The crossbar has been raised.
Because of an avalanche of organizational debacles caused in part by problematic governance financial oversight, much more is expected of healthcare boards. The pressure is coming from many fronts, including credit-rating or insurance agencies, lenders, large donors, regulators, accrediting bodies and the public. The key to meeting these emerging demands is developing a board's sense of financial responsibility in addition to its financial competencies, systems and practices. All are necessary-don't fall short of that bar.
Healthcare organizations are both critical social institutions and big businesses; they must balance the healing mission with the business ethic. They engage in economic transactions such as buying, producing and selling. All mission-related activity-strategic, clinical, operational-requires money and has financial consequences. To serve their communities well, healthcare organizations must be financially healthy. It's a board's fiduciary obligation to see that this is the case by fulfilling six core finance-focused responsibilities: specifying financial objectives (taken together, the board's definition of financial health); reviewing management's financial plans and making sure they are aligned with financial objectives; enhancing the organization's creditworthiness to be able to access debt financing at reasonable rates; ensuring capital is effectively allocated across competing projects; monitoring financial performance and expecting corrective action from management if problems are detected; and verifying that financial statements fairly and fully reflect the organization's financial status and needed internal controls are in place.
As the Rev. Martin Luther King Jr. put it, "Keep your eyes on the prize." Your board is accountable to community stakeholders and must ensure the organization's resources and capacities are deployed in ways that benefit them. This requires a high level of financial responsibility.
Gone are the days when a few board members could do all the financial heavy-lifting. Governance quality ultimately depends on the competence of everyone sitting at the boardroom table-all must be financially literate. That means they must understand the healthcare industry's financial structure and dynamics as well as the organization's local market. For example, they need to know that profit margins of 20% and an accounts-receivable turnover of 30 days (typical in other industries) are unrealistic expectations in healthcare. They also need to grasp basic accounting and finance concepts; have the knowledge and skills needed to read, analyze and interpret the organization's financial statements; understand the factors (both internal and external) that drive revenues/costs and sources/uses of capital; appreciate the importance of and demand for high levels of financial integrity and credibility; and be able to continually learn more about finance through experience in the boardroom.
Financial literacy does not mean having a master's degree in business or being an accountant. Nor do we recommend selecting only board members knowledgeable and experienced in this industry. What it does entail is helping each board member understand accounting and finance essentials relevant to his or her governing role.
Some years ago, a friend of ours joined a bank board. Before being allowed to cast a vote at meetings and collect director fees, he was required to attend a two-day workshop on banking accounting/finance and bank board financial responsibilities. A worthy idea? We think so.
Boards must have the infrastructure in place to effectively and efficiently perform their financial work. Two of the most important elements are committees and information.
Finance and audit committees with the right composition and performing the right functions are a must. There just isn't enough time for your board to get all the financial work done in its regular meetings. Committees are needed to do "governance staff work" such as focusing the board's attention, vetting proposals, framing recommendations and following up to make sure things are working out as planned. These committees are expected by investment bankers and bond-rating and insurance agencies.
The critical ingredient of truly great governance is information. However, the type of financial information boards require to govern is very different than the type executives need to manage. Here are two examples:
First, consider providing your board with custom-crafted, governance-focused and friendly financial statements-unlike those prepared by accountants for external users and management. These must be streamlined, simplified and easily digestible. Second, financial "dashboards" should be constructed to help your board monitor the organization's financial performance and condition. We recommend including graphical "gauges" composed of financial ratios (liquidity, profitability, capital structure and activity) and associated benchmarks keyed to the board's specified bond-rating target. The dashboard should focus on the most important overall measures of the organization's financial health. It shouldn't look like the cockpit of the space shuttle.
Like management and medicine, the financial aspect of governing is a practice, employing competencies and using systems to fulfill responsibilities. Among the most important board member practices are seeking clarification when one is confused or does not know the answer; asking questions to test financial assumptions, estimates and predictions that underlie all proposals; maintaining a healthy sense of skepticism without being paranoid; and building and maintaining a healthy board-CEO-CFO financial partnership.
Board financial fitness and savvy are no longer luxuries. With regard to its financial responsibilities, competencies, systems and practices, you need to know how your board stacks up and what should you be doing to improve.
Dennis Pointer is a professor of health-services administration, University of Washington, Seattle, and president of Dennis D. Pointer & Associates. Dennis Stillman is associate director and senior lecturer in UW's health-services administration program and principal of Dennis M. Stillman Associates.