REPRINTED FROM GREAT BOARDS, Fall 2008

The traditional, easyanswer—that the boardmakes policy and manage-ment carries it out—is toosimplistic. It offers littlepractical guidance at atime when fiduciary expec-tations are rising.Nowadays directors serveon boards to make a differ-ence, not just to be nameson the letterhead anddonors on a wall. Todayʼsboards must be informedand want to be engaged,both to fulfill their legalobligations and to leveragetheir time and talent toadvise management. But— at what point doesappropriate engagementcross the line intorunning the show?

It is tempting for directorsto believe they are doingtheir jobs by delving intomanagement decisions.The temptation is particu-larly strong for some, suchas physicians who practice

at the hospital and thinkthey know how thingsshould be done. Itʼs tempt-ing for outside directorswho may bring ideasbased on what works intheir businesses or what

theyʼve heard from friendswho are physicians ornurses.

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Seven GGuuiiddiinngg QuestionsIs it big?

Is it about the future?Is it core to the mission?

Is a high-level policy decision needed to resolve a situation?Is a red flag flying?

Is a watchdog watching?Does the CEO want and need the boardʼs support?

Distinguishing

FR

OMGovernance Management

By Barry S. Bader

“What is the difference between governance and management?” is by far the question that not-for-profit executives and directors ask most often. Effectiveboards understand the difference between governing and managing; dysfunctionalboards do not.

Health systems and hospitalsare complex organizations with

multiple moving parts; tinkering inone area will affect many others.

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Wise directors avoid the temptationto co-manage or second guess.Directorsʼ fresh thinking and appliedbusiness knowledge are desirable,but health systems and hospitals arecomplex organizations with multiplemoving parts. Tinkering in one areawill affect many others. Complexorganizations require strong, knowledgeable executive leadershipto get everyone pulling in the samedirection. They require tough choicesabout people and about what canand cannot be funded. Boards thattry to manage often end up generat-ing unintended consequences. They undermine the CEOʼs credibilityand authority, to the detriment of the organization as a whole. Theyalso risk driving away competentexecutives and directors who donʼtagree with a hands-on approach to governing.

Governance Roles andResponsibilitiesAn understanding of the differencebetween governance and manage-ment rests on the cornerstone of fiduciary responsibility. Just as corporate boards are accountable to shareholders, the governing bodyof a not-for-profit organization has a fiduciary responsibility to see thatthe organization is acting in the bestinterests of the public, and morespecifically the “stakeholders” whoare served by the organizationʼs mission. For the not-for-profit hospital, the highest-order stake-holders are the patients and the community.

Todayʼs boards carry out five primaryroles as independent fiduciaries (see Figure 1): choosing the CEO,approving major policies, makingmajor decisions, overseeing performance, and serving as externaladvocates. Hospital and health system boards focus their attention on the organizationʼs mission andstrategic direction, finances andinvestments, quality, community benefit, and corporate compliancewith laws and regulations. The role of management, led by the CEO,

is to operate the organization in line with the boardʼs direction.Management makes operationaldecisions and policies, keeps theboard educated and informed, andbrings to the board well-documentedrecommendations and information tosupport its policy-making, decision-making and oversight responsibilities.

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Figure 1: The Board-Management RelationshipBoardʼs Roles Managementʼs Roles

Select, evaluate, — Run the organization in line with and support the CEO. board direction.

— Keep the board educated and informed.

— Seek the boardʼs counsel.

Approve high-level — Recommend goals and policies, organizational goals and supported by background information.

policies.

Make major decisions. — Frame decisions in the context of the mission and strategic vision, and bring the board well-documented recommendations.

Oversee management and — Bring the board timely information in organizational performance. concise, contextual, or comparative

formats.— Communicate with candor and

transparency. — Be responsive to requests for

additional information.

Act as external advocates — Keep the board informed, bring and diplomats in public policy, recommendations, and mobilize fundraising, and stakeholder/ directors to leverage their external

community relations. connections to support the organization.

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Seven Guiding QuestionsEven when the mutual roles of theboard and management are under-stood, there isnʼt always a bright linedistinguishing governance from man-agement. Different situations willaffect the appropriate level of gover-nance involvement. Adverse resultsmay call for closer board oversight.For example, if the organization is ina financial downturn, is not improvingsubpar quality scores, faces allega-tions of improprieties, or is consider-ing a merger or major transaction,the board may become moreengaged and review more detailedinformation than it normally would.Otherwise, a governing board func-tions best when it focuses on higherlevel, future-oriented matters of strat-egy and policy and performs its oversight responsibilities in a rigorous but highly efficient manner.

Seven questions can help a boardand management to agree on theirappropriate roles for any matter ofboard oversight or decision making:

1. Is it big? The bigger the impact ofa decision, the more the board oughtto play a role in shaping and under-standing the action and its possibleconsequences. One rule of thumb isthat organizational decisions impact-ing roughly 10 percent or more of anorganizationʼs revenues or activitiesare strategic decisions. A decision onwhether to start or greatly expandmajor clinical service lines such ascardiology, oncology, and orthopedicswould be a strategic matter. Planning

how to implement the expansion ismanagementʼs responsibility. Thecorollary to “Is it big?” is “Is it too small to merit the boardʼs attention?”

2. Is it about the future? Boardsmake their impact on what theorganization will look like five or moreyears down the road. The boardʼsfingerprints should be on the organi-zationʼs long-term vision and anintegrated, three-to-five-year strategicand financial plan, as well as a mas-ter facility plan. Tomorrowʼs campusis the work product of todayʼs boardand management. Boards should relyon management to develop draftstrategy documents for board inputand approval. A board-approvedstrategic plan should have severalmajor focus areas, such as quality,growth, finances, and people, withmeasurable goals for key indicatorsand initiatives in each area. Anotherrule of thumb: if the board-approvedstrategic plan has more than five orsix strategic areas and more thanabout 20 strategic initiatives underthose areas, the plan is probablymanagementʼs operating plan andthe board is getting involved at toolow a level.

3. Is it core to the mission? As afiduciary, the board is the guardianof the mission. Questions such aswhether to continue a financiallyunderperforming facility, how muchto invest in community benefitactivities and whether to openclinics in medically underservedcommunities call for the board toexamine strategic and financialdecisions in a mission context.Management should bring the boardwell-documented analyses and rec-ommendations to help directors strike

the right balance when mission andfinancial realities come in conflict.

4. Is a high-level policy decisionneeded to resolve a situation?A policy sets forth principles, guide-lines, or practices to be applied incertain situations. For example,should a physician member of theboard who invests in a competingfacility be permitted to continue inoffice and practice on the medicalstaff? Should a manager bepermitted to dismiss an employeewho he says is underperforming,but who has filed a complaint allegingthe hospital is violating Medicarepayment rules? These situations callfor consistent decision-making basedon policies on physician competitionand whistleblowers, respectively.Other common hospital boardpolicies address such matters asconflict of interest, charity careand community benefit, executivecompensation, CEO evaluation,and public transparency. A boardʼspolicies should be compiled into apolicy manual that is available forreference at any board or committeemeeting and distributed to everytrustee. Of course, organizationshave hundreds of operational policiesgoverning various aspects ofpersonnel, finance and billing, andpatient care. These are not boardmatters. Policies requiring boardapproval should have a majorimpact on the organization, requirecompliance with laws or regulations,or affect the responsibilities andconduct of the board, management,and subsidiary boards.

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5. Is a red flag flying? Boardsshould routinely review dashboardsand other performance reports, butwhen should they get into more detaildiscussing results and raisingquestions? Directors should know thered flags that signal the need forcloser inquiry. Boards and especiallyoversight committees should focuson trends. One rule of thumb statesthat statistically significant over- orunderperformance on a strategic,quality, or financial indicator over atleast three reporting periods consti-tutes a trend. Of course, sentinelevents, reports of unethical or illegalactivity, or dramatic underperfor-mance require prompt board orcommittee review before a trenddevelops. Red flags may also appearin reports from the external auditor,general counsel, accreditationagencies, and others. To avoidslipping from governance intomanagement when reviewingperformance problems, the boardshould focus on whether manage-ment recognizes the problem andhas established the capability andplans needed to improve results.The board should not micromanagepossible solutions; it should holdmanagement accountable forproducing better results.

6. Is a watchdog watching? IfCongress, IRS, the state attorneygeneral, or the news media care, theboard should care. Hot button issues ofthe moment include community benefit,charity care, executive compensation,medical errors, and publicly availablequality results. Boards should be proac-tive on high-profile issues, adopting

A governing board functionsbest when it focuses on higher level, future-oriented matters

of strategy and policy andperforms its oversight

responsibilities in a rigorousbut highly efficient manner.

Organizational decisions impacting roughly 10 percent or more of an

organizationʼs revenues or activitiesare strategic decisions.

If the board-approved strategic planhas more than five or six strategic

areas and more than about 20strategic initiatives under those areas,the board is involved at too low a level.

Management should bring the board well-documented analyses

and recommendations to help directorsstrike the right balance when missionand financial realities come in conflict.

Directors should know the red flagsthat signal the need for closer

inquiry. One rule of thumb states thatstatistically significant over- or under-performance on a strategic, quality, orfinancial indicator over at least threereporting periods constitutes a trend.

The board should not micromanagepossible solutions; it should hold

management accountable forproducing better results.

If Congress, IRS, the state attorneygeneral or the news media cares,

the board should care.

When the CEO calls, good boards respond.

appropriate policies, overseeing performance, and ensuring the organization has a proactive publiccommunications strategy.

7. Does the CEO want and need

the boardʼs support? If the CEOasks for board advice or intervention,directors should respond. When CEOsare about to embark on career-limiting activities, such as fighting alabor union or terminating the con-tract of a noncooperative but popularphysician group, the executive mustknow the board will stand firm.Sometimes CEOs want the board tochallenge management to raise thebar for performance, which gives theCEO the boardʼs backing to ask morefrom senior leadership and the med-ical staff. CEOs may also ask for helpfrom directors with connections withdonors, legislators, and communitystakeholders. When the CEO calls,good boards respond.

Some practices and structures canhelp a board stay out of operationsand focus on governance. The chair-person should exercise leadershipand not hesitate to keep discussionsfocused on a higher plane. A CEOʼsletter to the board between meetingsupdates the board on recent eventsand obviates the need to discuss operations at meetings. A consentagenda enables a board to handleroutine matters without discussionand frees up time for more importantmatters of policy and strategy, as well as board education. Committeesfor finance and investments, quality,audit and corporate compliance, andexecutive compensation have cleargovernance purposes. Conversely, inmany cases, board committees on marketing, personnel/humanresources, and facilities engageboard members in management work and usually arenʼt needed.

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Most importantly, the board should elect members who understand and respect the difference between governance and management. Choose wisely, seeking as directors individuals who bring no personal agendas, understand the role of management in large, complex organi-zations, and have a desire to work as part of the board-management team. Then conflicts between the board and management will be rare.— Barry S. Bader

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