[Source: "Current Perspectives on Healthcare GovernanceA Roundtable Discussion Among Experts: Part II", AHLA]
Excerpt:
Mr. Silverman: Mr. Schwartz, lets focus on today’s governance environment at the state level nationally. What are the most important governance issues you can suggest to a nonprofit board going forward, to steer the organization in ways that would negate, or lessen, negative impacts of any inclination by a state Attorney General to conduct inquiries of governance practices?
Mr. Schwartz: There are several points to make here. It is important to recognize that state Attorneys General take their obligation to oversee the activities of nonprofit organizations very seriously. If they are not convinced that the nonprofit organization’s board of directors/trustees is exercising effective oversight, they are much more likely to conduct their own oversight investigation. As a result, the elements that tend to reassure them that an AG compliance review is not necessary include an engaged, independent board of directors; appropriate board committee oversight over "red flag" issues, including executive compensation and perquisites, travel and entertainment costs, conflicts of interest and related party transactions, and "mission compliance." In addition, institutional transparency with respect to governance can avoid problems based on a misunderstanding of the facts. Moreover, where issues arise, but an organization’s board can demonstrate that it is on top of the problem and dealing properly with it, most state Attorneys General are inclined to rely on the board to do its job and not institute a full compliance review. Where, however, the board’s action does not give the Attorney General comfort that effective oversight has taken place, investigations are much more likely.
Mr. Silverman: Can you recommend for us the types of structures that nonprofit healthcare companies should strive to adopt to ensure more competent governance? Things that immediately come to mind are independent committees and internal controls.
Mr. Schwartz: Well, first and foremost, people count. Having a strong, independent board of directors made up of individuals with diverse skills and backgrounds is the most important factor in good governance. In addition, it is crucial to have appropriate committee structures and compliance programs in place. As you know, in California many large nonprofit organizations are now required to have audit committees made up of wholly independent persons (although California law excludes non-corporate entities such a trusts, hospitals, educational institutions, and religious and governmental entities). Similarly, given the current regulatory focus on executive compensation, perquisites and travel and entertainment, we also strongly recommend independent compensation committees. These committees should have written charters that make clear the extent of their responsibilities; they should have the authority to retain independent outside auditors and consultants; and they should be made up of individuals with sufficient background and financial skills to effectively carry out their responsibilities. Finally, it is important that there be adequate compliance programs and appropriate board oversight of the internal audit function.
Mr. Silverman: Ms. Cornell, from an in-house perspective, what are your thoughts about oversight duties by nonprofit governing bodies.
Ms. Cornell: Stuart, in my view, it is important to note that the board’s oversight of an organization’s compliance program is continuing to take a more central role in board governance obligations. Not only should boards have a structure in place to make sure the organization has an adequate compliance program, but boards must undertake responsibility to make sure the program is alive and well: an active working program. This standard was set in the 1996 decision by the Delaware Chancery Court in the Caremark International case. In that case, the court not only articulated the board’s fiduciary duty to ensure a compliance program is in place, but also noted that failure to reasonably oversee the compliance program could result in liability. At the end of last year, the Delaware Supreme Court in Stone v. Ritter confirmed Caremark and took it to another level, setting forth specific conditions for director oversight. That case, together with the tone set in DOJ’s recent guidelines in the McNulty Memorandum, which also confirms board obligations for compliance program oversight, should provide all of us with a heightened sense of this important governance obligation. DOJ’s latest memorandum, "Principles of Federal Prosecution of Business Organizations" was issued in December, 2006.
Mr. Silverman: Mr. Schwartz, back to you. We hear a lot about the need to guard against conflicts of interest. In your view, what best efforts can a nonprofit healthcare system make to lessen the chance of conflicts of interest arising in the decision-making process? Are there ways to promote independence in decision making?
Mr. Schwartz: Again, transparency and process constitute the first line of defense. Of course, every organization should have a written conflict of interest policy—for both board members and senior management—and detailed disclosure forms so that any potential related party transaction is identified in advance. Moreover, it is crucial that there be a process (preferably computerized) to monitor and insure that any related party transaction is identified in advance. Only in this way can organizations obtain the benefits of the "rebuttable presumption of reasonableness" under the Internal Revenue Code or comply with state statutes like California Corporations Code § 5233. In addition, it is important to recognize that non-financial conflicts of interest exist and, as a result, conflict of interest disclosure forms should be broad enough to cover such relationship conflicts as well. Without such a system, it is not possible to effectively identify and properly "vet" transactions which may create conflict issues.
Mr. Demetriou: The issue of dealing with "non-financial" conflicts of interest is especially difficult. In part there are no legal guidelines to define the scope of these conflicts and thus crafting policies and disclosure forms that will address prospective conflicts present challenges. If the applicable standard for a non-financial conflict is whether the judgment of a director might be impaired due to relationships with another director that are external to the corporation’s affairs, then exploration of possible conflicts could require a very intrusive questionnaire, and certain directors may not respond favorably to the inquires.
Mr. Levine: Nonetheless, the point about seemingly indirect or non-financial conflicts is an important one. A complete conflicts policy should reach: interests in adverse litigation; gifts and gratuities; outside activities ("conflicts of commitment"); nepotism; and use of confidential or proprietary information.
