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E-Briefings – Volume 15, No. 3, May 2018

Welcome to The Governance Institute’s E-Briefings!

This newsletter is designed to inform you about new research and expert opinions in the area of hospital and health system governance, as well as to update you on services and events at The Governance Institute.

Click here to download the full PDF version.

The Governance Challenge in Hospital Turnaround and Transformation

Hospitals and health systems large and small are experiencing sudden operational headwinds that pose significant threats to their organizations. In confronting these challenges, governing boards face a major leadership dilemma. This article by Jeff Goldsmith and Scott Ransom, M.D., describes how confronting this dilemma will require boards to rethink the organization’s leadership strategy as well as their governance model.

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By Jeff Goldsmith and Scott Ransom, M.D., Navigant

Key Board Takeaways

Boards of hospitals and health systems considering a turnaround or transformation should ask the following questions:

Does your organization have expectations to change net income greater than 5 percent or lead a significant transformation?
Does the current CEO have the expertise and mind-set to lead your organization’s turnaround or transformation?
Does the organization’s senior management team have the expertise and mind-set to support the turnaround or transformation?
Did the current CEO or senior management team realize the troubled situation requiring a turnaround?
Does management have specific and actionable 30–90 day goals, strategies, and tactics to begin the transformational journey?
Has the board agreed upon the requirements and priorities for the transformational CEO?
Is the board ready to support the CEO and management team through the expected conflict and other challenges associated with transformation?

Hospitals and health systems large and small are experiencing sudden operational headwinds that pose significant threats to their organizations.1 In confronting these challenges, governing boards face a major leadership dilemma. It may be that the task of a turnaround and significant strategic transformation requires a leadership change. In some circumstances, a different type of CEO may be required to turn the organization around and lead change than the one who can incrementally grow and improve the stabilized enterprise. Confronting this dilemma will require boards to rethink the organization’s leadership strategy as well as their governance model.

Stopping the Bleeding and Leading Strategic Transformation

Before hospital enterprises can address their market’s current challenges, they must stop major bleeding and accomplish clinical and management leadership transitions. This often requires setting stringent short-term (60–90 day) performance improvement goals, as well as arranging the departure of established clinical and operating senior managers who stand in the way of longer-term success.

Boards have at least three choices for how to bring about this transformational leadership:

Initiate a formal search for a turnaround CEO, recognizing that this will likely be a one-to-three-year appointment due to significant short-term conflicts and strained relationships resulting from the turnaround process.
Hire an interim CEO to do the difficult turnaround and transformational work while simultaneously recruiting a permanent long-term CEO through the traditional search process.
Hire a turnaround firm or professionals with a strong transformation portfolio to drive organizational change that reports to the board while simultaneously recruiting the permanent CEO.

Options one and two will often require external assistance to analyze performance data, and help create performance targets and a dashboard to enable the board to evaluate progress and aggressively implement the strategy.

Leadership Requirements for the Task at Hand

Arresting sudden operating losses typically require a CEO with a thick hide, tolerance for interpersonal conflict, and the tenacity to break through organizational barriers that stand in the way of improved performance. It is rare that the senior team that led the organization into trouble can be counted upon to right the ship and steer it in a sustainable direction. Thus, the turnaround CEO may, in this process, need to part company with long-time senior clinical chiefs and managers. These actions involve incurring political costs, which can burden this CEO in building relationships for the longer term.

Having stabilized the organization financially, the turnaround CEO can then turn his or her attention to whether the market supports the organization’s strategic priorities, or whether it needs to reposition itself in payer or physician marketplaces. With the turnaround CEO's help, the board should also evaluate new service offerings and organizational assets (e.g., hospitals, physician practices, IT, long-term care facilities, etc.) to determine if they merit continued investment. Finally, the board should reassess capital spending plans, including IT procurement and implementation plans to ensure that they are sustainable and are likely to generate an adequate return.

Achieving positive financial results, clarifying the organization’s strategic direction, and pruning back operational deadwood carries political costs, which may ultimately handicap the turnaround CEO from leading the organization longer term. The board can cushion some of the blow by formally establishing their expectation that the “change maker” CEO is in place for at most one to three years, at which time they will seek to fill the job with a longer-term CEO who can consolidate gains made in the turnaround. People from clinical, operations, or administration positions who are promoted into senior management to support the turnaround and repositioning can be evaluated for their fitness for permanent appointment, or even promotion based upon exemplary performance.

Growth from a Sustainable Platform

Having achieved defined performance goals and righted the ship, the board may then launch a search for a permanent CEO who can consolidate the short-term performance gains and move the organization toward sustainability and growth. This new leader would start with a clean slate, and a longer time horizon. This may well be the time for the board to consider a generational change, appointing a leader that could conceivably head the organization for 10 or even 20 years.

This CEO might well have a different personality and leadership style than the short-term turnaround leader being replaced. They should be relationship-oriented and have a collaborative leadership style with an eye to long-term success. The new CEO should also be an effective recruiter that can articulate a compelling long-term vision for the organization and attract talented senior leaders and clinicians committed to that vision.

Board Challenges in the Turnaround Process

Board awareness of the stresses in this process can be useful in supporting the turnaround process. To help ease challenges, boards must:

Be unified in defining the turnaround and transformational challenge. Strong board leadership is required to ensure that support for non-incremental improvement is provided for the turnaround CEO including weathering the inevitable conflicts.
Reach consensus around the type of leader(s) they want, and be prepared to back them in the tasks needed.
Have a dashboard and performance metrics to evaluate the leader’s performance and hold the CEO accountable for meeting expected outcomes.
Be prepared for pushback from the organization’s multiple publics (clinical staff and faculty, employees, vendors and contractors, community leaders, donors, shareholders, press, and payers) and have a consistent messaging and communications strategy to present to the media and key stakeholders.

Guiding an organization through turnaround and significant transformation is one of the most stringent tests of a healthcare organization’s governance. Understanding the magnitude of changes required is the key to evaluating whether one CEO can accomplish all that needs to be done, or whether the job should be split between two people with very different qualities and backgrounds.

The Governance Institute thanks Jeff Goldsmith, National Advisor, and Scott Ransom, M.D., Managing Director, at Navigant for contributing this article. They can be reached at and

1Jeff Goldsmith, “How U.S. Hospitals and Health Systems Can Reverse Their Sliding Financial Performance,” Harvard Business Review, October 5, 2017.

Culture Alignment, High-Performing Healthcare Organizations, and the Role of the Governing Board
Part Two: Setting a Culture of High Performance and the Responsibility of Governing Boards

Hospital and health system performance is, or should be, at the top of the agenda for every healthcare board in the U.S. The optics on performance almost always manifest as a scorecard that is owned by the board. Most, however, fail to account for what may be the most important ingredient in the recipe that produces high performance: culture. In part two of this two-part series, Daniel K. Zismer, Ph.D., and Ben Utecht support the claim that a culture of high performance in organizations can exist and provide a framework for board discussion.

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By Daniel K. Zismer, Ph.D., and Ben Utecht, Keystone Culture Group

Hospital and health system performance is, or should be, at the top of the agenda for every healthcare board in the U.S., especially given the juggernaut that is the public demand for increased value for the health dollar spent. Board members hold final accountability for the organizations they govern, and management is hired to execute on performance plans approved by boards.

The optics on performance almost always manifest as a scorecard that is owned by the board.1 Such scorecards typically reflect performance metrics and comparisons to benchmarks across an array of important areas of evaluation. Each area evaluated can be variously important independently and as each interacts with others on the scorecard. Comprehensive performance scorecards have been raised to a high art and science. Most, however, fail to account for what may be the most important ingredient in the recipe that produces high performance: culture. There is such a thing as a culture of high performance in organizations. The balance of this article supports this claim and provides a framework for board discussion.2

Key Board Takeaways

Cultures of high-performing organizations are encouraged by boards that:

Are willing to make bold, outward-facing declarations of mission performance goals and expectations for the organization; this means clear translations of mission into specific, measurable performance goals that are aspirational and inspirational.
Have communications coming directly from the board to the organization, including routine summaries of the work of the board as it related to progress toward mission, strategy, and organizational development goals.
Make clear, tangible commitments to investments that will be made to support the work of the people who carry out the mission.
Establish, through management, how the board will evaluate progress on goal expectations.

Culture Drives Performance

Skeptics of culture as a driver of performance will say, “Healthcare organizations are composed of highly trained and experienced professionals; they know what high performance is and how to make it happen.” While such an assertion may hold some weight, what often passes with little understanding or appreciation by boards is that individuals hold intrinsic and integral beliefs regarding how they must perform to satisfy a personalized, internal compass that guides their behaviors. But, oftentimes, that internal compass doesn’t relate to, or integrate with, a drive to also ensure that the environment in which they work performs at high levels.

In fact, such is the case when professionals who rate themselves as high performers tolerate working in organizations that fall short of their personal standards of performance. The psychology of such situations will facilitate a disconnection and discordance of the individual’s perceived responsibility for the state and status of the performance of the “place” they work from that of their performance within that place; “I am good at what I do. The place I work at just can’t seem to get it right.” This dynamic translates to professional sports as well. NFL teams are populated with elite athletes. Players move around the league based upon trades and free agency. All teams play the same game coached by seasoned professionals. At the end of the 2017 season, 12 of 32 teams had never won a Super Bowl. Bad luck year after year or culture? Players on teams that don’t win, will not, necessarily, see themselves as subpar athletes because the team they play for isn’t a winner.

Nurturing a Culture of High Performance from the Boardroom

How can board members fully understand and harness the potential that comes from a culture of high performance? First, let’s return to our definition of culture: “Culture is the foundation of intrinsic beliefs that bind and inspire the behaviors of people in communities to pursue unity and purpose.” 3

Declarations of performance goal expectations by boards is necessary, but not sufficient. The foundational question is: What kind of culture is required to enhance the likelihood of success through the alignment of organizational goals with those of the people who are the organization? Board members and senior leadership must work well together here.

The foundation of a culture of high performance fits into a seven-pillar framework:

Everyone must understand and accept the mission of the organization. They must trust that those who govern are believers as well and will hold fidelity to the mission with their decisions and related behaviors.
Performance goals must be worthy in the context of the whole. Stated goals need to be seen as being worthy of their commitment of purpose and professional efforts. Goals tipped too far to the financial or operating efficiencies, for example, may create suspicions of intent.
Investments required must be seen as likely to deliver fair and equitable distribution of rewards; here the term “investments,” at the level of the individual, is defined broadly, including investments of emotional energy (i.e., the expectation that I, as an individual, am willing to invest my emotional energy in pursuit of the goals created by those who operate at a distance from my touch points within the organization).
Goals declared are consistent with a sound foundation of organizational ethics and morals. Board members must be worthy of trust.
Goals stated are the “right ones.” Highly skilled professionals will hold opinions on whether the organization “has it right” (with “right” defined in terms of the goal, the path to the goal, and the value of the returns available measured against the risks of pursuit).
Commitment and participation will not jeopardize the individual team members’ abilities to fulfill personal and professional goals and objectives.
Professionals must believe they are free to exercise sufficient personal judgement in how they execute on any plan.

Alignment of culture is critical to achieve high performance in pressured markets.4 How can boards know if the people of the organization are aligned with the performance goals of the organization? That’s the easy part; they will tell you if asked. It is our experience that everyone is more than willing to answer honest, well-crafted questions pertaining to the goal orientations of the governing board and senior leadership. Insufficient alignment is evidence that performance goal attainment is at risk. (See Exhibit 1 for an example of results from a survey that show misalignment among board members and community physicians in an organization.)

Exhibit 1: Board Member Alignment with Community Physicians

Note: This represents a sample of results from a comprehensive organizational alignment survey undertaken by Gregory Carlson, Ph.D., and Richard M. Shewchuk, Ph.D. Dr. Carlson is a Senior Advisor for Castling Partners, LLC.

Board members should be mindful that at the core of all healthcare organizations is a collection of teams composed of highly trained professionals that have an intrinsic need to succeed at the highest levels. To align these intrinsic goals with those of an organization requires a decided, designed, directed, and deployed approach to a culture of high performance. A culture of high performance is the responsibility of a governing board working hand in hand with management. The good news is professionals want to be associated with a winning team, as long as they believe in the path and goals of the organization. It is human nature.

The Governance Institute thanks Daniel K. Zismer, Ph.D., Managing Director and Co-founder of Keystone Culture Group, and Ben Utecht, former NFL player, public speaker, and Co-founder of Keystone Culture Group, for contributing this article. They can be reached at and

1 Robert Kaplan and David Norton, “Using the Balanced Scorecard as a Strategic Management System,” Harvard Business Review, July–August 2007.

2Part one of this article series looked at the board’s role in culture and culture alignment; see Daniel K. Zismer and Ben Utecht, “Culture Alignment, High-Performing Healthcare Organizations, and the Role of the Governing Board: Part One: Culture and Culture Alignment—The Foundation of a Board’s Culture Game Plan,” E-Briefings, The Governance Institute, March 2018.

3Keystone Culture Group, Culture Pro Series (see

4See Daniel K. Zismer and Ben Utecht, March 2018.

Board Lessons from Recent Non-Profit Scandals

As the saying goes, “To predict the next crisis, study the last one.” For as it is in business and in politics, so it is often with corporate governance. And over the last two years, a number of controversies have arisen in the non-profit sector that, individually and collectively, serve as an important oversight resource for boards and executive leadership. This article by Michael W. Peregrine discusses several examples of these controversies and provides tips for boards looking to reduce the risk of controversy and/or scandal at their hospitals and health systems.

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By Michael W. Peregrine, McDermott Will & Emery LLP

As the saying goes, “To predict the next crisis, study the last one.” For as it is in business and in politics, so it is often with corporate governance. And over the last two years, a number of controversies have arisen in the non-profit sector that, individually and collectively, serve as an important oversight resource for boards and executive leadership.

The affected companies reflect a broad cross section of the non-profit sector: a university fundraising foundation, a veterans’ support organization, a disease-associated charity, and a children’s medical organization. The allegations against management included fraud, financial malfeasance, waste of assets, and self-dealing. The allegations against boards ranged from conflict of interest, to passivity, to excessive deference to the CEO.

Each controversy involved unrelenting media scrutiny with associated costs in terms of expenses and ongoing damage to the reputation of the organizations and affected individuals. In each case, corrective efforts have been adopted by leadership, but the impact of the damage lingers. Indeed, for some of the organizations and implicated individuals, there is continuing legal exposure.

Yet it is important to note that in each of these examples there has been no determination by a state or federal court that the organization or any implicated fiduciary thereof violated applicable law. For that reason we have not, for purposes of this article, identified corporations or individuals by name (although all are a matter of public record).

Key Board Takeaways

Charitable status and “good works” are not prophylactics for board and management malfeasance. As boards look to reduce the risk of controversy and/or scandal at their hospitals and health systems, they should reflect on the following questions:

Is the board too reliant on the CEO and other senior executive officers, and does it, in a constructive manner, challenge their ideas and viewpoints?
Does the board have an efficient risk reporting system to ensure important information is promptly reported to the board and key committees?
Is the board adept at identifying “red flags” of legal/compliance risk?
Does the board make every effort to demand further information about serious legal, compliance, and financial issues that come to its attention?

A Snapshot of Recent Non-Profit Controversies

The University Foundation. This is an organization formed to solicit funds for a major university and to control the university’s endowment. The allegations against the foundation’s board included the failure to exercise oversight of the organization’s finances, approving property acquisitions without identifying a source of funding, authorizing excessive executive compensation, and allowing the inappropriate depletion of endowment assets.

Foundation executives were alleged to have exceeded their authority (i.e., acting without board approval), failed to adequately provide the board with necessary information, and to have presented the board with inaccurate and misleading information (among other concerns).

These allegations have been the subject of state attorney general and state auditor review, a specially commissioned forensic audit, and (reportedly) IRS inquiry as well. Recently the individual who served as CEO of both the university and the foundation was sued by the university for various allegations of malfeasance.

The Veterans’ Support Organization. The allegations here included extravagant staff spending (including on travel, administrative efforts, and fundraising), inadequate governance and administrative policies, misuse of donor funds, misleading advertising relating to spending for long-term support programs for veterans, and insufficient board oversight of executive actions.

The allegations were the subject of employee whistleblower complaints, were covered extensively by the national news media, and became the subject of a year-long investigation by the Senate Judiciary and Finance Committees. The charity made multiple changes in practices, policies, and executive leadership as part of the investigation and was subsequently recognized for these efforts by charity rating agencies and Senator Charles Grassley.

The Disease Charity. This situation reportedly arose from a fundraiser for the charity, for which Harvey Weinstein provided two items for auction. Allegedly, the contribution was conditioned on an agreement that the charity would transfer $600,000 of auction proceeds to a non-profit theater that had done a trial run of a musical produced by Mr. Weinstein. According to news reports, the theater had agreed to reimburse Mr. Weinstein for previous production costs and a charitable contribution if he could offset them with payments from third parties. (Theoretically at least, that could prompt private benefit concerns, among other issues.)

The board dispute over the arrangement led to two separate outside counsel investigations with conflicting results, and a resulting intra-board dispute that subsequently prompted a review by the New York Attorney General.1 Also, according to The New York Times, the transactions between the charity and Mr. Weinstein became, in late 2017, the subject of a criminal investigation by the U.S. Attorney’s Office for the Southern District of New York.2

The Children’s Charity. This controversy arose from the charity’s bankruptcy filing, which followed an arbitration award against the charity, which it was unable to pay. The nature of the filing, together with complaints from the other party to the arbitration (alleging that the charity’s CEO had a long history of engaging in fraud and financial impropriety), prompted the bankruptcy court to appoint an examiner to review the charity’s financial statements.

The examiner’s five-month investigation concluded that the charity’s CEO had engaged in a series of fraudulent transactions, including diverting over $50 million in donations for his personal compensation and the compensation of other individuals within the organization, using false and misleading charitable solicitation materials, financial mismanagement, improper reporting practices, and making false and misleading statements about charity operations in public filings.

The examiner also considered the conduct of the charity’s board and concluded that a cause of action existed for the charity, as “debtor in bankruptcy,” to pursue certain directors based on inattentive oversight (while noting that the likelihood of prevailing on such claims was uncertain; i.e., whether the alleged inattentiveness rose to the level of “gross negligence”).

Lessons Learned

These scandals reflect several themes that are worthy of note by non-profit boards.

Perhaps the overarching lesson is that it can happen, and frequently does. “The government” will indeed investigate perceived abuses in charity governance, no matter how meritorious the charity’s mission may seem. Note also that the range of governmental agencies that might exercise jurisdiction to investigate a non-profit is large, and the cost of responding to such an investigation (to both the charity and its leaders) is potentially huge.

More fundamental lessons relate to the level of engagement of the board, and the extent of its oversight of senior management. In order to reduce the risk of controversy and/or scandal, directors should:

Avoid being overly dependent upon, and overly passive with respect to, senior executive officers (especially the CEO).
Insist on a risk reporting system that assures the board and its key committees that information that could “keep management awake at night” is promptly reported.
Ensure the board’s role in the effective oversight of the organization’s business and operations, and in facilitating communication between the board and senior management.
Be capable of identifying “red flags” of legal/compliance risk when they arise in information that comes to the board’s attention, no matter the source.
Make robust inquiry and demand for further information about serious legal, compliance, and financial issues that come to the board’s attention.

Non-profit boards can benefit from an understanding of the facts and circumstances that were at the core of the several leading charity scandals of the past two years. The involved non-profits reflected a cross section of the charitable sector. Basic themes running through these scandals included inattentive board oversight of the financial activities of management, and a failure to identify “red flags” of possibly improper conduct. These scandals are a useful reminder that neither the organization’s charitable status, nor the “good works” it conducts, serve as prophylactics for board and management malfeasance.

The Governance Institute thanks Michael W. Peregrine, a Partner at McDermott Will & Emery, for contributing this article. Mr. Peregrine advises corporations, officers, and directors on matters relating to corporate governance, fiduciary duties, and officer–director liability. He thanks his associates, Ryan Marcus and MaryKathryn Hurd, for their assistance in preparing this article. The views expressed herein do not necessarily reflect the views of McDermott Will & Emery or its clients. He can be reached at

1 Jason Guerrasio, “Harvey Weinstein and Kenneth Cole Reportedly Covered Up a Suspicious Deal Involving a Charity,” Business Insider, October 19, 2017.

2Megan Twohey, “Tumult After AIDS Fund-Raiser Supports Harvey Weinstein Production,” The New York Times, September 23, 2017.