What is governance?
Governance is the process by which a board of directors ensures that a company is run in the best interests of the stockholders, the owners of the company. Directors govern by setting company goals and direction, adopting policies, making major decisions, selecting and evaluating the chief executive and monitoring corporate performance.
Not-for-profit organizations don't have shareholders, but they do have "stakeholders," constituencies that benefit from the organization's good works.
Faith-based organizations such as Catholic hospitals have "Sponsors," often the local diocese or a religious community that sponsors the hospital as a ministry of the Church.
In a not-for-profit or faith-based organization, governance means the board ensures that the organization is run in the best interests of the major stakeholders.
A hospital's stakeholders include its patients, their families and the community, including the poor and medically indigent. Stakeholders also include Sponsors, employees, physicians, local businesses and government, all of which have a stake in the hospital's success.
Should board members be compensated?
This practice, common on corporate boards, is rare among not-for-profit organizations but is growing slowly because of the increased responsibilities and time demands placed on directors as an organization grows and develops new programs or within large well established organizations.
According to the 2007 survey of boards by The Governance Institute, 88% of nonprofit boards do not compensate board members. Compensation is most common among boards of nonprofit Catholic health systems (27%), other nonprofit systems (15%), County hospitals (37%) and District hospitals (24%).
Among Catholic health systems, another 9% compensate selected board members, such as the Board Chair.
A follow-up survey published in November by The Governance Institute and Clark Consulting found little change. Of the 439 organizations that responded (22% response rate), just 12% offer boards cash compensation, with an annual retainer of $8,572 and an average per meeting fee of $528.
If your board is thinking about compensation, consider these questions:
- What is our rationale for compensation? Why would compensation make governance more effective?
- What has been the experience of other boards in similar organizations that adopted compensation?
- Would we be able to recruit and retain highly competent directors better than we can today?
- Are there any downsides to compensating board members?
An opinion from legal counsel on the implications for directors liability is essential. In addition, how will the community and public regulators, such as the State Attorney General, view compensation for directors?
Draft guidelines from IRS (Feb. 2007) say boards generally should not be compensated, and if they are, compensation must be approved by a committee of independent directors.
What should be covered in an orientation program for new trustees?
Some 73% of nonprofits consider a formal program of orientation and ongoing education very important to effective governance. An initial orientation program for new directors should include:
- The board's fiduciary duties, roles and responsibilities
- Board's committee structure
- Legal issues for directors
- Overview of the organization, including its mission, vision, and long range financial and strategic plans
- Major industry trends and community healthcare needs.
Follow-up orientation sessions might drill down on financial matters, quality and patient safety, physician relationships, community health, advocacy, and fund development. Ongoing education should keep the board updated on industry trends, emerging issues and effective governance practices. See the Resources section of the Great Boards website for an orientation course outline and other tools.
How should a board recruit and select new members?
An increasing number of boards are employing an explicit, competency-based selection process. First, the Nominating or Governance Committee develops a list of the competencies the board needs, including areas of expertise, skill sets, perspectives and personal attributes such as integrity and commitment to community. It also assesses the present composition against the competencies and identifies gaps. Second, the full board discusses and approves the competencies, and every board member is encouraged to suggest candidates to fill the gaps. Finally, the committee reviews prospective candidates against its competencies and, after a vetting process, chooses a slate to submit to the board for approval.
A governance policy should describe how the board develops competencies and carries out the process for recruitment, election and re-election of members.
How does a board determine the competencies it needs?
To begin, review the organization's mission, values, vision and strategic direction as well as a position description describing the responsibilities of a director. Then, discuss three questions:
a) What are the personal attributes every member should bring to board work?
Examples are: a demonstrated commitment to community service, support for the mission and values, personal integrity and an understanding of the difference between the role of management and governance.
b) What are professional and technical backgrounds and the skill sets board members need to understand the organization and execute its responsibilities?
Expertise in finance and business management are the most commonly needed backgrounds, but a board also may need members knowledgeable about community needs, information technology, quality management, ethics and values, political relations, marketing, law and real estate, among other areas. Also consider skill sets involving leadership, communications, consensus building and the ability to "think strategically outside the box." Some boards look for a few senior executives in large, regional corporations and changing industries to join local business and community leaders. No one person has all the competencies needed; a board is a team combining many strengths.
c) How does the makeup of the community compare to the board? Would the board benefit from a richer diversity of cultures, gender and generations among its members? Look for members who bring a needed competency or skill and also add to board diversity.
Who is an "independent director?"
All directors must exercise independent judgment. However, in an era of increased accountability and transparency, certain board functions -- e.g., serving on the audit committee and the executive compensation committee -- should be limited to directors with no material economic ties to the organization, i.e., "independent directors." Each board should develop its own definition. Some boards take a hard line, saying independent directors (or their families or business collleagues) may not have any economic relationship with the organization. Others use a "de minimus" standard, e.g., to be independent a director may not be compensated in an amount greater than $40,000 per year, or his firm may not do more $50,000 of business with the organization or 1% of its revenues, whichever is greater. (dollar amount for illustrative only)
What are "disabling guidelines"?
Disabling guidelines describe conflicts that are, or could appear to be, so material that an individual should not serve on the board or during the decision making process of a specific resolution process or event.
Each organization should develop its own guidelines; one size does not fit all. Here are examples from one institution:
"Under the following circumstances, a director should consider resigning, or may be asked to resign in the best interests of the organization:
� Repeated, intentional failure to disclose a conflict of interest
� A single but significant, intentional failure to disclose a conflict of interest
� Intentional violation of the organization�s confidentiality policy or code of conduct
� Engaging in any external conduct that the board construes may adversely impact the organization
� Serving as a board member, partner, investor, or senior executive of a direct competitor to the corporation or its subsidiaries (not to be construed as barring physicians whose practices offer routine services, such as in-office laboratories)
� Speaking publicly against positions of the board or the best interests of the hospital
� Serving as an employee of the organization, or having an immediate family member who is a senior executive officer for the organization
� Receiving direct compensation for ongoing services provided to the organization (i.e., serving as a �de-facto employee unless self excused from voting in these matters)
� Serving as an owner, partner, employee, board member, or investor of a vendor (professional services, financial institution, or other business) receiving a substantial amount of revenue from the organization
which we define as the greater of $200,000 or 2 percent of the annual revenues of that vendor in the preceding or current year.
Should boards have regular executive sessions?
Yes, and boards are increasingly employing the practice. The candor and interaction of an executive session promote a health culture and strengthen board-CEO comunications. Directors or the CEO may feel freer to raise some questions or concerns out of the earshot of the CEO's direct reports. Regular executive sessions should include only voting board members and the CEO but no other members of management. Some boards have an executive session at every meeting; others have the sessions less frequently. Annually, the board should have an executive session annually without the CEO present to discuss his or her evaluation. If the CEO is also the Board Chair, or if a board has a large number of "inside" directors, as is common on corporate boards, then "independent directors" should meet more often without the CEO.
What are executive sessions?
An executive session generally includes only voting members. If the CEO is a voting board member, he or she would attend, except as noted below.
Executive sessions are generally held for several reasons: to discuss confidential business matters; to discuss confidential board conduct issues; and to discuss the CEO's regular annual performance, with the CEO excused.
Should boards have term limits?
Generally yes. The longer an individual serves a board, the more vested he or she becomes in the current direction and policies. A limit on terms ensures the board has a regular influx of fresh and objective thinking.
Volunteer boards without term limits have a difficult time asking their friends and colleagues to step down even when their effectiveness slips. Term limits ameliorate this by requiring a member to step down as required by the bylaws. A common limit is three consecutive, three-year terms. A member must be off the board for at least one year before being eligible to serve another term.
Term limits have another benefit. Knowing vacancies will occur regularly, the board must create an ongoing process for identifying prospective members, thus keeping it in touch with changing community and constituency needs.
What committees should a board have?
It depends. Some boards function as a committee of the whole, while others make extensive use of working committees.
The most common committees for boards of health systems and hospitals are:
- Executive Committee (often meets only as necessary)
- Executive Personnel and Compensation Committee (often a subcommittee of or the same as the Executive Committee)
- Finance
- Audit (may be a subcommittee of the Finance Committee)
- Investments (may be a subcommittee of the Finance Committee)
- Quality
- Planning (becoming less common with the full board executing this function and involving all members)
- Governance.
To keep the committee structure relevant, consider abolishing all committees (except those required by law) every one to two years. Re-establish only those committees truly needed given the organization's current vision and the board's core responsibilities. Consider using task forces rather than standing committees to perform short-term projects.
What does a governance committee do?
The Governance Committee is generally responsible for overseeing and making recommendations to the board with regard to:
- Bylaws review and revisions
- Board nominations
- Succession planning for the Board Chair and other board leaders
- Board education and new trustee orientation
- Board self-evaluation
What are the key elements of an effective board conflict of interest policy?
- Definition. The policy should clearly define what constitutes a conflict of interest.
- Orientation and education. Every year or two, the general counsel or another individual should review the conflict of interest policy with the board and engage in an open discussion of any questions members may have.
- Disclosure. Board members should disclose any conflicts of interest in writing on an annual basis and when they arise during the year.
- Designate an arbiter. The conflict of interest policy should designate an individual or a committee to serve as an arbiter who reviews disclosure statements and determines whether a conflict of interest exists and how it should be handled.
- Handling conflict of interest situations. Whenever the board or a board committee considers a transaction for which a member has a conflict of interest:
- The member should declare the conflict and leave the room during the discussion and the vote. The chairman should assure this occurs.
- The interested director should not have private conversations about the matter with any other member of the board.
- The board may want to designate a disinterested third party or expert review panel to conduct a competitive bidding process or in some other way review the arrangement to be sure that the economic terms are favorable.
- The board should determine by a formal and documented vote that the transaction that it approves is in the organization�s best interests, and that it cannot conclude a more advantageous transaction with another organization.
- Documentation. The minutes of board and board committee meetings should document that the conflict of interest procedures have been followed, and the board has made a good faith effort to make decisions in the best interests of the corporation.
- Independent board functions. No board member with a conflict of interest should serve on the audit committee or the executive evaluation and compensation committee.
- Reasonable fees and prohibition on loans to directors. If the board provides compensation in the form of director�s fees, compensation should be reasonably based on the services provided. Compensation should not include loans to members of the board.
- Consider conflict of interest in the nominations process. When recommending individuals for election or re-election to the board, the nominating or governance committee should explicitly consider whether the knowledge and skills that an individual brings to the board outweigh any conflicts of interest he or she may have. In some instances, a conflict of interest is so material and direct that, even when all of a board�s conflict of interest procedures are followed, the individual�s presence on the board would still lead reasonable people to question whether the duty of loyalty is being fulfilled. Such individuals should not be elected to the board.
How should a board handle conflicts of interest?
What constitutes a conflict of interest?
A board member of a corporation owes a duty of loyalty to act in good faith in the best interests of the corporation. A conflict of interest exists whenever a board member has a �duality of interest� and could benefit privately, or appear to benefit, from decisions of the corporation or one of its competitors. In such cases, boards should follow the �3 D�s�:
- Disclose the conflict.
- Disassociate the member from discussion and voting on the issues related to the conflict.
- Document what has been done in the event legal questions arise.
Should individuals with a conflict of interest be barred from serving on a board?
Not necessarily. Each board should determine an appropriate policy toward conflicts of interest. Although some boards have a "no conflicts allowed" policy, most not-for-profits do not. Bankers, investment professionals, business owners, attorneys and other individuals who do business with the organization can be valuable trustees because of their familiarity with healthcare issues and a commitment that�s grown out of their business association. Recruiting talented members becomes more difficult if the board bars anyone with economic ties to the organization, especially in smaller communities.
If a duality of interest does exist, how does the board determines if it violates the duty of loyalty?
It is important to examine two things in particular:
Does the board member have a direct and material interest in transactions involving the corporation? For example, a radiologist whose group holds an exclusive contract with the hospital clearly has a direct and material interest in matters pertaining to physician contracting, and should not participate in any board discussions or decisions involving the radiology services contract and other physician service contracts. By contrast, a board member who owns very few shares of a publicly traded corporation (usually defined as less than one percent) that sells supplies to the hospital would not have a direct and material interest.
Has the individual complied fully with the board�s policy requiring disclosure of a conflict and disassociation with any matter involving the conflict? For example, a bank officer serving as a board member is required to disclose any financial business done for the corporation, and should be excused from discussions and voting on the selection or renewal of arrangements with financial institutions. Periodically, the organization�s banking business should undergo a competitive bidding or independent review process.
What is the difference between policy and operations?
"Policy" may be generally defined as a recommended course of action, a guiding principle, or a procedure that is established to guide current and future decision making.
It's often said that the board makes policy while management implements it.
Implementation is an operating responsibility.
Of course, an organization has numerous administrative policies developed and approved by management without board involvement, such as personnel and travel policies. No board that understands its role wants to be involved in such details. So what is the appropriate arena for policy making?
Effective boards limit their policy making to broad, high level matters. Establishing clear board policies on high-level matters helps directors to stay out of operations by articulating clear guidelines for operational decision making.
What types of high-level policies should boards adopt?
Several types of policies are appropriate for a board to adopt:
- Ends policies: Policies that establish broad organizational ends, such as the mission statement and long-range vision.
- Authority and limitations policies: Policies establishing the authority of, and setting limitations on, management or the medical staff. Examples include a position description for the CEO and a policy spelling out the CEO's maximum spending authority without consulting the board. Similarly, an investment policy establishes guidelines and limits for how the organization's assets may be invested by its investment managers where such a set of board directors exists.
- Board-management and board-medical staff processes: Policies establishing how the board carries out certain responsibilities and how it works with management or the medical staff, such as policies describing the CEO evaluation and compensation process; strategic planning process; budget process; financial planning and oversight process; and physician or relevant professional staff credentialing process.
- Standards: Policies articulating standards affecting the board, management, the medical staff and operational staff or the organization as a whole. Examples include a conflict of interest policy; code of conduct; corporate opportunity policy; a policy establishing criteria for appointment to the medical staff or medical advisory board; a policy on privileges who own competitive facilities; and a policy on patient or client safety and privacy policies.
- Externally required: Policies that external accreditation and regulatory bodies require be approved by the governing board. These policies may also fit within one of the categories above.
Some policies are nearly universal while others are found in some organizations and not others. For example, virtually all organizations have an equal opportunity policy and a conflict of interest policy for directors and officers.
From time to time, however, an organization needs the board to express its posture on a particular issue that is generating controversy or for which the organization needs a powerful statement of the boards values and expectations. Examples of policies developed by some nonprofits to meet particular needs include:
- Policy establishing the criteria for evaluating potential acquisitions and strategic partnerships
- Policy outlining whether and how the organization will enter in joint ventures with physicians
- Policy calling for a culture of quality and safety and providing a safe environment to report errors, investigate root causes and implement corrective actions
- Policy requiring all physicians newly appointed to the medical staff or advisory board be board certified
- Policy calling for all major product lines and services to generate at least a specific percentage return or meet criteria for a critical community service.
Some of our board members have a hard time distinguishing policy from operations -- how should we get everyone singing the same tune?
Have your Governance Committee, Executive Committee or Legal counsel draft a board policy distinguishing policy from operations, and then discuss it during a board meeting or at a retreat.
How often should a board conduct a self-assessment?
A board self-assessment generally should be done every two to three years. Self-assessment is a powerful tool for board learning and results in improved board effectiveness that in turn enhances organizational performance.
How should a board evaluate itself?
The most common approach is to have every member complete a questionnaire. The survey asks trustees to evaluate the board's effectiveness in performing its roles and responsibilities. It also assesses satisfaction with the board's size and structure, its method of selecting new trustees, the information and education available to members and the conduct of meetings.
The most important part of self-evaluation isn't completing the questionnaire and distributing the results. It's devoting a retreat or special board meeting to discussing the results and adopting a plan for continuous improvement. A facilitator can help make a self-evaluation retreat more productive.
What should a board evaluation process include?
A periodic self assessment may include: * Evaluation of the full board's performance against recommended practices * Evaluation of the board chair * Evaluation of committees * Evaluation after each board meeting of the meeting process * Evaluation and feedback to individual directors.
How can consent agendas expedite routine business?
The consent agenda is designed to expedite the conduct of routine business during board meetings in order to allocate more meeting time to education and discussion of substantive issues.
A board that finds that roughly 20 percent or more of meeting time is occupied by routine items should consider use of a consent agenda.
The consent agenda should include only routine financial, legal and administrative matters that require board action, and which are expected to be non-controversial and not requiring of discussion.
Consent agenda items always will have been reviewed by a board committee, medical staff committee, or senior management in advance.
Motions, resolutions and all supporting materials for the consent agenda should be sent to board members at least one week in advance. The consent agenda should be considered early in a board meeting. Any member may have an item removed from the consent agenda for separate consideration.
It is not appropriate to add to the consent at the meeting without circulating background information in advance.
For a sample board policy on using consent agendas, please see "Policy On Consent Agendas" (PDF).
