Chief executives face mounting oversight from governing boards of not-for-profit hospitals and health systems, but directors and trustees failed to make similar reforms stick among themselves, a new survey shows.
The biennial survey, conducted by the Governance Institute, a healthcare education and research company, polled all not-for-profit hospitals and health systems via mail on board size, composition, compensation and operations. Roughly 600, or 14%, of public and private not-for-profit hospitals responded to February's survey. The results offer a glimpse of how far not-for-profit healthcare leadership has gone to respond to lawsuits, congressional and regulatory inquiries, and public pressure to overhaul and open up governance of the $432 billion sector.
It's not far enough, said Edward Kazemek, chairman and chief executive officer of Accord Limited and a Governance Institute adviser. "There's still a long way to go," he said of the survey's findings on boards' efforts to strengthen governing boards' independence and improve safeguards against conflicts of interest among directors and trustees.
The survey found two-thirds of not-for-profit hospitals and system boards don't turn to an outside auditor for review of board members' conflicts of interest. Forty percent lack written policies stating that willfully violating conflict-of-interest rules constitutes grounds to dismiss trustees or directors. Another 35% don't require board members responsible for audit oversight to be independent, the data show. And 65% have no written policy on physicians' competition or conflicts of interest.
Still, boards did make headway elsewhere. More CEOs must meet detailed, written performance goals or risk losing pay should they fail, the survey shows. Nearly 90% of governing boards have formal plans for evaluating their chief executives and 78% have mutually agreed-upon performance goals; that's compared with 63% and 74%, respectively, in 2003. Eighty-three percent of boards link CEOs' pay, in part, to performance, up from 66% in 2003. However, the 2003 survey asked if pay was "largely" based on performance.
Quality appears to play a larger role in executive compensation, with 71% of not-for-profit hospitals and health systems reporting that such goals figured into executives' evaluation. In 2003, 56% of respondents said quality goals figured into senior executives' incentive compensation.
Boards made some progress but continued to struggle when measuring their own performance or using competency criteria to choose new members. Seventy-four percent had no formal steps for performance evaluation of directors or trustees; 56% didn't have measures for new members' skill and ability, though that improved from 65% in 2003. That's not surprising, said Dennis Pointer, a governance consultant and president of Dennis D. Pointer & Associates. That's because there's little research to link certain attributes with a successful tenure on a governing board, he said.
Boards also appear more sensitive to excessive executive compensation in the wake of heightened public and regulatory scrutiny. Eighty-four percent of boards review executives' compensation to make sure salaries, benefits and bonuses don't violate any laws, the 2005 survey found. Another 8% reported such a move is under consideration. In 2003, 76% of boards reviewed executives' compensation and another 12% did not, but were considering it.
And though many boards lack criteria covering physician competition and conflicts of interest, that may soon change. The 2005 survey found 35% of those without such a policy are considering one, an indication that hospitals feel increasing pressure from entrepreneurial doctors, Kazemek said.
Corporate scandals, public scrutiny and the potential for heightened regulatory oversight have pushed directors and trustees toward reforms, he said. Many feel pressure to adopt measures included in the influential Sarbanes-Oxley Act, which Congress passed in 2002 to boost accountability and transparency of publicly traded companies.
Sarbanes-Oxley prompted Piedmont Healthcare, an Atlanta-based not-for-profit founded by physicians, to overhaul its doctor-heavy board to include outside directors, said Tim Stack, president and CEO of the three-hospital system. "They wanted to be squeaky clean," Stack said of the physician-director-led board revamp, which added seven nonphysicians to the 15-member board.
It seems growing scrutiny faced by directors and trustees didn't reverse a long-standing reluctance to compensate governing boards. Ten percent of boards surveyed in 2005 offered compensation to one or more board members compared with 12% in 2003.
And the two years between surveys made almost no difference in whether or not they plan for smooth turnover at the top. The percentage of not-for-profits that require a CEO succession plan rose to 24% in 2005 from 22% in 2003. "It should be 100%, frankly," said Paul Earle, a governance expert at executive search firm Spencer Stuart. "That's essential in this day and age to protect the institution." Spencer Stuart was one of three companies to partially finance the survey.
Healthcare's lack of succession planning has been recognized as a weak spot inside the industry. "The first thing about a succession plan is to have one," said James McNerney Jr., president and CEO of Boeing Co., who gave a keynote speech at an early December meeting of healthcare executives and consultants in Chicago.