By Daniel K. Zismer, Ph.D., Castling Partners and University of Minnesota
Today, a sizable proportion of healthcare delivery in the U.S. remains in the hands of independent hospitals and health systems governed by community-based boards—i.e. community-based systems of care not owned or controlled by large, multi-state conglomerates (public or private).
Community boards rely upon their CEO as the principal link between governance decisions and execution of those decisions. CEO hiring and performance oversight is the responsibility of the board, along with other roles and accountabilities that necessarily come with the responsibilities of a “fiduciary.”1
The balance of this article asserts and defends the position that boards too often fail their CEOs—an unintentional occurrence that is avoidable. This is framed as 10 observations to use as a guide for discussions between a community health system board and its CEO.
1. Understanding the Work of the Board
Governing boards of “hospitals” (licensed components of community health systems) are, by state statute, tax code, and accreditation criteria, the last stop in the accountability chain.
Boards hold accountability for all requirements of a licensed, accredited hospital. It is often the case that “the hospital” is at the center of the community health system. This hospital carries the license for the care system. By most state statutes, the board is responsible and accountable for the entirety of the performance of the healthcare organization and all it does.
The principal work of the board is upholding the healthcare organization’s fidelity to its mission responsibilities. This is accomplished through what the board observes, evaluates, and directs management to attend to. The work of the board is evidenced in its balanced scorecard,2 which shows what the board measures and helps determine where the CEO should focus his/her attention.
The work of the CEO is the support of the board’s work. Boards must make this work clear to the CEO. The CEO’s job is about the execution and performance on the board’s vision and plan to serve its mission. Community boards too often defer to the CEO for the definition of their collective job. It should be the other way around.
2. Are We a Competency-Based Board?
Community health system boards are often composed of successful, well-intended community leaders who willingly serve their local healthcare organization to fulfill a sense of civic responsibility.
The probability that the board possesses the fullness of competencies to govern the complexity of community healthcare delivery is remote. To have a competency-based board, the composition of the board must be intentional. Many (if not most) community health systems require some level of reconstruction, including the re-examination of the definition of “community.”
“Communities” can and should be defined variously; definitions can be encompassed by geographies, healthcare needs of populations, demographics, socioeconomic strata, etc. Boards require an accepted definition of “communities” as they go about their work.
An ongoing question of a CEO and board leadership is “what competencies are we missing?”
CEOs necessarily must also rise to the level of a board’s lack of competency. It is important to know when and to what level that is occurring so plans can be made for ongoing board competency development.
3. The Lack of a “Belief System”
The guideposts of any organization’s strategy is its belief system—what it believes about its position in the dynamic world and markets in which it exists.
Stated beliefs are different from the organization’s values.3 Beliefs guide behaviors, including the behaviors of strategy for a health system. Values guide how an organization carries out the actions of its mission. CEOs operate with more conviction and confidence when they know where a board stands on its collective beliefs and values.
4. Defining Priorities for the CEO
Clarity regarding what the board believes the CEO is responsible for is paramount. The answer to related questions is obvious, right? “It’s everything!” Not so fast. Experience shows that boards and CEOs thoughts around this can differ, or at least emphasis of time and effort allocations. CEOs will, necessarily, be self-directed in the allocations of their time and efforts according to their judgements of “need,” which is typically not an issue until the “big problem” arises and the board asks, “Where were you?”
Board leadership will often shy away from checking in periodically on this issue for fear of micromanaging the CEO. However, health system board members typically hold opinions on what the CEO should be doing. CEOs can be caught unaware, finding themselves adrift in a sea of perspectives on “what you should have been doing.” Periodic check-ins on priorities management should not be viewed as a board micromanaging the CEO. Board chairs need to put this high on their list of “things to do.”
5. Watching for Excessive Centralization of Decision Making (Especially with Physician Strategies)
Smaller organizations, in particular, can fall prey to excessive (and at times pathological) centralization of decision making; specifically, “the CEO makes all the decisions” especially those related to key physician strategies, contracts and terms and conditions of employment agreements, and the like. The latter can become very problematic. Community hospitals and health systems are and will continue to employ an increasing proportion of physicians required to fulfill mission responsibilities and strategies. Success with employed physician strategies requires the development of a physician services organization, a dedicated leadership model, and a healthy culture. A healthy culture encourages a sense of equity, fairness, and transparency, including how physicians are treated and compensated. When the CEO of the organization “holds all the cards” (i.e., controls all terms and conditions of employment agreements) and arrangements are to be held “in confidence,” the ability to develop a healthy and productive physician services culture is constrained.
Boards should be concerned with ensuring that the CEO establishes and encourages the framework for a productive physician services strategy, ensuring that related decision making is appropriately delegated to a qualified leadership team with appropriate legal, regulatory, and financial guidance as it relates to agreements between the health system and employed (and otherwise contracted) physicians.4
6. The Role of Physicians on the Community Health System Board
Community health system boards will, necessarily, require increasing representation from physicians, including physicians employed by the health system.
Boards need to understand the purpose and roles and responsibilities of physicians on the boards. While qualified as “insiders” by the Internal Revenue Code,5 they are there for the same fundamental reasons as all other board members—to act as fiduciaries on behalf of the organization. They are not there to represent constituencies (special groups of physicians, employed or independent) nor are they there to “report” on the performance of management.
Boards (especially board leadership) set the tone for the roles (and behaviors) of physicians on the board. Physicians will, typically, appreciate clear guidance on their responsibilities as members of the board; the role is often a new experience for physicians. CEOs need to know that physicians aren’t a special class of board member, with the understanding that specific board seats may be assigned to ex-officio members (the chair of the executive committee of the medical staff, for example). Here, a board member may hold a special duty to the board. Such duties should be made clear, in writing.
7. The Insufficiency of Peer Group Comparisons
A common practice of the management team’s evaluations of performance is comparisons with peer groups—“how we’re doing compared with organizations like ours.” While a useful point of view, related observations are limited and insufficient for the ongoing evaluation of organizational performance. For example, with financial performance indicators a healthcare organization may see that, as compared with its peer group, it ranks above the 60th percentile in operating margin performance. On the surface, it’s doing better than most in its class. The reality is its financial performance may be absolutely insufficient to build the debt capacity required to fund the future capital asset investment requirements for its mission in the community.
Governing boards should provide CEOs permission to expand the board’s perspectives on the performance of the organization to answer the important questions regarding “how we are performing as compared with how we need to perform to succeed with our mission and our strategy.”
8. Board Edicts and Related Constraints
Community health system boards will take stands that constrain the CEO’s thinking, attitudes, and behaviors; stands proclaimed as edicts such as “our strategy is to remain independent.” Well, for starters, “staying independent” is a cause not a strategy, and such proclamations shape and direct the thinking and leadership behaviors of CEOs.
More than one CEO has taken such edicts to heart forsaking all other learned and available rational strategies, including what may be best for a community-based health system.
Resolve by a board is not the issue here. It is the forethought required to know if such resolve will cause a CEO to labor against his or her experience, common sense, instincts, and ethics.
9. Interference of Personal Relationships
By definition, community boards are composed of members of defined communities and are oftentimes high-profile members of these communities. Consequently, stakeholders in the mission, strategy, and business affairs of the health system will have access to board members. Historic relationships facilitate ease of access.
The bane of many CEOs is this ease of access, which frequently gives way to unfettered discussions at social and neighborhood events, and worse, the unsanctioned “secret meetings.” When left uncontrolled, boards can and should expect the paranoia of the CEO to spike and ultimately reach dangerous levels if everyone but the CEO knows about this.
Management of this issue is done by board leadership, a written code of board conduct with informal and formal sanctions if violated. While it is impossible to unring a bell, once heard, board members should bring such potentially destructive commentary to the board chair for management with the CEO in the loop, unless such knowledge rises to a level of importance that puts the organization at risk by premature and unmanaged disclosure.
CEOs must trust their board to conduct itself professionally and by standards and best practices that provide them reasonable and practical levels of protection from inappropriate and back-channel communications.
10. Going to the Outside for Responsible Performance Metrics and Related Methods of Performance and Risk Evaluations
A major risk for boards is being overly reliant upon the CEO (or other officers) for what they should know about their organizations. The major risk is almost never “what you know,” it’s “what you don’t know.” Boards will believe that permitting the CEO to establish the depth and breadth of required performance metrics, standards of performance, and related indicators of organizational risk constitutes a show of good faith and confidence in their CEO. To a certain extent it does, but it, in turn, exposes the board to the risk of not knowing what they don’t know, which has translated to the legal risk of what is reasonable and prudent for a qualified board to know.6
A case example is useful here:
The community health system has grown its employed physician base to 100. The CFO reports that this group of employed physicians “is producing at the median for similarly structured groups.” The board doesn’t know what to make of this—“Is this good or not?” With a little education the board could know that with such analyses median productivity can be significantly less than the mean (due to the typical shape of the sample distribution curve) meaning if collective productivity was moved to the mean (the average), upwards of several million dollars of incremental revenue would be produced for the health system generating a sizable contribution to operating margin.
Here a modicum of board education goes a long way to decision making related to system strategy and financial risk management.
Boards should encourage the CEO and senior leadership to go outside the organization for best practice examples of balanced scorecards and strategy maps, especially samples from larger, more structurally and strategically complex organizations.
While CEOs do fail in their jobs, boards often contribute to that failure—boards do fail their CEOs. Boards fail CEOs for a number of reasons and, often, at several levels. The 10-point framework provided is intended to encourage healthy conversations between a board and its CEO (and ultimately the senior leadership team).
Board chairs carry the principal responsibility for the board’s obligations to support the CEO. The board chair/CEO relationship, with roles clarification, is important.
Boards should routinely undertake not only rigorous self-evaluations of how they are doing in fulfillment of their responsibilities and accountabilities to the organization and the communities served, but also how the board is doing in its responsibility to the CEO. The CEO’s opinion matters in the process. The framework provided here can be a good conversation starter for such efforts.
The Governance Institute thanks Daniel K. Zismer, Ph.D., Managing Director and Co-Founder, Castling Partners, and Professor Emeritus, School of Public Health, University of Minnesota, for contributing this article. He can be reached at email@example.com.
1The term “fiduciary” derives from the Latin “fiducia” meaning trust; a person (or institution) who has the power to act on behalf of another. A fiduciary carries responsibility beyond the “casual person”—the responsibility of carrying greater knowledge and expertise. The beneficiary (here a healthcare organization) is in a position to rely upon the fiduciary to act in good faith without conflict of interest or self-dealing.
2The “balanced scorecard” is a tool often used by boards to gauge ongoing performance against approved performance goals and objectives developed in collaboration with management (see R. Kaplan and D. Norton, The Balanced Scorecard, 1996). Performance measures include financial and non-financial. The work of the board and management is the translation of the vision and strategy of the organization to metrics that are used for board decision making.
3Values of an organization define the principles and ethics by which it conducts its business. The values guide the behaviors of the organization, including those of the board. Beliefs of an organization describe what leaders believe to be true about the environments and markets in which a business or industry operates. Values remain constant (immutable), while beliefs are subject to the changing nature of business environments and related dynamics.
4 Boards should be mindful of the methods and processes applied to create legal arrangements with physicians. Board involvement should extend beyond understandings of legal and regulatory oversight to business practices that implicate internal and external fairness and equity and protections of organizational reputation and brand value. Excessive concentration of control of these relationships and arrangements with the CEO exposes the organization to risks related to “due care of a board.”
5An “insider” is defined by the Internal Revenue Code as a person having a financial interest in the activities of an organization.
6One of the two principal duties of fiduciaries is the “duty of care” (the other is the duty of loyalty)—to act in good faith and in a prudent manner in decision making. To the extent that a board relies solely upon the counsel and judgement of the CEO for important decisions, a board may reasonably be accused of not exercising “due care” in the execution of it responsibilities.
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