Bryant: Inside general counsel is generally deemed to be a member of the management team, and therefore sometimes has a conflict of interest internally. Let's say the issue is senior management's incentive plan. Even if all the proper procedures have been followed, in-house counsel is still a beneficiary of that incentive plan, so when he or she looks at it, it's not really with an objective eye. Being a member of the management team sometimes skews the way you look at things.
Chresand: Given the relationship between the in-house general counsel and the CEO, there are occasions when it's appropriate for us to retain outside counsel to avoid any appearance of conflict. Board members do view outside counsel as having more independence because they're not employees of the organization. Outside counsel also often represent more than one health system or hospital, so sometimes they have a perspective that we might not have from the inside.
Wilson: The internal and external auditors' roles are quite different. The external auditor focuses on financial statements rather than on the daily inner workings of the various hospital departments. That's the purview of the internal auditor.
LeMoine: Never. In Enron's case, Arthur Andersen served as both internal and external auditor.
Wilson: There are two: 1. Audit Committee members should be independent of management. No hospital employees should sit on the Audit Committee. In fact, when the Audit Committee meets with the internal and external auditors, management should be asked to leave the room. 2. Trustees who sit on the Audit Committee should be financially literate enough to interpret financial statements and engage in a meaningful discussion with the auditors.
Riley: I recommend that the board have an Audit Committee that's separate from its Finance Committee. At least one member of the Audit Committee should have substantial financial expertise. But the rest of the members should represent a cross section of your board members. Some of the best communication I've ever heard take place between an Audit Committee and an external auditor has come from board members with little financial background, who are willing to ask the proverbial dumb question.
LeFever: Members must be willing to ask questions. They need to ask the auditors point-blank to go beyond the numbers and say whether this is a company that is well run and as financially strong as the records seem to indicate.
For more information, see the August 2001 issue of the GREAT BOARDS newsletter.
Here's how David LeMoine says Ascension Health does it. The Audit Committee members adopted a multi-page "charter" detailing its roles and responsibilities. The document serves the function of bylaws for the committee, and outlines the group's responsibility, the work to be done, the timeline for the work and the procedures for doing the job.
Prepared by the system's internal auditor, Catholic Healthcare Audit Network of St. Louis, the charter lays down the law about which kinds of people should comprise the Audit Committee, what authority the group has for internal and external auditing and how often the committee will meet.
Network CEO David LeMoine says he reviews the document and the committee's responsibilities for at least an hour with the Audit Committee each year. He repeats the exercise for each of his clients.
"They need to understand what their roles and responsibilities are, and they need to understand what my roles and responsibilities are," he explains. The charter, he says, "assists them in fulfilling their responsibilities because it's all laid out there-what they have to do at each meeting."
LeMoine also prepares the agenda for each Ascension Health Audit Committee meeting. The group meets at least three times a year.
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).
Step one is to clearly define the foundation's mission, vision and relationship to the hospital. Board members should have a clear position description, and they should be involved in a meaningful way in fund development activities. Foundation board members need to understand why the hospital needs funds and how donated funds will be used. Foundation board members should be recruited because of their commitment and willingness to contribute time and resources, not just have their name on the letterhead. Besides raising and donating funds, some foundation board members with the time and talents can participate in the hospital's strategic planning, thus helping shape the programs and services that contributions support. But beware: strategic decisions are the responsibility of the hospital or parent board that sees the big picture. One great way to re-energize a foundation board is a self assessment and improvement process, culminating in a board retreat. For more information, see the Summer 2003 issue of the Great Boards newsletter.
Adelman: Inside lawyers get involved with everything, and generally much earlier in the process. Outside counsel don't get involved in an issue until after a lot of discussion has taken place. Sometimes that can be a significant disadvantage for outside counsel.
Chresand: In-house counsel is more apt to be involved with the board and the issues on a regular basis and notice trends or issues that come up. We can be proactive rather than reactive with the board in dealing with issues. We're also a fixed expense, while outside counsel typically charges by the hour.
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 board should be large enough to include a diversity of the competencies it needs to exercise its responsibilities but small enough to engage in active discussion, make timely decisions and bond together as a team. Generally, 9-15 members is the ideal size range for boards of hospitals and health systems.
Before asking how many, first ask why the board wants members with competence in medicine.
A hospital or health system board benefits from having physician members who help the board understand clinically related issues and the perspectives of practicing physicians and their patients. From their practices, they bring a "real world" context to the board's work and help the board make better informed decisions.
A physician board member has the same fiduciary responsibility as every other trustee. Voting physician board members must make decisions based on the best interests of the organization, not the interests of medical staff members. With the exception of the president of the medical staff, physicians on the board may reflect but not do not "represent" the opinions of the medical staff.
The medical staff president, however, is elected to represent the medical staff, and therefore, we believe this individual should be a non-voting board member. (If the staff president currently is a voting member and no problems with this have occurred, there's probably no need to rock the boat. Maintain the status quo, but be aware that a voting medical staff president has a built-in conflict of interest that down the road, could be problematic.)
Next, ask what kind of physicians make good board members. Physicians elected to a hospital or health system board should be judged by the same criteria as any other board member. Among those qualifications, several are paramount: they need to be committed to the organization's mission and values, think strategically, communicate effectively, understand the difference between governance and management, and follow the board's rules of conduct, including its confidentiality and conflict of interest policies.
All that said, what's the appropriate number or percentage of qualified physicians on a hospital board? We believe an appropriate proportion of physicians for most hospital boards is around 15 percent to no more than 25 percent. The most recent survey by The Governance Institute, conducted in 2000 and published in Value Added Governance, indicates that the median hospital board had 12 members, including two medical staff members. Among the survey respondents:
As an upper limit, keep in mind that the Internal Revenue Service says no more than 49 percent of a tax exempt organization's board should be "insiders," which includes management staff as well as physicians who have privileges at the hospital.
There is a substantial amount of variance in meeting frequency. According to the 2003 survey of boards by The Governance Institute:
What are the most common committees of hospital and health system boards? According to the 2003 survey of boards by The Governance Institute, 93% of hospital and health system boards have one or more board committees. The range was one to 19 committees – with a median of five committees. The most common committees are:
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.
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 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”:
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:
What are the key elements of an effective board conflict of interest policy?
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. For a sample policy statement, go to the Governance Resources section of www.GreatBoards.org
Adelman: It's a huge mistake. It totally distorts the attorney/hospital relationship. I'm being asked for my unbiased advice of the pros, cons, risks, benefits and alternatives for a particular transaction. If I give that to the board, and then I turn around and vote on the decision, I've colored my advice. I'm biased. I'm saying you ought to vote how I vote.
Chresand: I would frown on that. I think it creates potential conflicts; it puts them in a less-than-objective position.
Iseman: It's a bad idea for the general counsel to sit as a member of the board. It's a conflict of interest. The general counsel needs to remain independent and to not be a part of the final decision-making process.
This approach is used by some small hospitals whose board and board committee meetings are open to the public. In these hospitals, a QI committee typically includes department heads and medical staff representatives and is the point of coordination for quality indicators and performance improvement efforts. If a problem is identified but not addressed, the committee is supposed to act. As the ultimate guarantor of hospital quality, the board reviews its reports. Having a trustee on the QI committee demonstrates the board's commitment to quality and ensures that problems not resolved by the committee are reported to the board.
However, a QI committee gets into nitty-gritty issues. The trustee needs to work at a policy level and not get involved in operations. The trustee might be given a job description as follows:
If the committee determines the medical staff is not addressing a quality issue, the trustee should communicate the board's expectation that the medical staff will meet accreditation requirements and perform peer review. If they cannot do so objectively, the trustee should explain that the board will do what's needed to protect patient safety, such as authorizing an outside peer review or taking disciplinary action.
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. According to the 2003 survey of boards by The Governance Institute, 88% of hospital and health system boards do not compensate board members. Compensation is most common among boards of Catholic health systems (27%), other 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:
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.
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.
Yes, the chief executive officer should be a voting, ex-officio board member, unless the practice is prohibited by statute, which is the case with some governmentally owned facilities. We say this with respect for CEOs who are not voting members and believe they shouldn’t be. Many are quite effective and comfortable in their roles. However, we believe the chief executive should be a voting board member because:
The CEO should not participate in deliberations on her compensate nor serve as a voting member of the Executive Compensation, Audit Committee, or Governance Committee of the Board, although she may advise these committees.
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:
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.
Decades ago, volunteer boards actively engaged in managing their hospitals on a daily basis. Today, with highly trained executives at the helm, effective hospital boards stay out of operations and focus on governance, not management.
Effective boards concentrate on these six essential aspects of governance:
The Governance Committee is generally responsible for overseeing and making recommendations to the board with regard to:
Adelman: If there's something going on that is illegal or not in the best interest of the corporation, and the CEO isn't reporting it to the board, then counsel has an obligation to go to the board and report it. That's extremely rare. It's sort of the bottom line, the end point on your relationship that defines everything in front of it.
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.
This question is discussed thoroughly in the May 2002 issue of the Great Boards newsletter. The next few questions and answers were cut from the article for space reasons; be sure to read the newsletter article along with these FAQs. Our sources include several experts in healthcare auditing:
Bob Wilson, an independent consultant who works with financially troubled companies, including hospitals. Wilson worked as an auditor and consultant for Arthur Andersen for 29 years until 2000. (robt_e_wilson@yahoo.com)
Mike Riley, president of transAction Associates in Baltimore, Md., a healthcare management consultant providing project management, capital financing and financial turnaround services to hospitals and health systems. (mriley@transactionassociates.com)
Bob LeFever, a financial and management consultant in Philadelphia for 25 years, and a member of the Temple University Health System board. LeFever also is a former member and chairman of the Jeanes Hospital board.
David LeMoine, CEO of Catholic Healthcare Audit Network in St. Louis, which conducts internal audits for Catholic healthcare systems. (dlemoine@chanllc.com)
To get started, here are a few basics: Virtually all hospitals and healthcare organizations hire an accounting firm to conduct an annual audit of their financial statements. Management prepares the financial statements and works closely with the external auditors, but the Board of Trustees, through its Audit Committee, is responsible for overseeing the relationship with the external auditor and approving its report.
"There's a common misconception that the external audit is a fraud audit to find every single accounting error," says Mike Riley. "External audit procedures are designed to test the fairness of the financial statements' presentation, taken as a whole-not the accuracy of every accounting transaction."
Nonetheless, the external auditor's first job is to evaluate the organization's accounting procedures to determine how much it can reply on management's data in conducting its own tests to certify the accuracy of the financial statements. In the course of its work, the external auditor may identify potential problems and areas to examine closely in the way the system keeps its books and reports on its financial operations. Is it classifying revenues or expenses in an overly aggressive way that doesn't conform to accounting standards? In addition, the auditor inspects any transactions that are not routine, and it spot checks the system's accounting and inventory systems.
Auditors make a note of any "material" discrepancies in the organization's financial statements. What is "material" varies depending on the system and the auditor, but usually falls in the range of a 5 percent to 10 percent deviation from what has been reported on financial statements.
Then the auditor gives the Audit Committee its opinion: Are the financial statements a true representation of the organization's financial statements? Is it at risk of failing in the next year? Are there particular concerns that management, and the board, should examine and address? These notes to the audit report may be the most important part of the document.
A second audit-one that's less common in healthcare-is the internal audit, during which a staff auditor or an outside auditing firm follow a similar process to determine whether internal accounting systems and departmental procedures are in order. The board's Audit Committee also oversees that relationship.
"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:
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 board’s values and expectations. Examples of policies developed by some hospitals and health systems to meet particular needs include:
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 hospital counsel draft a board policy distinguishing policy from operations, and then discuss it during a board meeting or at a retreat. For an example, please see "Governance Policy Statement On Distinguishing Policy From Operations" (PDF).
A general counsel is the Swiss Army knife of lawyers, reviewing and negotiating contracts, verifying compliance with federal and state regulations, advising on business deals, drafting bylaws and resolutions for board consideration, working on employment agreements and physician disciplinary actions and generally weighing in on any discussion that involves legal rights and responsibilities. The general counsel is especially busy before board meetings, reviewing agenda items to determine whether they involve legal issues or require the adoption of formal resolutions. Most important, perhaps, is the general counsel's role in making sure the system is meeting its fiduciary responsibilities.
Our experts say Audit Committee members should ask auditors to clarify anything they don't understand. In addition, they suggest these tough questions:
In August 2002, Great Boards invited four attorneys who specialize in working with health systems to weigh in on the general counsel's place at the boardroom table. The panel included:
S. Allen Adelman, of Adelman, Sheff & Smith in Rockville, Md., who serves as outside counsel to four Maryland hospitals. aadelman@hospitallaw.com
L. Edward Bryant, a partner with Gardner, Carton & Douglas in Chicago. Bryant serves as outside counsel for 25 health systems, and is chairman of the board at the Sisters of Charity of Leavenworth. ebryant@gcd.com
George Chresand, who is employed full-time by Fairview Health Services in Minneapolis, Minn., as legal counsel and chief compliance officer. Gchresa1@fairview.org
Robert Iseman, a partner with Iseman Cunningham Riester & Hyde in Albany, N.Y. riseman@icrh.com
Robert Iseman has held seats on two sides of the boardroom: as a member of Eastern Mercy Health System's Board of Trustees and as outside counsel for a number of other health care systems. He says the role of a lawyer who also is a trustee is much different from that of outside counsel.
"As a board member, I've been very careful not to inject my role as lawyer into my board role because there's already a counsel for the organization," notes Iseman, whose Albany, N.Y., firm serves as general counsel to a number of hospitals and health systems.
Lawyers who serve on boards have a lot of influence with the other trustees, Iseman notes. Trustees might believe they will run afoul of the law if they don't vote the same way as the lawyer-members, he says. "I don't feel they ought to feel that way," he says.
As legal counsel and chief compliance officer for Fairview Health Services, George Chresand works with a number of trustees who are lawyers but are not employed as such by the system.
"Those who have been effective board members have always recognized that their role is as a community member who happens to be a lawyer," says Chresand. "They've realized they're not the corporation's counsel, and they defer to the general counsel to provide the legal advice."
Still, Chresand says he appreciates hearing the opinions of lawyer-trustees because they are intimately familiar with hospital business. "We always include them on task forces, where they can give us their helpful advice," he says. "We've always recognized that the lawyers who are on our board are good lawyers."
Still, he says, there can only be one general counsel. "If they're lawyers but they're not the lawyer for the company, they need to realize they're wearing a different hat while they're serving as a trustee," he says
Some 73% of hospitals and health systems consider a formal program of orientation and ongoing education “very important” to effective governance. An initial orientation program for new directors should include:
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.
All boards should perform value-added work and not duplicate work done at another level of the organization.
In health systems with multi-tiered governance structures, it's common that local or market boards report to a parent board that has authority over finances, strategic plans, CEO appointment and even local board appointments.
Even though formal authority is vested in the parent board, local boards can be given a good deal of responsibility so they add value. The local board and its CEO should know the local market, community needs and special circumstances far better than a corporate board overseeing a national or regional system. Therefore, the local board can add value in the areas of strategic planning, quality of care, community relations and fund development. The local board should also participate in CEO evaluation.
If local boards don't have meaningful responsibilities, they won't be able to attract and retain talented trustees who could put their volunteer efforts to work elsewhere.
For more information on this subject, see "Value-added Governance in Multi-tiered Health Systems" by Barry S. Bader, available from www.governanceinstitute.com.