This Health Law News article is Part IV in a series discussing the new governance study, “Governance in Large Nonprofit Health Systems: Current Profile and Emerging Patterns.” The full Report is available here. Part I – Executive Summary was published in Hall Render’s Health Law News on August 8, 2012, Part II – Public and Private Scrutiny of Hospital and Health System Governance was published on August 28, 2012 and Part III – Benchmarks of Effective Governance was published on September 4, 2012. The remaining articles in this series will cover key findings and their potential significance for hospital and health system boards, exceptional governance features of the participating systems and key recommendations.
In Hall Render’s September 4 Health Law News article, Rex Killian, President of Killian & Associates (“K&A”) and Of Counsel to Hall Render, explained how the benchmarks of effective governance were organized around three key measures of board performance: board structure, board processes and board culture. In this Part IV, K&A and Hall Render will address the key findings of the study with respect to a hospital’s or health system’s board’s structure and composition. In Parts V and VI, we will address the key findings with respect to the benchmarks on board processes and board culture, respectively.
Two benchmarks and related indicators on board structure addressed board size, board member terms and term limits, board committees and board composition, including board member competencies, independence and diversity. The following is a summary of the key findings.
Board Terms and Term Limits – Eleven of the fourteen system boards in the study (79%) have adopted terms and term limits. This compares to 64% of hospital and health system boards as a whole in the U.S., as determined by a national survey completed by The Governance Institute in 2011. While the length and number of terms varied, the most common provision is three-year terms with a maximum of three consecutive terms or nine years. While some boards continue to debate this governance practice, governance experts and private and public bodies that have weighed in on good governance practices have recommended the adoption of board terms and term limits. As an example, the Internal Revenue Service (in 2009 training materials for its agents in the field of nonprofit governance, as published on the IRS website) has stated:
“Term limits for board members are an effective way to ensure board vitality. If the board does not have term limits, the [IRS] encourages the organization to review its board membership periodically to confirm that board members remain interested in and suitable for the board.”
The Independent Sector, in publishing its 33 principles of good governance for nonprofit organizations, states in Principle 17 that “[T]he board should establish clear policies and procedures setting the length of terms and the number of consecutive terms a board member may serve.” Term limits provide a natural turnover on the board and infuse the board with new talent and insights, and staggered terms provide a way to ensure institutional memory while facilitating a disciplined board succession plan.
Board Size – Ten of the fourteen system boards had a size of between nine and seventeen voting members. While there is no uniform standard in the health care sector, the 2007 report of the HRET – Center for Healthcare Governance Blue Ribbon Panel on Healthcare Governance advocated a range of nine to seventeen voting members for hospital and health system boards. In the public sector, the average size of boards is around eight or nine. None of the health system boards in this study were smaller than nine. To the extent that many governance best practices emanate from the public sector, boards should continue to reexamine their size to make sure it is appropriate and facilitates effective governance.
Board Committees – The research team focused on seven core governance functions and sought information as to whether board committees had effective oversight responsibility for these functions. All of the system boards in the study had committees with responsibility for (a) audit and compliance, (b) executive compensation and (c) finance and investments. In addition, nearly all of the boards had committees for (d) patient care quality and safety, (e) board education and development and (f) system strategy. Only six of the system boards had a standing committee with oversight responsibility for community benefit. These findings vary significantly from a 2011 AHA Health Care Governance survey of hospitals where less than half of the hospitals surveyed had Executive Compensation, Strategy and Community Benefit committees – undoubtedly choosing to perform these functions by the board as a whole. As part of the interview process, CEOs and board members were asked to share their personal assessments of the effectiveness of their boards’ committees. While a large percentage of the CEOs believed the committees were highly organized and performed effectively, only slightly more than half of the trustees shared the same view.
Whether or not a hospital or health system board has a board committee with oversight responsibility for a specific governance function is often dictated by the size and complexity of the organization. Regardless of the board’s structure, what is important here is that the board clearly identifies its key responsibilities and monitors its performance against those functions. Based on K&A’s experience, a well-organized committee with a Charter setting forth its responsibilities and duties is an effective way for a board to fulfill its oversight responsibilities. A good example of this is the board’s responsibility around board education and development, board evaluation and board succession planning. If these very important governance functions are left to the board as a whole, in K&A’s experience, little focused action occurs. In contrast, when a board charges a Governance Committee with these responsibilities, governance issues become a higher priority and action steps are developed to improve the effectiveness and efficiency of the board.
Board Composition – To measure the board’s performance on the board composition benchmark, the study examined board member independence, diversity (racial and gender) and clinical experience (medical and nursing).
Independence – For purposes of the study, the term “independent board member” was defined as “persons who are not a member of a sponsoring body such as a religious congregation, not a full or part-time system employee, and not directly affiliated with the system in any way except serving as a voting board member.” While 82% of the board members in the secular systems in the study met this definition, only 49% of the board members in the faith-based systems were independent. It is interesting and likely instructive to see the impact that the independent standards set by Sarbanes-Oxley (2002) and by the NYSE had on the composition of public sector boards. The proportion of independent directors on the boards of the Fortune 500 increased from 22% in 1987 to 84% in 2011. In the nonprofit sector, the IRS and the Independent Sector have called for a majority of board members to be independent. While not yet an express requirement, the fact that the IRS now collects data in a nonprofit organization’s Form 990 on the number of independent directors could well be a precursor to an eventual regulation.
Diversity – In evaluating a board’s composition, it is increasingly important that a board include members with a strong blend of collective competencies and skills needed to fulfill the responsibilities of the board and members with diverse backgrounds, including ethnic, racial and gender perspectives. In the study, 17% of the system board members were non-Caucasian (both for secular and faith-based systems). This is somewhat higher than the comparable figure (10%) for hospitals that participated in a 2011 survey conducted by AHA. With respect to the gender mix of the 14 boards, the proportion of women serving on the boards of faith-based systems was 40% and 21% for the boards of secular systems. In interviews with CEOs and board members, one in five expressed the opinion that their board deliberations would benefit from more racial and ethnic diversity around the board table.
Clinical – Of the board members in the study, 14% are physicians, and 6% are nurses. Collectively, then, clinicians constitute 20% of the systems’ voting board memberships.
If you have questions regarding the study, please contact:
- Rex Killian, K&A, at 314-504-2213 or rkillian@killianadvisory.com;
- Lawrence Prybil, PhD, LFACHE, Professor and Associate Dean of Public Health, University of Kentucky, at 859-218-2239 or Lpr224@uky.edu;
- Jeffrey Carmichael, Hall Render, at 317-977-1443 or jcarmichael@hallrender.com; or
- Your regular Hall Render attorney.
