizational programs and to help to prevent future terrorist attacks (Gilliard, Khandekar, 2006). This case alone indicates the absence of stakeholder orientation in the American Red Cross and the organization’s poor ethical vision. The organization does not understand what stakeholders need at the moment, and does not realize the ethical consequences of its financial and strategic decisions.
Low Board’s Professionalism
High executive turnover at the American Red Cross is a symptom of both the absence of ethical culture and stakeholder orientation and low professionalism of the board members. According to Ferrell et al. (2012), most board members were compelled to leave after the major ethical scandals, which means that they were professionally unprepared to deal with the emerging ethical challenges. Today’s board members are gradually coming to realize that the success of their decisions and, at the same time, the strength of their organizational position, depend on their ability to carefully balance the interests of suppliers, customers, of the entire community, and of the employees (Verschoor, 1998). The effectiveness of board’s functioning also depends on and is related to the effectiveness of the internal control (Verschoor, 1998). However, the American Red Cross and its recent ethical lapses imply the lack of any internal control within the organization. In the situation, when fostering the implementation of ethical codes and behavior requirements is impossible, board members prefer to leave the company.
Poor Trust and Excessive Emphasis on Marketing
Due to the lack of ethical culture and stakeholder orientation, the American Red Cross also experiences the lack of trust in its relations with stakeholders and employees. In June 2000, workers of the American Red Cross went on strike (Gilliard, Khandekar, 2006). They also rejected a new contract with the American Red Cross, because they did not agree with long hours and increased health benefit costs (Gilliard, Khandekar, 2000). They were dissatisfied with the frequent changes in the workplace schedules (Gilliard, Khandekar, 2000). In addition, the organization continued deriving most of its revenues from blood sales. The financial and profit goals of the organization were pushed to the forefront of its strategic performance. In 2001, an antitrust lawsuit was filed against the American Red Cross, on the basis that "the organization used its clout to eliminate competitors" (Gilliard, Khandekar, 2006, p. 56). After the results of the organization’s activity after 9/11 were revealed, the community lost its trust in ethics and fairness of the American Red Cross.
It should be noted that the problem of stakeholders trust resembles a two-edged sword. On the one hand, trust is vital to the organization’s strategic survival. On the other hand, too much trust is never good. Organizations should be particularly cautious, when developing trusting relationships with their stakeholders, whereas the latter should not exercise excessive trust in their relations with the organization. “Trust relations may not always have beneficial consequences […] trust or trust-like behavior can be seen as the root of corrupt activities” (Husted, 1998, p. 233). Apparently, the problems facing the American Red Cross cannot be solved by merely developing and implementing a Code of Conduct. At present, the organization can choose among several different alternatives, with each having distinctly different impacts on its wellbeing.
Identification of Possible Action Alternatives
All problems identified in this case are related to the lack of ethical culture at the American Red Cross. In this context, the organization can choose from the following action alternatives:
remain passive and do nothing to change the situation;
hire a new board of executives;
develop and implement a new Code of Conduct;
develop a totally new strategy to reconstruct and implement a culture of ethics at all levels of the organization’s structure.
Despite the claims that the American Red Cross does not fare well in terms of its financial and management results, the recent financial performance outcomes suggest that the organization can potentially avoid any further actions and keep using its current strategic and management principles. Moreover, the organization’s board of directors seems to be extraordinarily optimistic about its current state and future prospects:
“In the midst of responding to the extraordinary demands of 9/11and a lot of criticism about these efforts, my observation is that the Red Cross never lost sight of its responsibility to every community and every victim of other disasters that occurred, some 45,000 since last September. The timely and capable response day-in and day-out to these disasters speaks volumes about the character of the volunteers and staff, their talent and most especially their dedication.” (Gilliard, Khandekar, 2006, p. 58).
However, it is difficult to imagine that in this case the organization will be able to secure itself from the risks of long-term failures. A company that is not ethical cannot enjoy perfect profits in the long run (Ferrell et al., 2012). With time the lack of ethical climate will reduce the organization's performance, although the no-action alternative may help to save some costs at the present moment. It is also possible that certain ethical controversies will turn into the lawsuits; thus, causing another set of financial difficulties for the American Red Cross. Given the importance of strategic long-term orientations, the no-action alternative is not the best way to solve the existing organizational problems of the American Red Cross.
Hiring a New Board of Directors
In light of the excessive executive turnover at the American Red Cross, one of the potential solutions could be to hire a new Board of Directors. The importance of this decision is justified by the fact that corporate boards play a vital role in the quality and ethics of corporate governance (Schwartz, Dunfee, Kline, 2005). Corporate boards and their members set the tone for the ethical or unethical climate, and they carry the primary responsibility for ethical compliance within organizations (Schwartz et al., 2005). At the same time, corporate boards’ ethical behaviors have profoundly positive impacts on the organizations’ long-term performance. The main question, however, is how to ensure that the new board of directors at the American Red Cross accomplishes its ethics mission and improves the ethical health and wellbeing of the organization. From the case study, earlier efforts to find a distinguished leader for the American Red Cross have failed (Ferrell et al., 2012). Under the influence of an increased executive turnover the local branches also faced leadership troubles (Ferrell et al., 2012).
The strength of the proposed decision is in the opportunity to bring a new vision and fresh look into the organization. The main weakness is that it will take time to find a leader, who will have enough capacity and talent to improve the organization’s public image. In addition, hiring a new board of directors alone will hardly suffice to bring the American Red Cross to the desired strategic end. Bearing in mind the most recent corporate rewards and excessive benefits scandals, the American Red Cross will have to (a) find solid motivation for the new leader that goes beyond financial rewards, and (b) develop and implement a new code of conduct for the board members. The company’s ethics starts with the ethics of directors, and the American Red Cross will need to be very specific in defining and describing the set of values and rules that are to be followed by its directors.
Developing a New Code of Conduct
The history of Codes of Conduct dates back to the end of WWII. Today, it is difficult to imagine a successful company without a code of ethics. The importance of codes of conduct was legitimized and fixed in a number of laws and regulatory acts, one of them being the Sarbanes-Oxley Act. Even the New York Stock Exchange requires that listed companies develop and publish their ethical principles and values (LRN, 2006). The presence of Ethics Codes is usually associated with a better image of ethical and legal compliance, better internal control and corporate social responsibility. The American Red Cross had its Code of Business Conduct updated in 2007 (Ferrell et al., 2012). All employees and volunteers had to read and sign the document (Ferrell et al., 2012). The organization also had the Concern Connection Line, where staff and volunteers could receive confidential advice regarding the most controversial ethical and legal problems (Ferrell et al., 2012). From what is currently known about the American Red Cross, these policy changes did not work.
For the American Red Cross, having a new policy created and published was just a formal step, which did not lead to any changes in workers’ and board members’ ethical mentality. Codes of conduct are of a little value, if their principles and requirements are not communicated to the employees (Ferrell et al., 2012). At the American Red Cross, the implementation of a new ethics code was thoroughly calculated and had to parallel the company’s commitment to the legal norms of corporate performance (Jones, 2003). These, however, are the two major weaknesses of business ethics. Moreover, relying solely on the formalized codes of conduct has never been good to any business. On the contrary, excessive reliance on such codes can be counterintuitive and counterproductive. When a code of ethics is simply handed out to the employees without any further action, these employees will hardly engage in any deep analysis of their own actions and the principles communicated by the code. This is actually what happened to the American Red Cross, as it tried to reconstruct the principles of its ethical work. These negative experiences suggest that implementing a new code alone will never work for the American Red Cross, because codes of ethics should always be part of the broader ethical efforts, and have to be supported by the continuous communication, training, and openness in the relations between employees, executives, and stakeholders.
Developing a New Organizational Strategy to Reconstruct the Ethical Climate
This is, probably, the most problematic, but potentially the most effective solution to the problems encountered at the American Red Cross. The proposed alternative is the most problematic, because it involves more than one step, and requires that the present approaches to ethics in the organization are completely restructured. It will have to incorporate a new board of directors, new executives and codes of conduct, new communication channels and ethics training mechanisms, as well as necessarily give the organization’s stakeholders a voice in the most essential organizational decisions. The costs of such ethical restructuring can be enormous, but its benefits will also be extensive and far-reaching. It is through a well-developed ethical strategy that the American Red Cross can establish a new ethical culture and implement a stakeholder perspective, by balancing stakeholders’ interests with the needs of the organization (Ferrell et al., 2012).
Based on the analysis of the available alternatives, the decision is to develop and to implement a new ethics strategy to create and to help to sustain a new ethical climate within the organization. The decision is based on the earlier ethical experiences at the American Red Cross, and rests on the assumption that the essence of ethics is all about relationships (Ferrell et al., 2012). The earlier experiences have proved that implementing a code of ethics alone or changing the board of executives would not be enough to guarantee smooth and profitable performance at the American Red Cross. For years, the main strategic decisions in the organization have been governed by the necessity of the legal compliance and profitability concerns. However, ethics is more than law, and ethical culture is more than a code of conduct. The proposed alternative will enable the American Red Cross to incorporate its ethical values into its business strategy and turn ethics into the foundational component of daily decision making (Ferrell et al., 2012).
In order to understand the way the proposed strategy will be implemented, its main components have to be specified. It should be noted that the proposed strategy borrows some of its elements from the stakeholder orientation approach described by Ferrell et al. (2012). To a large extent, it is an extended version of the strategy proposed by Ferrell et al. (2012), because it also includes the elements of employee communication and training and evaluation components to measure its effectiveness. This strategy will include but will not be limited to (a) the analysis of ethical practices; (b) the analysis of stakeholders’ needs; (c) the restructuring of the corporate values and principles; and (d) continued education and training provided to the employees. Stakeholder involvement will be encouraged at all stages of strategy implementation and evaluation.
The first step of the proposed strategy is assessing the current state of the corporate culture of the American Red Cross (Ferrell et al., 2012). However, the organization will also need to create the ethics commission, which will be responsible for the implementation of the proposed strategy. The commission will include the current board members, executives, and employees with the highest performance scores. At this stage, the commission will also identify the most influential and essential stakeholder groups, and their representatives will also have to be included. This way, the organization will open the gateway to the stakeholders communication and will create a better picture of its strategic failures and possible returns. The process of assessing the corporate culture will involve the analysis of the mission, vision, the existing codes of conduct, and the reasons why the earlier ethical efforts have failed. The current state of the organization’s ethical climate will have to be reevaluated against the needs, desires, and interests communicated by the stakeholders (Ferrell et al., 2012). The organization will hold a general meeting with all commission members in order to notify them of the new beginnings and to set the direction for the future movement. At this meeting the commission will also develop a responsibility matrix and define the boundaries of each member’s conduct. Such meetings will be held regularly (at least once a week) in order to monitor the implementation progress.
The second step is the identification of the most pressing ethical and organizational culture issues. These may include but is not limited to the problems in implementing the new code of ethics, the lack of effective communication and trust, financial mismanagement due to the lack of a salient ethical commitment, the absence of an explicit code of board conduct, etc. The goal of this step is to see where and how the American Red Cross was effective (or ineffective) in managing its ethical problems. The commission will also have to evaluate the extent, to which the organization was committed to the ethical conduct in the past. At this stage, the commission will finally arrive at a better understanding of the organizational culture at the American Red Cross, and will prepare itself to the development of relevant ethical solutions.
The third step will be determining the available resources and mapping out the sequence of steps to bring the organization towards better ethical culture (Ferrell et al., 2012). At this stage the commission will hold a meeting with other employees and volunteers to communicate the ethical issues they have identified in the earlier stages. They will also encourage other participants to express their views and propose novel solution. This is where employee and stakeholder engagement will become a vital element of the proposed strategy. This is actually one of the main elements that the American Red Cross was missing in its past approaches to ethics.
Depending on the analysis of the propositions provided during the stage three of the implementation process, the ethics commission will devise a new strategy, which will necessarily include changes to the existing code of ethics, creation of a new code for the board of directors, development of the new communication channels, and additional training and education opportunities for the employees. As stated earlier the American Red Cross had already had its ethics policy revised; however, without further education and training it will remain only a formal document without any valid influence on the organization. By allowing employees and stakeholders to express their opinions freely, the proposed strategy will cultivate the culture of openness and information exchange at all levels of organizational performance. Stakeholder groups will be allowed to monitor the process and its outcomes and provide their opinions and feedback on a regular basis.
Evaluating the effectiveness of the organizational culture and its ethical components is not an easy task. The proposed strategy incorporates numerous elements and models. As a result, the process of evaluation will also need to be multifaceted and complex. The evaluation strategy will include the two major components: (a) employee feedback and (b) stakeholders feedback. Additionally, the ethics commission will measure changes in the organization’s financial performance and conduct a broad survey in order to evaluate employee understanding of the new ethical values and principles. A detailed analysis of the organization’s connection line will need to be performed as well. The organization could also benefit from conducting an independent audit of its ethical practices and results.
First, all employees and stakeholder group representatives will be asked to provide their initial reactions and feedback as to the relevance and appropriateness of the new ethical measures. Comprehensive employee surveys exemplify the most effective way to measure the organization’s ethical pulse (LRN, 2006). All surveys will be anonymous. Employees will also be free to report any dissatisfaction or misconduct concerns they might be facing. At the same time, another broad survey of employees’ ethical knowledge will be carried out in order to ensure that the education and training measures implemented as a part of the new ethical strategy worked. These, however, are the subjective measures of assessment, which are the subject to the risks of bias.
To make the assessment procedure more objective, the ethics commission will initiate a detailed analysis of the ethics hotline. The following evaluation criteria will be used: the number of calls, the nature of the call and complaint, and the frequency, with which the callers report having tried to solve the problem locally (LRN, 2006). These measures will add to the responses and feedback provided by the employees and stakeholders. Finally, the organization will initiate a detailed independent audit of its financial and ethical operations. The greatest benefit of an independent audit is that it allows evaluating the effectiveness of the organization’s internal control function. In other words, the independent auditors will evaluate the extent, to which the board of directors and executives copes with its ethical obligations.
The American Red Cross is facing too many challenges. Still, the roots of its problems are in the lack of the ethical culture, poor stakeholder orientation, low board’s professionalism, and excessive reliance on profits and marketing. Only a thorough restructuring of the organization’s ethical principles will help to deliver better strategic results and enhance trust and satisfaction in its relations with stakeholders. It seems that the company is not aware of the stakeholders’ needs and expectations. The proposed strategy will foster inclusion and stakeholder engagement in the ethical and policy decisions made by the American Red Cross. Changes to the existing Code of Conduct will be made based on the feedback provided by the employees and stakeholder groups. Participation will create an atmosphere of openness within the organization. The effectiveness of the new strategy will be evaluated with the help of employees and stakeholders surveys, as well as through independent audits and regular stakeholder feedback.