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Boards of Directors: Success, Mediocrity and Sometimes, Failure

As a follow-up to a recent post on Boards of Directors and corporate governance (http://wp.me/ptUlY-gq), this post addresses how boards promote success, can often drive mediocrity and in some cases prompt organizational failure.  The take-away where success, mediocrity and failure occur isn’t structure, terms or committees rather, a consistent excellence or break-down in terms of structural clarity, roles, and organizational focus.  Governance which exists, regardless of the framework, to enhance and perpetuate corporate/organizational value, reputational integrity, and shareholder/stakeholder security and return is the foundation for success.

If there is a single condition more preeminent than another that drives mediocrity and failure for a board it is conflict of interest.  This condition is not unique to non-profits or for-profits but in my history, I encounter it more frequently in non-profits, likely due to the inherent lack of compensation available for directors.  The non or limited compensation component in non-profits is more ripe for a “quid pro quo” reward structure in which, the director is a de facto player in the organization’s business via a vendor relationship of some sort.  Even in the best of circumstances, the vendor representative on the board scenario defeats the concept of independence producing an air of duplicity and insider dealing.  If judgment is clouded, opinions suppressed or decisions focused on the inter-relationships among directors and the entity beyond the absolute best interest of the organization, governance cannot be optimal.

Effective governance requires independence and to the greatest extent possible, a board level series of tests and policies that promote independence and police conflict.  Below are the common tools I find most helpful in achieving and maintaining independence.

  • Recruitment of individuals that are unrelated in any regard, to the organization (not vendors, no familial employment, no familial relationships, etc.).
  • Policies that require annual disclosure of employment, board memberships for the director and director’s family, investments where applicable, etc.  This is to insure that directors don’t have relationships, ownership, investments that mask independence.  Note: Disclosure is not enough as once disclosed, remedy becomes the key.
  • An annual review of major vendor relationships such that the same is given to each director as part of his/her annual disclosure.  If a director is anything more than a passive investor in a vendor relationship, the director is no longer truly independent.
  • In healthcare organizations, annual background checks with the OIG, licensing boards (where applicable, DEA (where applicable), and criminal checks are warranted.
  • Policies that require reviews concurrent with major capital purchases, capital projects, mergers/acquisitions, etc. to assure that independence remains among the board.

The element second in importance to independence at the board level is role clarity and policies and organizational structure that clearly delineates the role of the board, the duties of directors, and the key performance elements for the board.  Again, these pieces lacking is a certainty for organizational mediocrity and/or, potential failure.  A board’s primary objective is to assure the viability, health and well-being of the organizational entity.  In this realm, its role is clear.  Where I have seen boards struggle and thus the organization, is when a lack of this clarity exists.  Below is my top seven item list that identifies where boards can assure role clarity for the board and each director.

  • The Board must have a job description or functional description and should each director.
  • Shareholders (and for non-profits, stakeholders) must be identified (not individually necessarily).  This element is where I see non-profits struggle mightily.  For example, for a non-profit CCRC shareholders/stakeholders are not residents.  Residents are customers, even in entry-fee communities.  Shareholder/stakeholders are for certain, any holder of public debt and any holder of mortgage paper.  Major vendors and insurers are stakeholders as well.  The definitional clarity begins at the “organizational level” in terms of where lies, for a board, the duty to assure organizational stability, reputational solidity and organizational viability and financial fluidity.  Yes, customers such as residents are tangentially impacted when things aren’t well-off but truth be examined, a debt failure causes irreparable harm to residents if a board isn’t engaged in securitizing organization viability.
  • A formal function, policy, etc. for board performance review and director performance review.
  • A formal function and structure at the board level for long-term planning – financial, strategic, etc.
  • A plan at the board level for CEO review, retention and succession.
  • A formal function for board development and education.
  • A communication element for discussions/feedback from/with shareholders/stakeholders.

Returning to the title: Success at the governance and thus, organizational performance level is when the board is truly committed and has put into place, the structural elements necessary to fulfill the boards primary duties;

  • Assure independence.
  • Focus on the financial, reputational and legal risks and the securitization thereto, of the organization.
  • Plan for and understand, the environment in which, the organization operates.
  • Assure plans for operating in this environment meet and exceed, the requirements in the second bullet above.
  • Understand and have policies and procedures in place, that clearly delineate the role of the board from that of management.  Maintain a fertile environment for a qualified CEO to garner appropriate feedback, support, reward, and security.  Boards need to assure, for the organization’s viability, retention of high-performing leadership and the succession thereof.
  • Be open and literally virtual, to shareholders/stakeholders.

When I encounter mediocrity and unfortunately, failure or the likelihood of failure, I see the same set of issues repeatedly.  As before, I have seen these most often among non-profits but not exclusively.

  • Lack of independence for directors.  In some circumstances, the conflict of interest is so clear (directors in high-level, influential posts with major vendors) and in some cases, subtle where familial relationship are involved.  Suffice to say, in non-profits this is one is the most prevalent.
  • Involved or have a tendency to become involved in operational issues.  This element is perilous in so many ways.  First, the board exists to function separate and distinct from management.  A board’s job is to procure and secure, competent capable management not to dabble in operations.  If management is underperforming, it is the board’s duty to identify the performance gaps and to assist management in achieving correction but not by becoming involved in operations.  Likewise, boards that find the need to meddle don’t empower management to take risks, drive performance and seek innovation.  Think about it: The presence of board members in operations creates sufficient tension for management and thus, management tends to guard what it does and how it does it.
  • Insufficient knowledge for the industry that the board operates within.  Boards need education sufficient to understand the key risks, shareholder interests, etc. in the applicable industry.  Uneducated boards equal poor decisions.
  • Lack of knowledge and engagement with stakeholders and shareholders.  Remember, this is a key issue even for non-profits. My non-profit clients goof this one all the time.  They believe that the shareholder/stakeholder is whomever they are serving (patients, residents, etc.) and thus, they lose sight of where the organizational risks and commitments (legal and other) truly lie.  Boards engage shareholders and stakeholders, management engages customers.  I can literally write dozens of pages of case studies where boards, especially non-profits, lost sight of (or never had in sight), the actual stakeholder/shareholder and ultimately, what happened and how painful it was.
  • Lack of a risk management structure at the board level.
  • Lack of a process and commitment to strategic and financial planning.
  • No or a deficient process for board recruitment, review and performance measurement.

In the final installment of this three-part series, I’ll cover best-practices for governance, specifically in the healthcare/post-acute care/seniors housing environment.  In so doing, I’ll cover the issues such that regardless of tax status (exempt or taxable), the information is relevant.

 

 

 

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April 8, 2014 Posted by | Assisted Living, Home Health, Hospice, Senior Housing, Skilled Nursing | , , , , , , | Leave a comment

Boards of Directors: Outside Looking In

Over the course of many engagements plus my years as an executive, I’ve addressed and been asked to address, the theme of effective governance, particularly at the Board level.  To bring this topic into full context, one of my many “hats” that I wear (periodically), is as an advisor to graduate and post-graduate students working in the arena of health policy and healthcare management. One of my students currently, is researching this topic of governance especially as the same (effective v. not effective) correlates with organizational prosperity.  Her area of concentration in this research is non-profit health care organizations, though for-profit organizations are included as a contrast subject.

Her research and our conversations, reviews, etc. are fascinating as the content leads me across my many experiences serving on boards (non-profit, for-profit and publicly traded) as well as my many client engagements working with and/or in conjunction with, senior executives and their boards.  Upon further thought it thus occurred to me that I haven’t written anything as of late on this whole issue of governance – what it is, what it should be, where effective and ineffective collide in terms of organizational prosperity, etc.  Of course as always, my episodic journey (fits and spurts over a few weeks where time permits) led me through tons of stuff from my notes on engagements to former lectures and presentations to other research I have gathered.  Being brief: Wow.  I have a collection; quite a bit deeper than I thought/remembered.  The net of my review is that this topic of “governance” lends itself to a series of posts.  This is the first and for simplistic sake, it covers the core duties and the counterbalance of liabilities, for any Board (non-profit or for-profit).

To start, the core duties of a board are completely separate and thus, different from the core duties of management.  A board has a bifurcated role and responsibility.  The first duty is the advise and consult responsibility with management concerning the strategic and operational direction of the company.  The second and equally important duty is to monitor company performance at the macro level (financial, compliance, risk, etc.).  Topically, the latter element includes but is not necessarily limited to (not in particular order);

  • Approval of strategic plans and strategies.
  • Testing of performance measurements and oversight of risk management.
  • Succession planning for the top executive(s) and the process of selection, when required, thereof.
  • Audit – assuring the completeness, compliance and integrity of financial statements
  • Compliance – assurance that the company/organization complies with all federal, state and other related laws and regulations.
  • Approval of major capital investments
  • Protection of company assets and reputation, including tangible and intangible assets (intellectual property, trademarks, name, etc.)
  • Assure adequacy of executive compensation packages and develop and implement, the same in order to assure the security of key executive(s).
  • Represent the interest of shareholders and/or stakeholders (non-profits).

The key issue for a board is the concept of independence; the independent director.  In this regard, the ideal is that a board is solely interested in the welfare of the organization and thus, each director is free of self-interest such that the same would compromise his/her judgment and/or render him/her unable to take positions opposite of management when required.

The board is headed by the Chair(man or woman) who is responsible for agenda, meeting schedules and structure, committee coordination and overall communication within and across the board.  Boards make decisions on a majority rule basis unless specifically required otherwise (certain actions may require a super-majority) and such decisions are based on the information and input from management.

Board committees may exist in large numbers or in smaller numbers.  In healthcare, the following committee functions/board committees require specific attention.

  • Quality/Compliance: This is a major risk area and it is perhaps, the most critical oversight function for a healthcare board today.
  • Governance: Boards need to address new member recruitment, director performance, board performance, board education, etc.  This element also includes CEO performance and may/may not encompass compensation for the CEO.  Some organizations split compensation into another committee.  I have found both split and shared equally as effective if properly managed.
  • Audit/Finance; Second only to compliance in terms of risk, boards need to engaged in the review of investments (capital, other), financial statements, the engagement of auditors, the review/approval of financial plans, budgets, forecasts, and where applicable, any organizational financing activities from feasibility through completion/non-completion.  This function also encompasses financial risk management and review of public release information.

Board terms are all across the map today but the two best practice models I favor are one-year, annual election of members or staggered two or three-year terms.  Each have merit and each have flaws.  The true test of effectiveness of any “term” condition is how effective the governance function is in terms of director review, board review, etc. Boards that have effective director performance review, clear criteria and effective board performance review self-police and thus, make term conditions work regardless of length.

Finally and key for all boards and members to understand is that boards have specific legal duties, typically identified under their respective state laws or as embodied in case-law.  These duties are typically identified as “fiduciary” in nature.

  • Duty of Care: The requirement that decisions are made via deliberation and investigation/data.
  • Duty of Loyalty: The requirement that directors act in the best interest of the corporation or enterprise.  This duty has also been, in some case-law decisions and state laws, expanded to include the best interest of shareholders.
  • Duty of Candor: This is more applicable to publicly traded companies but I have found it universally applicable.  It essentially means that the Board provides all relevant and transparent information to any party where the organization solicits business, solicits investment, or is inclined to be or involved in transactional business.  Effectively, this is the full and honest disclosure rule or as I like to call it, the tell the truth”  principle.

In my next post, I’ll explain how the implications of board duties, structures, etc. play out in real life and how public vs. private (non-profit vs. for-profit) situations compare and contrast.

March 18, 2014 Posted by | Assisted Living, Home Health, Hospice, Senior Housing, Skilled Nursing, Uncategorized | , , , , , , , , | 2 Comments

Duties of Boards: An OIG Perspective

This seemed to be a natural successor topic to my last post, “Why Quality Matters”; principally arising out of recent press releases from the OIG.  For example, in June the OIG reported that it had recovered $2.4 Billion in fraud, waste and abuse.  In July, an OIG release reported that a Nursing Home Executive was banned from being involved in any Federal health care programs as part of a settlement with the OIG.  Undoubtedly, more news of the same vein will be forthcoming, particularly since the Stimulus Bill included additional dollars for the OIG to stay on the offensive in “fighting waste, fraud and abuse”.  With some reconciled legislation on health care reform also due out in the coming months, a portion of the savings to pay for the added benefits coming from recovery actions, greater scrutinty will no doubt be placed on providers and individuals by the OIG on billing and quality of care activities.

Having been a CEO in a large health care organization I can attest that Boards (especially non-profit boards) believe, more often than not, that compliance and quality is management’s job.  I can also attest that all too often, limited time is provided at meetings for matters of quality and compliance.  Unfortunately, from all too many conversations with colleagues over the years, I know that even CEOs don’t pay enough attention to the rigors of quality and compliance and  as a result, their boards definitely don’t understand how important these matters are – organizationally and personally.

A seemingly complicated lanscape (quality and compliance and the Federal requirements) is perhaps the primary reason why so many organizations fail to fully and adequately embrace what the OIG is actually getting at.  In reality, most of the core provisions and what needs to occur at the organizational level is fairly straightforward.  Legal counsel that specializes in health care is usually a safe, first step in terms of board education and laying out a compliance program.  Grasping the basics however, is an operating responsibility and for most organizations and their boards, they should understand the following.

  • Boards have two main responsibilities in this area – the Duty of Care and the Duty of Loyalty.  The OIG has made it plain that these fiduciary duties include the maintenance of a corporate compliance program.
  • Boards have the oversight obligations to the Quality/Compliance Plan and the Corporate Integrity Agreement.  The OIG via recent cases and actions has indicated that the Board must review compliance with federal health care programs at least quarterly.  Documentation standards have also been raised  to the point where Board resolutions  and individual certifications are now the benchmarks for directors to substantiate agreement with board activities on the compliance front and to document board level reporting and investigative actions into quality and compliance at the organizational level.
  • Board members are at risk “personally” in terms of liability if the Duty of Care is breached.  The OIG has been issuing papers for several years encouraging boards to become more active and more knowledgeable about the federal health care programs their organizations are participating in.  The OIG, citing a case involving Caremark has indicated that, “directors under extreme circumstances may be at personal risk if they fail to reasonably oversee the organization’s compliance program or act as mere passive recipients of information”.

Taking the above “core” into account, Boards can and should take a few very simple steps (of course this should be part of  a written program adopted by the Board) to achieve and to maintain, essential compliance (legal counsel again is advisable here to make sure that all “Is” are dotted and “Ts” are crossed).

  1. Quality is a Standing Subject/Report at Each Meeting: The OIG says a minimum of “quarterly” and frankly, in today’s environment that is not enough.  This report should be structured and management and other organizational representatives need to bring quality information directly to all members of the Board.
  2. Document Board Engagement: Board members need to be engaged and minutes should reflect questions and a back and forth conversation to illustrate a dialogue about quality.
  3. Board Statements: The Board should adopt a resolution and perhaps even sign on to a mission statement commiting each director to his/her Duty of Care.
  4. Allocate Resources: The Board needs to be active participants in strategic planning and budgeting processes where resources such as staff, equipment and infrastructure are allocated to maintain and improve, the delivery of care to patients and residents.
  5. Create Structure and Processes: The Board should create for itself, formal programs and processes to solicit feedback beyond information presented by management.  For example, the Board should seek education on quality matters and matters of compliance.  The Board should require reporting of turnover, resident/patient satisfaction, complaints, and key quality indicators.  The Board should also seek outside counsel (physicians, clinicians and other experts) to from time to time, provide additional information and resources to its members and to attend on behalf of the Board, meetings where quality matters are discussed as an “independent” resource or auditor to the Board.
  6. Implement Accountability: The Board’s chief duty is to assure not just that information is freely flowing but that standards are met and when they are not, corrective action is taken.  The Board must assure that management is held accountable for inadequate quality and compliance and that corrective action is taken immediately and reported back to the Board.

It is important to note that these steps are not guarantees of compliance with OIG requirements but certainly, a fabulous practical start – especially if memorialized by action and written documentation.  What I can guarantee will occur if these steps are taken and implementation is done carefully and correctly (not just as an exercise in “paper” compliance) is the following.

  • Culture of Quality: The organization begins to develop a culture of quality.  The Board sets the tone for management and employees and that tone is an expectation of high levels of quality in resident and patient care.  The priority is clearly known that quality is as important as financial results.
  • Finances and Quality are Connected: When the Board is engaged with equal attention to the quality of care delivered, a better allocation of resources and a better strategic plan and budget is built.  The Board becomes far more aware of how resource use is and should be tied, to the ultimate product delivered to patients and residents.
  • Quality and Success are Connected: The quality of care is tied to every aspect of an organization (see last post, “Why Quality Matters”) from liability to malpractice to regulatory citations to billing audits to reputation and ultimately, volume.  Quality improves staff retention, reduces complaints and regulatory actions and improves customer retention and supply.

The conclusions here are quite simple: Boards and individual Directors need to become more engaged in oversight and inquiry of their organization’s delivery of care to patients and residents.  Additionally, given the link between payment and compliance under Federal health care programs (Medicare and Medicaid), Boards have a duty to make certain that compliance programs are in place, effective, and provide detailed enough information to the Board so that the pitfalls associated with individual director liability and organizational criminal and civil penalties can be avoided.  In short, compliance programs need to be in place which monitor not only the delivery of care but the billing practices thereto, especially pertaining to Medicare and Medicaid.

July 31, 2009 Posted by | Hospice, Policy and Politics - Federal, Skilled Nursing | , , , | Leave a comment