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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