Wilson: There are two: 1. Audit Committee members should be independent of management. No hospital employees should sit on the Audit Committee. In fact, when the Audit Committee meets with the internal and external auditors, management should be asked to leave the room. 2. Trustees who sit on the Audit Committee should be financially literate enough to interpret financial statements and engage in a meaningful discussion with the auditors.
Riley: I recommend that the board have an Audit Committee that's separate from its Finance Committee. At least one member of the Audit Committee should have substantial financial expertise. But the rest of the members should represent a cross section of your board members. Some of the best communication I've ever heard take place between an Audit Committee and an external auditor has come from board members with little financial background, who are willing to ask the proverbial dumb question.
LeFever: Members must be willing to ask questions. They need to ask the auditors point-blank to go beyond the numbers and say whether this is a company that is well run and as financially strong as the records seem to indicate.
To begin, review the organization's mission, values, vision and strategic direction as well as a position description describing the responsibilities of a director. Then, discuss three questions:
A board should be large enough to include a diversity of the competencies it needs to exercise its responsibilities but small enough to engage in active discussion, make timely decisions and bond together as a team. Generally, 9-15 members is the ideal size range for boards of hospitals and health systems.
Before asking how many, first ask why the board wants members with competence in medicine.
A hospital or health system board benefits from having physician members who help the board understand clinically related issues and the perspectives of practicing physicians and their patients. From their practices, they bring a "real world" context to the board's work and help the board make better informed decisions.
A physician board member has the same fiduciary responsibility as every other trustee. Voting physician board members must make decisions based on the best interests of the organization, not the interests of medical staff members. With the exception of the president of the medical staff, physicians on the board may reflect but not do not "represent" the opinions of the medical staff.
The medical staff president, however, is elected to represent the medical staff, and therefore, we believe this individual should be a non-voting board member. (If the staff president currently is a voting member and no problems with this have occurred, there's probably no need to rock the boat. Maintain the status quo, but be aware that a voting medical staff president has a built-in conflict of interest that down the road, could be problematic.)
Next, ask what kind of physicians make good board members. Physicians elected to a hospital or health system board should be judged by the same criteria as any other board member. Among those qualifications, several are paramount: they need to be committed to the organization's mission and values, think strategically, communicate effectively, understand the difference between governance and management, and follow the board's rules of conduct, including its confidentiality and conflict of interest policies.
All that said, what's the appropriate number or percentage of qualified physicians on a hospital board? We believe an appropriate proportion of physicians for most hospital boards is around 15 percent to no more than 25 percent. The most recent survey by The Governance Institute, conducted in 2000 and published in Value Added Governance, indicates that the median hospital board had 12 members, including two medical staff members. Among the survey respondents:
As an upper limit, keep in mind that the Internal Revenue Service says no more than 49 percent of a tax exempt organization's board should be "insiders," which includes management staff as well as physicians who have privileges at the hospital.
An increasing number of boards are employing an explicit, competency-based selection process. First, the Nominating or Governance Committee develops a list of the competencies the board needs, including areas of expertise, skill sets, perspectives and personal attributes such as integrity and commitment to community. It also assesses the present composition against the competencies and identifies gaps. Second, the full board discusses and approves the competencies, and every board member is encouraged to suggest candidates to fill the gaps. Finally, the committee reviews prospective candidates against its competencies and, after a vetting process, chooses a slate to submit to the board for approval.
A governance policy should describe how the board develops competencies and carries out the process for recruitment, election and re-election of members. For a sample policy statement, go to the Governance Resources section of www.GreatBoards.org
This approach is used by some small hospitals whose board and board committee meetings are open to the public. In these hospitals, a QI committee typically includes department heads and medical staff representatives and is the point of coordination for quality indicators and performance improvement efforts. If a problem is identified but not addressed, the committee is supposed to act. As the ultimate guarantor of hospital quality, the board reviews its reports. Having a trustee on the QI committee demonstrates the board's commitment to quality and ensures that problems not resolved by the committee are reported to the board.
However, a QI committee gets into nitty-gritty issues. The trustee needs to work at a policy level and not get involved in operations. The trustee might be given a job description as follows:
If the committee determines the medical staff is not addressing a quality issue, the trustee should communicate the board's expectation that the medical staff will meet accreditation requirements and perform peer review. If they cannot do so objectively, the trustee should explain that the board will do what's needed to protect patient safety, such as authorizing an outside peer review or taking disciplinary action.
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:
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.
Generally yes. The longer an individual serves a board, the more vested he or she becomes in the current direction and policies. A limit on terms ensures the board has a regular influx of fresh and objective thinking.
Volunteer boards without term limits have a difficult time asking their friends and colleagues to step down even when their effectiveness slips. Term limits ameliorate this by requiring a member to step down as required by the bylaws. A common limit is three consecutive, three-year terms. A member must be off the board for at least one year before being eligible to serve another term.
Term limits have another benefit. Knowing vacancies will occur regularly, the board must create an ongoing process for identifying prospective members, thus keeping it in touch with changing community and constituency needs.
Yes, the chief executive officer should be a voting, ex-officio board member, unless the practice is prohibited by statute, which is the case with some governmentally owned facilities. We say this with respect for CEOs who are not voting members and believe they shouldn’t be. Many are quite effective and comfortable in their roles. However, we believe the chief executive should be a voting board member because:
The CEO should not participate in deliberations on her compensate nor serve as a voting member of the Executive Compensation, Audit Committee, or Governance Committee of the Board, although she may advise these committees.