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Not Your Father's Board: Why Some Boards Pay Directors

Not Your Father's Board: Why Some Boards Pay Directors

Across the country, a small number of larger, more complex health systems have quietly begun to pay directors for their service on boards. At first glance, this seems out of place in a nonprofit healthcare industry that has relied for decades on public service-minded individuals who lend their expertise without pay. But something seems to have changed to make paying directors more culturally acceptable to some organizations.

What has changed? Practically everything!

As anyone who has served on a health system board recently will tell you, this isn’t your father’s board. The stakes are higher for today’s board members, the risks are greater, and the amount of effort required of directors has grown substantially. The vast majority of board members continue to serve without pay. However, some systems have found that compensating directors helps them in recruiting more highly skilled outsiders with diverse backgrounds who are able commit the time and energy and who take the risks inherent in board service in the 21st century.

This article will examine some of the changes taking place in boardrooms across the healthcare industry that are influencing some organizations to consider paying directors.

Boards are smaller and members have more sophisticated skill sets

Your father’s board was made up of local, community-minded businessmen who came together several times a year to hear presentations by the CEO and give their approval. As hospitals began to merge and create systems, boards merged, too, and grew bigger and more unwieldy. Large boards often suffer from problems that arise out of their size. A certain amount of “social loafing” occurs on large boards. Individual members feel less accountable for results, and less engaged than directors on smaller boards. Some directors of large boards come to meetings without spending enough time on preparation, and they may not be well versed on issues to be discussed. Often the result is a board slow to take action and members who don’t find a lot of satisfaction in their board service.

The pace of change in the healthcare industry has forced many health systems to reduce the size of their boards, and to expect more from directors. While systems have reduced board size, they have also, by necessity, become more careful about whom they recruit for board positions. Skills in business, finance, IT, social media, and marketing are valuable; clinical experience and backgrounds in systems integration, population health management, chronic illness care, public health, epidemiology, insurance risk, and risk management are at least as valuable.

The interest in recruiting directors with sophisticated skill sets is driven by the need for patient-centered care, the focus on quality and safety, and a heightened emphasis on director independence. The trend toward greater physician integration and the simple fact that people with clinical backgrounds are moving into CEO and senior executive positions makes those same backgrounds desirable in board members. 

Boards increasingly try to reflect the diversity of the patient base in gender, race, ethnicity, age, religious traditions, and other factors because diversity helps the board to better understand the issues facing the organization, therefore bringing in multiple perspectives when deliberating the strategic imperatives of the enterprise. Diversity will only happen when board leadership makes it a priority. Of course, finding directors with the right skills and experience remains the highest priority, so women and minorities with desirable skills will be in demand.

Boards are managing more complex clinical enterprises with a multitude of risks

The healthcare industry is consolidating at a breathtaking pace, with mergers and acquisitions announced almost weekly. This is happening because scale matters. Economic pressures are a primary driver of industry consolidation. Revenue is constrained, margins are squeezed, and sales and property tax exemptions are being challenged by state and local authorities.

At the same time, providers are increasingly expected to focus on the entire continuum of care. This has led to widespread hospital-physician integration, the establishment of Accountable Care Organizations, the development of population health management strategies, and the assumption of insurance risk.

Healthcare is being transformed through consolidation and integration. Boards are required now to manage complex clinical enterprises that look nothing like the simpler organizations of the past. With complexity comes a long list of risks that need to be managed, including strategic, operational, financial, compliance, and security risks.  

These risks arise from all directions, including electronic health records, physician-hospital integration, high turnover, the outsourcing of services, and changes in the economic, political, regulatory, and social landscapes. Fraud and abuse cases are on the rise. Whistleblower cases have doubled in the past five years. Data breeches were up 140% in 2013. Most worrisome is the idea of the “unexpected crisis.” Board members must ask themselves, “what don’t we know that we should know?”

Responsibility for risk oversight lies with the full board, and the board must focus intensely on risks before they become value killers. But board members face an additional risk – the risk to their own reputations. Joining the board of a troubled organization can expose people with long careers full of accomplishments to the risk of failure or, worse yet, scandal. Consider AHERF, Tuomey, Penn State, and other recent high-profile news stories as an example of the personal risks board members accept in serving.

Boards are challenged to hold themselves accountable, continuously improve, and operate with total transparency

Boards today are being held accountable for the performance of the enterprise in all aspects of operations – cost, quality, patient safety, community benefit, and population health. The Affordable Care Act and ACOs are only part of the story. Government agencies, regulators, the Joint Commission, debt rating agencies, and more knowledgeable and assertive consumers are all demanding results. Boards must expect directors to provide high-level oversight of all aspects of operations from a risk perspective, and help management problem solve and innovate. Boards are increasingly being scrutinized for their performance and adherence to governance best practices.

Organizations are also being scrutinized for continuous improvement and adherence to best practices. Pressure on performance is coming from debt rating agencies, government agencies, state attorneys general, the Joint Commission, and insurance companies. Regulations are changing, as are public expectations. Boards that are slow to change with them risk both liability and embarrassment.  

Ongoing evaluation and continuous improvement must be built on hard metrics as a critical path to excellence. Performance must be measured not just against last year, but against competitors and high-performing peers. More robust governance committees will drive adoption of best practices and intentional governance.

Not only is board service more challenging and riskier today than ever before, but boards are expected to operate in a fully transparent way. Regulators are pushing for more transparency on behalf of the public, with CMS quality data initiatives and reporting requirements, disclosure mandates from the IRS, and spillover from Dodd-Frank and SEC regulations from the public company arena. Pressure is also coming from the 24/7 media world we live in today, and from consumer and purchaser groups.

In short, the public is demanding transparency, and health systems must tell their own story or risk letting others tell it for them. Health systems need to demonstrate quality, safety, customer service, and low cost; they need to demonstrate the value proposition for the community in better health outcomes, better patient experiences, lower costs, and wellness and disease prevention.

In the future, boards will be expected to tell the public “this is what we are accountable for, this is how we are doing, and if there are deficiencies, here is what we are doing about it.” Transparency may feel uncomfortable at first, but it builds trust with the public and within the organization as well. After all, if you have nothing to hide, then transparency is a friend.

Boards are all recruiting from the same small pool of qualified individuals

So the ideal board member is a mature leader with an impressive resume, unique skills, a clinical background or expertise in a key area, and preferably someone who can bring more diversity to the board. Furthermore, the ideal board member is an outsider, without connections that could lead to conflicts of interest. And that person needs to be willing and able to take on a time-consuming role that carries significant personal and professional risks, all while continuing to excel in his or her “day job.”

Not surprisingly, the pool of candidates who meet this description is limited. And the exceptional people in the candidate pool get invitations to join more boards than they can possibly consider.

As board work gets harder and requires more time and personal commitment, as the rigors and risks of board service increase, highly-qualified board members are becoming harder to find. After all, the CEO job is getting harder, too, and CEOs who would make excellent board members are often too busy to consider serving, if their own boards have not imposed limits on outside board participation.    

In recognition of all of these factors, some boards have begun to compensate directors. This trend is in its infancy, and it is most often seen in larger more complex health systems. Today, the number of hospitals and health systems that pay directors exceeds ten percent. It continues to grow, albeit slowly.

The decision to compensate board members is a cultural one that is unique to every organization. It should not be seen as a solution to every problem, and it should not be made without careful consideration. This decision, like other major decisions, will be public knowledge and will be scrutinized by people who will not understand the challenges the move is intended to address. When weighing a decision to pay board members, these are some things to consider:

  • Does state law permit paying board members?
  • Is the state attorney general likely to support such a measure, or at least not to oppose it?
  • Is paying board members consistent with our culture?
  • Is there a precedent for paying members of non-profit boards in the area?
  • Is board compensation likely to become a political issue?

If you decide to pay board members, begin with a modest pay package structured in a way that is easily explained and defended. Pay for non-profit board service will never rival pay at a Fortune 500 company board.

Will compensation for health system boards ever become a common practice? In the near term, we expect the vast majority of boards in our industry will to continue to rely on unpaid directors. Will more organizations consider paying board members in the years ahead? Only time can tell. Those that do will find it helps them deal with the difficult issues of attendance, preparedness, peer review, and under-performing board members. It is likely they will also find that the real value in compensating directors is in the social contract it establishes with the board.

Ken Ackerman

Ken Ackerman is Area Senior Vice President & Senior Advisor of Integrated Healthcare Strategies, a division of Gallagher Benefit Services, Inc.  Mr. Ackerman brings a distinguished career in health care administration that encompasses management of hospital-based multi-specialty medical group practices and acute care facilities as well as executive-level involvement in the nation’s largest rural health care system, Geisinger Health System in Pennsylvania, where he served as president of Geisinger Medical Center.  More recently, he served ...

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