One exception to that trend is the University of Pittsburgh Medical Center, which, in a quest for transparency, claims to be the first not-for-profit healthcare organization in the nation to become compliant with Sarbanes-Oxley, yet maintains a board of 57 members. Sarbanes-Oxley is silent on the subject of board size, and 12-hospital UPMC is compliant with the law in all respects, including an audit committee made up of completely independent members, says Michele Jegasothy, UPMCs corporate secretary and assistant counsel. The board size is a reflection of the relatively young system that grew up in the late 1980s and 1990s, a system that grew up by acquisition, Jegasothy says. So we acquired a lot along the way, and in each case the hospitals negotiated rights to sit on the parent board. We thought that was a great way for the parent to have a link to the communities where those particular hospitals are. Board members at UPMC do not receive compensation.
Jegasothy says that she doesnt expect the board to grow. Periodically, the system conducts an in-depth analysis. The board is one connection to the community, and that, I think, is the driving factor for not changing the board size at this point, she says. We look at the issue periodically, and I expect it will come up again soon. I can only say we will cross that bridge when we come to it.
Sarbanes-Oxley has not been the only driver of good governance practices because many not-for-profit healthcare organizations were already going down that road long before the legislation took effect, says Luanne Armstrong, vice president of governance for Texas Health Resources in Arlington. The health system took some small, insignificant steps to become Sarbanes-Oxley-compliant, but the system for many years has had a board of independent directors with separate audit and finance committees, a key tenet of Sarbanes-Oxley, she says. The parent company board has 18 voting members with a variety of skills and expertise. They are not compensated.
Armstrong, who oversees 24 boards at Texas Health Resources, including its 12 hospitals, says her position itself is a reflection of a growing trend. She says she knows of half a dozen vice presidents like herself and more at the director level. The board evolution nationwide may accelerate: Many people, including Armstrong, believe that Sarbanes-Oxley-like legislation targeted at not-for-profits is coming on a national basis, she says. States also are considering regulating not-for-profits as well. I think Sarbanes-Oxley is becoming an old story but its not the whole context because there is ever-increasing scrutiny and state legislation, Armstrong says.
Similarly, transparency, not Sarbanes-Oxley, was the driver behind a more-corporate board at Catholic Health East in Newtown Square, Pa., says Robert Stanek, its president and CEO. The multistate system, which includes 23 hospitals, was also encouraged by its religious sponsors. Beginning in 2000, the system worked to develop a competency-based board, veering away from the historic not-for-profit boards in which there are typically four bankers, three accountants and three lawyers, Stanek says. We said we needed experts in ethics, community services, philanthropy, finance and continuing care.
The 19 board members are all independent, except for Stanek, who sits on the board in an ex-officio capacity. Only the chairman is compensated a relatively minor amount, which Stanek wouldnt disclose. The system board meets quarterly while the executive board meets monthly. One member of the system board, Larry OConnell, an ethicist, travels from California for meetings, Stanek says.
Besides everything else driving the push toward transparency, Stanek notes that good governance affects systems bond ratings. John Wells, a senior director at Fitch Ratings, says not-for-profit boards are becoming increasingly more accountable. In rating hospitals, Fitch believes financial performance is a direct product of hospitals governance and management, he says. The rating agency assesses a boards commitment to an organizations mission and whether it can clearly articulate its strategy as those boards will make decisions that promote the long-term viability of their organization, carefully balancing benefits against risks in furtherance of its mission, Wells writes in an e-mail.
The Internal Revenue Service also is prodding not-for-profit boards to become more corporate just as Sarbanes-Oxley has pushed boards at publicly traded companies, Orlikoff says. Under IRS rules, no more than 49% of a not-for-profits board can be insiders or people who do business with the organization, he says.
Alexander, the health management professor, says the expectations for not-for-profit hospital boards are piling up and creating a dilemma for their members. There is, I think, an interesting paradox going on where executive management is playing a more central role in boards
even as boards apply greater scrutiny and oversight to management, he says.
I think it is largely a function of the fact that hospital boards are still dependent on management for interpretation and participation. I think independence only goes so far, and I think it is largely a function of the fact that a board of a not-for-profit hospital has to be cognizant of everything that goes on in a complex organization like a hospital. Where the contradiction comes in is on the one hand the board is still dependent on management for information they receive and a lot of interpretation. Its still a work in progress, I guess.