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Should board members be compensated?
This practice, common on corporate boards, is rare among not-for-profit organizations but is growing slowly because of the increased responsibilities and time demands placed on directors. According to the 2003 survey of boards by The Governance Institute, 88% of hospital and health system boards do not compensate board members. Compensation is most common among boards of Catholic health systems (27%), other systems (15%), County hospitals (37%) and District hospitals (24%). Among Catholic health systems, another 9% compensate selected board members, such as the Board Chair.
A follow-up survey published in November by The Governance Institute and Clark Consulting found little change. Of the 439 organizations that responded (22% response rate), just 12% offer boards cash compensation, with an annual retainer of $8,572 and an average per meeting fee of $528.
If your board is thinking about compensation, consider these questions:
- What is our rationale for compensation? Why would compensation make governance more effective?
- What has been the experience of other boards in similar organizations that adopted compensation?
- Would we be able to recruit and retain highly competent directors better than we can today?
- Are there any downsides to compensating board members?
An opinion from legal counsel on the implications for directors’ liability is essential. In addition, how will the community and public regulators, such as the State Attorney General, view compensation for directors? Draft guidelines from IRS (Feb. 2007) say boards generally should not be compensated, and if they are, compensation must be approved by a committee of independent directors.
Who is an "independent director?"
All directors must exercise independent judgment. However, in an era of increased accountability and transparency, certain board functions -- e.g., serving on the audit committee and the executive compensation committee -- should be limited to directors with no material economic ties to the organization, i.e., "independent directors."
Each board should develop its own definition. Some boards take a hard line, saying independent directors (or their families or business collleagues) may not have any economic relationship with the organization. Others use a "de minimus" standard, e.g., to be independent a director may not be compensated in an amount greater than $60,000 per year, or his firm may not do more $60,000 of business with the organization or 1% of its revcenues, whichever is greater. (dollar amount for illustrative only)
What are "disabling guidelines"?
Disabling guidelines describe conflicts that are, or could appear to be, so material that an individual should not serve on the board. Each organization should develop its own guidelines; one size does not fit all. Here are examples from one institution:
"Under the following circumstances, a director should consider resigning, or may be asked to resign in the best interests of the organization:
• Repeated, intentional failure to disclose a conflict of interest
• A single but significant, intentional failure to disclose a conflict of interest
• Intentional violation of the organization’s confidentiality policy or code of conduct
• Engaging in any external conduct that the board construes
may adversely impact the organization
• Serving as a board member, partner, investor, or senior executive of a direct competitor to the corporation or its subsidiaries (not to be construed as barring physicians whose practices offer routine services, such as in-office laboratories)
• Speaking publicly against positions of the board or the best interests of the hospital
• Serving as an employee of the organization, or having an immediate family member who is a senior executive officer
for the organization
• Receiving direct compensation for ongoing services provided to the organization (i.e., serving as a “de-facto employee”)
• Serving as an owner, partner, employee, board member,
or investor of a vendor (professional services, financial
institution, or other business) receiving a substantial amount of revenue from the organization—which we define as the greater of $200,000 or 2 percent of the annual revenues of that vendor in the preceding or current
year.
Should a member of the medical staff serve on the executive compensation committee?
No. All members of the executive compensation committee should meet the board's definition for an independent director. In no way should they have any significant, or material, economic relationship with the organization. If they do, it is a conflict of interest that could be perceived to influence their decisions on CEO pay and benefits. A member of the medical staff is an "inside," non-independent director, and therefore should not be named to this committee.
What should a board evaluation process include?
A periodic self assessment may include:
* Evaluation of the full board's performance against recommended practices
* Evaluation of the board chair
* Evaluation of committees
* Evaluation after each board meeting of the meeting process
* Evaluation and feedback to individual directors.
added/updated: 11/14/2006
topic(s):
Self-AssessmentThis information comes from GreatBoards.org, the online resource for effective governance.
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