The Spring 2006 issue of Great Boards will include articles on CEO succession planning, the definition for an "independent director," and practical ways to elevate your Board's Quality Committee from an operational to a truly strategic focus. Look for the issue in April.
The Winter 2005 issue of Great Boards is still available (as are all our back issues) at www.GreatBoards.org. Stories focus on evaluating individual trustees' performance and redesigning board meetings to stimulate greater engagement and discussion of strategic issues. The issue includes a sample template for an annual board work and education plan. We've added sample templates for individual trustee assessment from four health systems to the Great Boards website; go to http://www.greatboards.org/resources/.
Too many boards are mired in mundane quality oversight activities, according to a new article by Barry Bader in the March-April issue of Healthcare Executive, the journal of the American College of Healthcare Executives (ACHE). The article describes five steps and practical ideas for engaging the board to play a leadership role. A reprint is available from www.GreatBoards.org.
Most of our stories in this Update reflect the government's growing interest in tax-exempt organizations and their governance. So we start on a more positive note, with a new resource to stimulate your thinking about creating "great governance."
Jim Collins has published a 35-page monograph applying his counsel for taking a company from "good to great" to social service organizations. His theme -- "business thinking (alone) is not the answer" recognizes the more diverse mission, performance indicators and role of multiple stakeholders in not-for-profit organizations. Drawing examples from Cleveland Orchestra, the Girl Scouts and other non-profits, Collins tailors five recommendations for achieving excellence. The monograph makes provocative background reading for a board retreat or education session. "Good to Great and the Social Sectors: A Monograph to Accompany Good to Great" is available for less than $10 a copy from www.amazon.com.
As if we needed another reminder that not-for-profit governance must monitor management or face outside scrutiny, the health department in Rhode Island has proposed stringent oversight of Roger Williams Medical Center, according to the Providence Journal. The Medical Center's prior CEO and two other individuals were accused of hiring a state legislator to advance the medical center's interest. Roger Williams subsequently negotiated a plea agreement acknowledging criminal wrongdoing and agreeing to new ethics rules and additional care for the poor.
The Roger Williams board has been criticized for not firing the prior hospital president in 1998 when he was found to have misappropriated funds, said the newspaper, and for not agreeing to a government settlement that would have prevented the hospital's indictment. Where was the board? In December 2001, the board of the medical center, the hospital's parent company, downsized from about 20 to 3, with the then-CEO as 1 of the 3. The hospital maintained a separate board with 21 members. The state's deputy attorney general called the governance structure "very, very murky."
Exercising its authority over the hospital's licensure, the health department proposed requiring the medical center to hire a forensic auditor to review its finances, to study the Sarbanes-Oxley Act and adopt aspects applicable to nonprofits, and retain an expert in nonprofit corporate governance to recommend changes hospital governance, possibly including changes in board composition and committee structure. For more on this developing story, see the Providence Journal's Feb. 14 story at http://www.projo.com/news/content/
projo_20060214_rwh14.da44c67.html.
Our colleague and health attorney Michael W. Peregrine of McDermott, Will and Emery (MWE) has identified 10 Corporate Governance Trends that may affect Nonprofit Hospitals and Health Systems in 2006. They include conflict of interest management, executive compensation, an end to golf outings and other perks, director recruitment and retention and a renewed focus on "the charitable mission." More details on all 10 trends may be found on Great Boards' website at http://www.greatboards.org/.
MWE has also published two new, useful references. You can find Guide To Corporate Minute Taking at http://www.mwe.com/index.cfm/
fuseaction/publications.nldetail/
object_id/f2896ec5-a0de-4ace-91aa-d75464a5c46f.cfm, and a summary of guidance resulting from the IRS' recent "compliance check" of executive compensation oversight practices at tax-exempt organizations at http://www.mwe.com/index.cfm/
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object_id/1d50abc1-fb93-47b0-b8ad-e4386b9c56ff.cfm.
The anticipated oversight legislation of tax-exempt organization began to emerge at the end of last year. The Tax Relief Act of 2005 approved by the Senate Finance Committee (and now nearing Congressional approval) included two related "charity reform" provisions with implications for tax-exempt hospitals and health systems. One provision would require large nonprofits with assets of more than $10 million to obtain a certification from their independent auditor that the IRS Form 990 filings accurately reflect the organization's unrelated business income tax liability. Another such provision would require some nonprofits, such as health system's parent organizations, to pay the greater of 5 percent of their asset value or 85 percent of their income to the organizations they support, and it would also limit the ability of the parent corporation to own for-profit subsidiaries.
Also as 2005 drew to a close, the Senate Finance Committee issued a governance inquiry letter to the American Red Cross, in the wake of questions regarding its spending in Hurricane Katrina relief efforts. The committee has previously raised questions about The United Way of the National Capital Area, The Nature Conservancy and American University. The Committee's inquiries once again concentrated on whether board governance structures and practices are properly designed and functioning to provide effective oversight and decision making.
The heat is rising on not-for-profits in Illinois and California. The Illinois Attorney General has proposed two pieces of legislation that are attracting nationwide interest. The Hospital Fair Billing and Collection Practices Act would set standards for billing and collection practices in Illinois hospitals. The act would impose uniform standards and procedures for hospital billing and collection processes. Hospital governing boards would be required to adopt policies to prohibit "abusive, harassing, oppressive, false, deceptive, or misleading language or collection conduct" by the hospital or its collection agents. Boards would be responsible for approving policies for advancement of bills to collection and have to approve legal action related to collection efforts.
A companion piece of legislation, the Tax-Exempt Hospital Responsibility Act would establish charity care requirements for Illinois tax-exempt hospitals, excluding critical access hospitals. Hospitals would have to comply with the act in order to maintain their tax status and issue tax-exempt debt under various state laws. The act would mandate that covered hospitals provide charity care in an amount equal to 8 percent of the hospital's total annual operating costs.
For more information on these acts, go to McDermott Will and Emery's website:
http://www.mwe.com/index.cfm/
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29866944-5ffe-4334-976c-5d43f7fd01b2.cfm
and http://www.mwe.com/index.cfm/
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object_id/10ad7114-72e4-4be3-b8d6-5f6cbd0e4151.cfm.
In California, state legislators held a hearing questioning whether not-for-profit hospitals whose profit margins exceed certain levels should be allowed to maintain tax-exempt status, according to a story in the Contra Costa Times on December 8, 2005. Fifteen of California's 200 not-for-profit hospitals earned profit margins above 10%, according to a state survey. Much of the focus of the Assembly's Revenue & Taxation Committee hearing was on Sutter Health, which reported an 8.5 percent system-wide margin but also has margins exceeding 10 percent in nine of its 27 hospitals in Northern California, according to the newspaper's story.
A labor union that is battling Sutter on many fronts alleges the hospital system reaps about $245 million a year from its tax-exempt status. The newspaper quoted Gary Loveridge, senior vice president and general counsel for Sutter, that Sutter's profit margins are "necessary to balance fiscally successful years with years the hospitals' earnings are lower, and that Sutter is working to reform its collection practices and improve its commitment to charity care. For more information, go to http://www.contracostatimes.com/mld/cctimes/.
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Barry S. Bader, Bader & Associates
12225 Seline Way, Potomac MD 20854, 301-340-0903
www.GreatBoards.org *** bbader@GreatBoards.org