Wednesday, September 23, 2009

Why Have Governing Boards Forsaken Their Duties? - Ideas from Silverglate and Malchow

We have posted frequently about the governance and leadership of academic medical organizations. While one would think that health care organizations, and especially academic health care organizations ought to be held to a particularly high standard of governance, we have noted how their governance is often unrepresentative of key constituencies, opaque, unaccountable, unsupportive of the academic and health care mission, and not subject to codes of ethics. How the governance of organizations with such exemplary missions and sterling reputations got this way has been unclear.

Now there are new insights from the ongoing discussion of one of the most interesting and controversial cases of disputed organizational governance. We have often come back to the example of Dartmouth College, of which Dartmouth Medical School is a significant component. We most recently discussed here an ongoing dispute about the extent that the institution's board of trustees ought to represent the alumni at large, or instead, ought to be a self-elected body not clearly accountable to anyone else. (For our take on this complex case, start here and follow the links backward.) The latest development in the case is a lawsuit filed by Dartmouth alumni challenging an increase in the number of self-elected, or "charter" trustees, which they charged broke an 1891 agreement that established numerical parity between alumni-elected and charter trustees.

Soon after this lawsuit was filed, an important article by Harvey Silverglate (one of the founders of FIRE, the Foundation for Individual Rights in Education) and Joseph Malchow appeared. For those interested in the case, the article includes extensive detail, with multiple citations, on all the twists and turns of the case, and is very much worth reading. (See this post on FIRE's Torch blog for more background and discussion.)

However, the article also features extensive scholarship on governance of US not-for-profit institutions, focused on academic institutions (including medical academia), and with relevance to other not-for-profit or non-governmental health care organizations. In particular, the article sheds light on how the governance of such organizations has become so degraded.

First, Silverglate and Malchow summarized the duties of governing boards:


Traditionally, fiduciary duty [of the board of trustees] has been understood as having two components: the duty of loyalty and the duty of care. The duty of loyalty requires a fiduciary to act in a manner he or she reasonably believes to be in the best interests of the organization. The duty of care obliges directors to inform themselves of reasonably available information prior to making a business decision. More recently, courts have considered the duty to act in good faith [the duty of obedience] as a fiduciary requirement. This component, similar to the duty of care, is satisfied when a director makes informed decisions without conflicts of interest.

The question central to the dispute regarding Dartmouth governance is to what or to whom do fiduciaries owe their duty. Corporate directors have a relatively straightforward task of serving the corporation and its shareholders. In the case of a charitable trust, however, which generally does not have 'ascertainable beneficiaries who can enforce their rights,' the duty of fiduciaries is instead directed toward fulfilling or furthering the organization’s mission


So just to summarize, considerable discussion, scholarship, and I believe some some laws support the notion that the board of a not-for-profit organization is obliged to take reasonable care to make informed decisions free of conflicts of interest to uphold the organization's mission.

However, currently, many boards value deference to the organization's (usually hired) top managers and avoidance of internal conflict within the board more highly than these obligations:

Dartmouth, to be sure, is far from the only place where fealty to organizational leaders—and the notion of 'going along in order to get along' —has been placed before true fiduciary duty.

Silverglate and Malchow have some important ideas about how we came to this.

Not-for-profits became more like for-profit corporations:

During the 1980s, traditional nonprofit organizations supported by donations and governed by donors and volunteers became increasingly displaced by professionally staffed commercial nonprofits, supported by grants, contracts, and earned income, and governed by insider boards. The shift in governance was armored by progressively professionalized and entrepreneurial management, which was perceived to be more adept at control of the ebb and flow of funds in the American market.

Top hired not-for-profit executives assumed more power at the expense of other constituencies, including the professionals who did the work:

By the 1990s, with faculty power firmly institutionalized at colleges and universities, a notion that university presidents were bereft of power took hold. The AGB [Association of Governing Boards], in 1996, argued that university presidents needed to regain power with a pivotal document of its own: Renewing the Academic Presidency: Stronger Leadership for Tougher Times. Though this outlook was applied to varying degrees at colleges and universities, an imperative toward greater executive power in universities was thus established.

Presidential and professorial decision-making power, combined with the rise of the administrative bureaucracy in academia, have generally relegated trustees to a secondary role in campus affairs.

Attempts at reforming governance were inappropriately based on a for-profit corporate model, and particularly the need to project unity and avoid confrontation among the leadership trumped transparency:

Aligning academic boards with the cultural trends of increased critical oversight has obvious benefits, but some boards have moved to adopt the norms of for-profit corporate governance that are simply not applicable to the university context. Admittedly, this is a thin distinction when considered on a theoretical level. But in practical terms, misguided nonprofit reforms—some of which, upon close examination, actually violate an institution’s mission—are readily evident.

For example, some nonprofit boards have emphasized the adoption of formal nondisclosure pledges or confidentiality agreements that step well beyond nondisclosure of proprietary information. This is hardly uncommon in the business sector, where bottom-line strictures demand a certain degree of internal accord and non-transparency. And though there is evidence that nonprofit board directors have, from time to time, attempted to hush public dissent, only recently have dominant majorities of some nonprofit boards proposed and ratified binding pledges not to publicly air differences. According to a 2006 BoardSource publication, 'If a board member does not support a decision for whatever reason, [he or] she has a responsibility to remain silent or step down from the board.' (Recall the resignation offer made to Zywicki before his second term was denied.)

These directives, written in highly influential publications in the realm of university governance, disregard the important role that public discussion has on decision-making at universities and nonprofits in general. 'In the nonprofit context, nondisclosure agreements or the use of 'executive session' rules to curtail debates about policy and procedure depart from established norms. They shut down opportunities for public dialogue and for communication with other concerned and influential parties, including reporters,' nonprofit specialist Norman I. Silber wrote in the Oregon Law Review.

Emphasis on raising money rather than upholding the mission has lead to board deference to hired executives.

Fidelity to institutional leaders, rather than institutional mission, is now paramount in higher education, as deviation from accepted decisions is perceived as potentially shrinking the donor base. Administrators cringe at public disagreement; rather than focusing on the long-term likelihood that competing ideas will result in implementation of the fittest, they tend to focus on the short-term possibility that a particular alumni subset may be offended. This shortsighted outlook is not only an insult to the intelligence of alumni and other constituencies, but it is ultimately detrimental to the institution, as established ideas are enthroned and unchallenged. It is also based on false premises: as in the case of Dartmouth, there is no established correlation between public criticism and donor decline.


Boards are increasingly composed of executives of for-profit corporations, particularly in the finance field, who may grant the same deference to the organizations' leaders that they would like from their own board. That is, hired executives identify more with other executives than with the organizations they are supposed to be leading:


Judge Cabranes noted that trustees, especially business executives, tend to act toward university presidents as they wish their boards would act toward them—deferentially. And the phenomenon of board members believing they serve at the pleasure of the executive is what one nonprofit attorney and blogger, has termed 'upside down board.' The ascendance of the hedge-fund community, a peculiar province of graduates of elite institutions, has contributed to the prevalence of the upside down board....


The article suggests some issues that need to be addressed to make governance more accountable, transparent, ethical and honest. Boards need to be reminded of their duties, and that their loyalty should be to the mission, not the organization's executives, or the views of the board's majority. Transparency and open discussion are more important than projecting the (sometimes false) impression of unity. New board members should be chosen for their loyalty to the mission rather than their similarity to and congeniality with current board members.

I strongly suggest that anyone who cares about how health care organizations are run ought to read Silverglate and Malchow's full article. It should be required reading for current and would-be board members of academic and health care not-for-profit organizations (but I will not hold my breath waiting for them to read it.)

19 comments:

Anonymous said...

In Canton, Ohio we have Aultman Health Foundation (Aultman Hospital), a nonprofit, owning AultCare Insurance, a for profit. There have been a series of law suits questioning Aultman's business practices regarding fair competition, with respect to other hospital organizations in the area. Aultman uses a legal strategy of delay and cost escalation to hold these suits at bay relying on a greater asset base to simply out wait their opponents.

One constant issue is the compensation packages of the various Aultman senior managers. This has never been made public due to the stated reason of "confidentiality."

So here we have a a nonprofit acting in the same manner as a for profit corporation using it's tax status to shield it from questions concerning senior management, as well as funding an ever increasing share of the insurance market.

One does have to question the true "mission" of the Aultman Health Foundation, it appears to be simply no different that that of a for profit business trying to eliminate competition, and dominate this market.

Steve Lucas

Anonymous said...

The problem with the analysis, both here and in Silverglate and Malchow, is that it doesn't fit the historical facts in health care. Health care organizations NEVER received a lot of their income from donations--in other words, the following statement "During the 1980s, traditional nonprofit organizations supported by donations and governed by donors and volunteers..." has not been true of hospitals and other health care organizations since the 1950s. Pre-Medicare hospitals got more than 90 percent of their income from payment, not donations.

Thus, a conflict of interest existed even before the 1980sd, but it was a more subtle one. Physicians, using their influence in state legislatures, gained control of both payment systems (through nonprofit Blues) and nonprofit hospitals. Donors and volunteers had little influence in comparison to the medical staff. And, physicians used that influence to divert nonprofit subsidies to Blues and hospitals to generate higher incomes.
The notion that these conflicts of interest just suddenly appeared in the 1980s is historically inaccurate.

Roy M. Poses MD said...

To anonymous above,

granted that hospitals did not historically get that much money from donations, I still believe most of the quote is generally relevant to health care not-for-profits.

See Ludmerer's Time to Heal for more discussion about how academic medical centers acted more and more like for-profit corporations.

I would also argue that in many hospitals, the power of the medical staff as a whole has decreased relative to the hired (usually non-physician) managers.

Anonymous said...

You might argue that, but you'd have a fun time trying to reconcile that with data. Data like the fact that for-profit hospitals have twice as high a representation of physicians of their boards as nonprofit hospitals. Data like the fact that during this period when hospitals were supposed to be increasingly under the control of non-physicians, the representation of physicians on boards more than doubled.

I have no doubt that hospitals acted more and more like for-profit entities (though all the research shows there is not a dime's worth of difference in the behavior of for-profit and nonprofit hospitals). I also have no doubt that this demonstrates that Mencken was right about your oft-proposed simple solution to the problem. Physicians have been highly complicit in both the historical and the ongoing conflict of interest problems in medical care, and the increase in physician representation has gone hand-in-hand with growth of the problem. Clinical training provides no "shrink-wrap" protection for conflicts of interest, profiteering, or fiduciary malpractice.

Roy M. Poses MD said...

Anonymous,

If you are going to make arguments based on data that isn't glaringly obvious, then either present the data, or give a citation for it.

But if the boards actually exert little oversight and mainly just defer to the hired executives, what is the point of your data on physician representation?

You seem to suggest that increasing physician representation on hospital boards causes conflict of interest problems. And what data do you have to support this contention?

If you bothered to read this blog, you would notice that we have been quite critical of physicians' conflicts of interest, and have not argued that clinical training protects against the ills cited above.

We have suggested that clinical training may make people more aware of the clinical context, and that understanding and accepting medicine's traditional values might be a good thing for leaders. We never argued that clinical training provides anything like a guarantee of good behavior.

MedInformaticsMD said...

I would also argue that in many hospitals, the power of the medical staff as a whole has decreased relative to the hired (usually non-physician) managers.

I believe the poor health IT being forced upon hospital physicians by those administrations, with inadequate physician say, and the dominance of the IT personnel in hospitals over such decisions is consistent with the decrease.

-- SS

MedInformaticsMD said...

Anonymous writes:

Clinical training provides no "shrink-wrap" protection for conflicts of interest, profiteering, or fiduciary malpractice.

Nor does HC MBA training. Can we, however, agree that those who lack clinical training are medical dilettantes?

-- SS

BipolarPorch said...

I am curios if anyone here could comment on my situation of that being an investment advisor and financial planner, both subject to a legal fiduciary duty as well as an ethical fiduciary duty. who suffered a mental illness. In my case it is bipolar disorder and attention deficit disorder.

After several years, I finally realized the cognitive impairments I was having(memory deficits, attention deficits, impulsivity, impairments of executive functions and the like) are related to my bipolar disorder and ADD and I sold the firm.

My duty of loyalty to my own firm(I owned it) was such that I posed a much higher legal liability of malpractice or breach of fiduciary duty, due to the disorder and I was more prone to mistakes and errors as well.

My duty of care to my clients is the biggie. Managing many many millions of dollars of other people's money, with the impulsivity traits I have as well as the memory/attention deficits, just made it painfully obvious that people were in harm's way.

My duty to act in good faith simply meant that I either disclose my disorder as a potential harm, or one might say conflict, to the clients goal of financial independence or that I resign. I chose the latter.

I have second guessed this rather huge decision, but when I think about my fiduciary duty and the peril of bipolar disorder as it relates to financial management, I still believe I made the correct choice.

Compare that, for example, to Bernie Madoff who in his last year of operating was, in fact, a fiduciary. An extreme example to be sure, but still very relevant I think in terms of what an actual breach of fiduciary duty looks like.

Faced with similar medical news, would you guys do the same if you managed money under a fiduciary duty?
Andrew

Visit my Bipolar News Site...

Anonymous said...

Nor does HC MBA training. Can we, however, agree that those who lack clinical training are medical dilettantes?

No. I've met individuals with management training who do an outstanding job of educating themselves about clinical issues. And I've met individuals with clinical training who do an outstanding job of educating themselves about management and business issues.

And, I've met managers who do not attend to the clinical issues and clinicians who think that anyone can just learn management on the fly.

There is simply no simple formula for this.

Anonymous said...

If you are going to make arguments based on data that isn't glaringly obvious, then either present the data, or give a citation for it.

I'd suggest a start by reading the last 25 years of work on hospital governance by Jeff Alexander and his colleagues. Some of their work confims your bias. The rest highlights greater complexities. Boards have grown in physician representation (that's from both AHA and Governance Institute data), and also instituted numerous changes that give them greater control of the CEO and management. On the other hand, CEOs have gained some greater voting influence, among other areas. Physician influence tends to be positive for some types of physicians and in some areas, and negative in others.

Suffice to say, that the issues are far more complex than the simplistic version presented here and that a short blog comment cannot do justice to a quarter century of research.

Roy M. Poses MD said...

Anonymous, and a brief comment obviously cannot do justice to a quarter century of research either.

If you insist on making your point about the prevalence of physicians on hospital boards, please provide some data, and a specific source for it. (Simply referring to 25 years of work by a single author who seems to have published hundreds of articles is not much help.)

I agree that a blog quote cannot do justice to the complexity of the Silverglate and Malchow article, much less the entire field of not-for-profit governance. However, I do what I can to make issues of health care organizational governance salient to people who are worrying about the intractability of our health care system's problems.

Finally, I do not understand how your points relate to the points I tried to make in the blog post (save the issue of not-for-profit boards ceding more authority to hired executives). Certainly the issues are complex, but you have not pointed out how better to understand this complexity, or how it might relate to most of the issues Silverglate and Malchow and I raised.

Finally, Mr or Ms or Dr Anonymous, I do not understand why you are maintaining your anonymity in this discussion. You are not blowing the whistle in any sense, and I see no reason you should fear retaliation for expressing such views. Would you like to tell us who you are? (You need to register on Google to do so, just put identifying information at the bottom of your comments.)

MedInformaticsMD said...

No. I've met individuals with management training who do an outstanding job of educating themselves about clinical issues.

Could they pass medical boards? Could they reasonably interpret a complex medical article in, say, The Annals?

In an emergency could they provide medical care? (mot in the legal sense, just in the skills sense.)

If not, why not, and what do you mean by "outstanding job?"

In comparison, I have no MBA but did a good job managing a department of 50+ and a budget of $13 million for an international pharma, solving severe business problems that had been impairing R&D and managing my budget consistently to within 0.5% of EA.

Is there perhaps an asymmetry between medicine and business?

-- SS

MedInformaticsMD said...

I ads:

What, exactly, is it that "individuals with management training who do an outstanding job of educating themselves about clinical issues" are qualified to do?

Harald K. said...

The article does not seem related to the November 2008 contract lawsuit it claims to address. It is not published in a reputable journal, as far as I can tell, and it does contain a few errors and reckless exaggerations. I wonder what makes it "important."

I am puzzled by Health Care Renewal saying "So just to summarize, considerable discussion, scholarship, and I believe some some laws support the notion that the board of a not-for-profit organization is obliged to take reasonable care to make informed decisions free of conflicts of interest to uphold the organization's mission."

I agree that scholarship believes that laws support the notion regarding conflicts of interest, but that does not bear repeating and does not relate directly to the rest of the article. You might be interested to learn that the authors of the cited article have both been employed by the same Dartmouth trustee.

Roy M. Poses MD said...

Harald K -

An anonymous comment was forwarded to me in reply to your comment above:

"I think he missed the point of the article. It is relevant because issues of public policy are always potentially relevant to contract disputes. And Silverglate and Malchow's point is that independent trusteeship--as embodied in the 1891 agreement--further the state's goals of having non-profit boards that carry out their fiduciary duty. Dependent boards hand-picked by college presidents and based on financial largesse undermine the state's policy of vigorous and independent boards of trustees."

Harald K. said...

Issues of public policy are “potentially relevant” to everything under the sun, aren't they? Public policy is not an issue in the lawsuit that is referenced in the paper, and this fiduciary question seems to be a late arrival trying to latch onto a prior legal tangle.

The 1891 agreement is an attempt to give an outside interest group some influence over the board, so it does not embody “independent trusteeship.” I do not think that is the point the authors tried to make anyway. If the state’s policy in creating the Dartmouth trusteeships were a relevant question, we would be able to find the answer easily, and that is that the state made the board self-perpetuating.

Although I am wary about replying to someone who can’t be bothered to comment here, even anonymously, I would note that the emailer seems to have conceded my point about the article’s lack of importance.

Roy M. Poses MD said...

Harald K -

The alumni of a university are an "outside interest group?" Really? Of course, this seems to go along with the view expressed by many executives of large organizations that only they know or ought to know what the organizations' interests are. It would seem that the alumni of a university have more of a long-term affiliation with the university than do hired executives who can jump somewhere else when things get uncomfortable.

If you are concerned about replying to an anonymous commentator, why don't you supply your own last name and address? Maybe Dartmouth insiders know who Harald K is, but I surely do not, and I doubt that most of our reades know either.

Harald K. said...

I do indeed think of an alumni association as being an "interest group" outside of the university corporation. It lobbies and cajoles and in some cases has a formal relationship, but its officers are not identical with the board of directors an any example I have encountered. Do you know of a university that is owned by its alumni club? I can see Deep Springs College or some unusual institution like that having this sort of relationship.

If you no longer think the article is a good summary of “fiduciary responsibility,” or if you have concluded that you are not qualified to judge, then perhaps the post ought to be redacted to reflect this change.

Roy M. Poses MD said...

Harald K, whoever you are, your word games are getting tedious:

I was talking about alumni as a whole, and not arguing about the legitimacy of a particular alumni association. But you seem to want to do the latter.

You try to knock down a straw-man when you argue that an alumni association is not identical with a board of directors. Who said it was?

I surely am not going to change my opinion just because your opinion is different, and your only justification for that opinion appears to be non sequiturs and other logical fallacies.

By the way, last time I challenged you to stop hiding behind the cloak of anonymity. You obviously are on the side of the Dartmouth administration and its friends among the unelected members of the Dartmouth board, so you have nothing to fear from them. So why not make your identity known?

If you choose not to, I wonder if it is because you are a public relations flack being paid to defend the administration and unelected members of the board?