Smile Merger Fell Apart Amid Months of Internal Bickering

April 1, 2011       Mark Hrywna      

A lot can happen in three weeks just ask Operation Smile and Smile Train. The boards of the organizations had approved a merger of the cleft surgery charities only to abandon the plans when some donors raised concerns and several board members asked charity regulators to intervene.

An online petition against the merger had garnered more than 2,000 signatures by the time the boards of the two organizations agreed to abandon the merger on March 7. Just three Mondays before, the board of Smile Train had approved the merger, with a fullpage ad in the next day’s New York Times announcing the move.

“At a time when the public discussion should have been about how our two organizations can change the lives of more children, there has been instead a selfserving campaign to spread untruths about each organization, the proposed merger and those of us who supported it,” Smile Train Cofounder Charles Wang wrote in an open letter on the charity’s website. In the weeks following the merger approval, the two charities “had to spend too much time and attention dealing with false innuendo, accusations and allegations,” he said, taking away from their missions.

“One of the many positive results of this indepth process is that our two organizations have identified key opportunities where we can leverage our collective expertise and resources to collaborate in the future,” William Fox, Operation Smile’s chairman, said via a statement, although the organization had no specific details regarding future collaboration. The plan would focus on building sustainability in partner countries.

While the two organizations have similar missions, they operate differently. Norfolk, Va.based Operation Smile generally transports volunteer doctors to perform surgeries while the Smile Train model aims to instruct local medical teams to perform the surgeries.

The merged entity would have been headquartered at a new 70,000 square foot facility that Operation Smile is building in Virginia Beach, Va., with the help of an anonymous donor, on land donated by the city. The New York headquarters of Smile Train was to have remained as a satellite office.

Brian Mullaney had the idea for Smile Train while on the board of Operation Smile, which was created in 1982 by Dr. William Magee and his wife, Kathy. He set out with help of Wang’s fortune to start The Smile Train in 1999. “Programmatically, it was something that didn’t fly for Operation Smile’s focus,” said Mark Atkinson, a board member of Smile Train, who previously had served on the board of Operation Smile.

Mullaney’s annual compensation of $678,058 was paid from temporarily restricted donations from Wang, according to Smile Train’s Form 990. His base compensation was $390,000, with $250,000 in bonus and incentive compensation for the fiscal year ending June 2009.

Atkinson was among three board members along with Mullaney and Robert Smits to vote against the merger at Smile Train’s board meeting on Feb. 14. About two weeks later, he and Smits sent a fivepage letter to the New York Attorney General’s Office about their concerns with the merger and requested intervention. The attorney general’s office in New York, as well as Virginia, would have had to approve the merger.

A week before the merger was abandoned, Smile Train’s Medical Advisory Board voted against the plan, as did several other affiliates in other nations, including Smile Train Canada and Smile Train Italy.

“For two organizations that want to bury the hatchet, this is certainly not a way to get started,” Atkinson said soon after the boards approved the merger. “One could argue, point that Smile Train seemingly got the short end of the stick.”

“We’ve advertised ourselves to be different for 10 years; Wang paints it as helping more kids. I’m all for that, but this deal kind of gives up the farm,” Atkinson said. He added that the merger “happened rather hastily” and negotiated with a certain faction of the board, unbeknownst to other board members.

“While these two organizations were kind of doing the same thing, I think the model we’d put together was doing very, very well,” Atkinson said. “We certainly didn’t have to (merge), I didn’t think it was necessary for us to merge,” he said.

Atkinson wasn’t opposed to the two charities working together, but if there was to be a merger, it should’ve been on more equal terms, perhaps reflecting the size of the two entities. “Clearly I don’t think that’s the case,” Atkinson said. You’re basically dissolving what had been a very well-oiled machine. In terms of business, I just don’t think it could’ve been handled any more poorly. It was very secretive,” he said.

According to the most recent tax filings, New York City based Smile Train had revenue of $92 million compared, to Operation Smile’s $33 million, and five times in net assets.

Andrew Frank, a spokesman for Wang, disputes the idea that the merger was presented as a done deal.

“Given the historic mistrust, the initial overtures between the organizations were carried out cautiously and privately between the Operation Smile leadership, Mr. Wang and a few other Smile Train Board members,” according to explanations posted on the organizations website. Both sides were concerned about confidentiality and aimed to “build trust and establish the framework” for a potential merger before sharing the proposal with their boards, “particularly since the Smile Train board included at least one board member who had a wellknown history of animus against Operation Smile,” referring to Mullaney, who declined to comment for this story.

The confidentiality concerns were borne out, as the proposal to the full Smile Train board soon made it into the hands of the press and other third parties, distributing internal communications and a copy of the confidential draft merger agreement, which had not been finalized.

Frank said Smile Train board members had six days from the time they were presented with the proposal on Feb. 8 until a board vote Feb. 14 to consider the proposal, ask questions and get more information. “The timing of the review period was driven by wellfounded concerns regarding leaks and confidentiality breaches, and the potential damage they could have on delicate merger talks and on both organizations,” Smile Train said.

The seeds of discontent seem to trace back at least a year ago, when Mullaney presented the Smile Train board with the idea to expand the model to other health issues, such as clubfeet and blindness.

In an open letter posted on Smile Train’s website, Wang said senior management made a presentation to the board last year stating that the need for cleft surgery was waning and that the organization should branch out to other areas and medical procedures. “While these are very good causes, the board wanted to protect donor funds and would not divert Smile Train resources to noncleft initiatives,” he wrote.

“Smile Train senior management failed to heed the board’s directive to focus only on clefts, and instead continued to pursue other noncleft initiatives. After this activity was uncovered by the board, management promised to focus only on clefts but continued its pursuit of noncleft programs. For this and other reasons, the board ultimately lost confidence in the leadership of the organization and decided it was necessary in October to make a change in top management,” Wang said.

After Mullaney’s presentation in the spring, Wang introduced two new prospective board members in June to expand the board from seven to nine members, which the board approved unanimously. While he voted for the board expansion, in hindsight, Atkinson described it as a power play to ensure Wang had a majority voting bloc on the board, made up of current or former employees of his business enterprises.

“Certainly right now I think the Smile Train board is tainted. You will not see a vote cast by any of Wang’s employees that is different from a vote Wang will cast,” said Atkinson.

While Mullaney was removed in October, his term as president ends June 2011, and he will receive a severance package. “Everyone agreed at the time to do this in an amicable way in order to move the organization forward, said Frank.

On the day the merger was approved and announced by both organizations, five employees of Smile Train were let go, including DeLois Greenwood, vice president; Hana Fuchs, vice president, finance and administration; Michele Sinesky, manager, donor relations, and Karen Lazarus, manager. A spokesman declined to comment, although at the time of the merger both organizations said there were no plans to layoff staff as a result of the consolidation.

Atkinson had questioned a proposed Legacy Fund, which was to set aside some of Smile Train’s assets to ensure its programming commitments were carried out for three years. The fund would be overseen by Wang and five board members appointed by Wang, who would be Smile Train’s chairman emeritus. Four of the five board members would be from Smile Train, with one from Operation Smile. The Legacy Fund is “a standard feature of nonprofit mergers to create a temporarily restricted fund within the new organization that segregates certain assets to ensure the preservation and transition of historic programs postmerger,” said Frank. “Some people are spinning this as his personal thing there is no personal benefit at all for anyone,” he said, aimed only at helping with the combined programmatic integration.

The Smile Train Legacy Fund was designed to set aside funds within Operation Smile Train that can only be spent on Smile Train’s charitable programs and historic obligations for a period of three years. Operation Smile Train would have owned all of the assets in the fund, according to Frank. While detractors of the merger painted a picture of The Legacy Fund as under the control of Wang, supporters described those people as obviously having an “an axe to grind” with the merger and Wang. NPT