Getting Straight A's in Governance Doing your homework is the key to the governance triangle.
Governance is governance is governance. It does not matter whether it is the board of BCE, Bombardier, the local mental health association or your neighbourhood long-term care residence – the principles of governance are universal. “But we are different”, when voiced by a board member of a long-term care organization, illustrates the fact that that board member does not understand what governance is about. Yes, the context in which a board governs a long-term care facility is different from the context in which the board of Bombardier governs – but it is the context which is different not the role of governance.
Admittedly, though, being a member of a long-term care organization’s board of directors/trustees these days is a thankless job. You get paid nothing (or next to nothing), your job description is fuzzy at best, there is seldom much good news, you are in constant dread of your exposure to liability, you hate single-point access to longterm care, families are vociferously demanding more and better for their loved ones, no one seems to know where you are headed, and the sandwiches served at endless meetings get boring real fast. And yet, long-term care is the industry of the future.
How does a long-term care board quantify the value it has added to the organization each year? Asking that question is another example of a board not understanding its job. In business, we have “profit”; in government we (used) to have “excess revenues over expenditures”; in not-for-profits we (hopefully) have an “operating surplus”. The nomenclature varies but the concept is the same – as is the role of the board in achieving financial, quality, strategic or whatever types of organizational goals are in place, regardless of the sector in which the Board finds itself.
High-performing firms today have high-performing boards, who know where they are going, and high-performing chief executive officers (CEOs) to whom the former delegate management and in whom their boards have a great deal of trust. And so it should be in long-term care; but, sadly, it is not in many cases. For the most part, many boards of long-term care facilities are little more than self-perpetuating – albeit, well-meaning and well-intentioned – social clubs made up of individuals who see their involvement as “giving back to their community or family” in a prestigious, part-time way.
Some board members are “board junkies” serving on a number of boards simultaneously. Others are “lifers” having served on a board “forever”. Most board members are sterling citizens; some are captains of industry; but almost all of them leave their common sense and business acumen at the door of the boardroom when they enter a board meeting.
If governance is thought of as a subject in school, then getting straight A’s in governance is the same as for any other subject in school. To get straight A’s you need to work smart, study and do your homework. In short, you need to master the three A’s in the Governance Triangle as depicted in Figure 1: being aware of and knowing precisely what governance is and is not; acting and behaving as a “governor” should; and, at the end of the day, holding the CEO accountable for the organization’s performance.
[Ed. Note: Figure 1 is available only in the print edition of STRIDE.]
Practicing any management concept will only be as good as the working definition used to establish the meaning of the concept in the first place. The most generally-accepted definition of governance is “the responsibility and accountability for the overall operation of an organization”. More specifically, a Board charged with governance is responsible for (i) setting strategic directions; (ii) overseeing operations; and (iii) recruiting, evaluating, rewarding and sometimes dismissing a CEO to whom management has been delegated. Of all the relationships a Board may encounter, its relationship with its CEO is the most important. Governance is a process shared by the Board and its CEO – an interdependent partnership. The Board has only one employee – the CEO - who, in turn, is accountable only to the Board as a whole.
A board’s ultimate accountability is to the organization’s ownership. This is fairly straightforward in the case of church-owned, government-owned, privately-owned or publicly-owned long-term care operations. However, many not-for-profit facilities are corporations without share capital, i.e. without owners per se. In these cases the Board is the ownership. In all cases, the Board must (i) operate with due diligence and (ii) find out what really matters to its stakeholders. Due diligence refers to the careful and prudent examination and questioning of current and future finances, long-term debts, investments, contractual obligations and pending litigation. Due diligence is about asking questions and getting answers. “What really matters” usually can be reduced to an organization’s reputation, values and integrity.
The Board is the guardian of a long-term care organization’s mission, reputation, values and integrity. To be effective in this regard, the organization needs directors/ trustees and a CEO to be singularly dedicated to these intangibles – and no others. A board can be forgiving of a CEO with respect to performance but should never bend on integrity, mission or values.
Actions – Abiding The Fine Line
Ironically, most long-term care boards understand the basic definition of governance but seldom practice it. They slide. They slide into micro-managing finances, human resources, and the delivery of care. Most boards are comprised of competent individuals who often collectively act incompetently as a board. To keep the Board focused it needs to set the strategic directions for the corporation with measurable indicators against which to gauge the CEO’s success or failure in achieving said ends. There is a strong, direct, positive correlation between organizational performance and the Board doing its direction-setting well. One board, one CEO and one strategic direction shared by the Board and CEO does not guarantee success but anything more ambiguous than this “unity of direction” can be a recipe for disaster. But where does an organization draw the line between “setting” direction (Board) and “pursuing” it (staff). Figure 2 illustrates where this fine line should be drawn.
[Ed. Note: Figure 2 is available only in the print edition of STRIDE.]
Although focused, Boards also need to be open to self-improvement. Focused should not mean stagnant. And long-term care boards have some bad habits that need to be broken. First, meeting too often is a trap. It creates unnecessary work for staff; leads directors/trustees into micromanaging what is not their concern; and distracts management from their priorities. If strategic ends do not justify a meeting, then it should not be held.
Second, board members should be selected on the basis of competence in governance, not “representativeness” or any other criteria. Boards should not be the “killing field of vested interests”. Board members need to be peers for a CEO and, thus, adept at business management. Knowledge of long-term care is a bonus. Most competent directors/trustees are also quick students and will soon pick up the “context” on the job. And remember, gradual, planned turnover in board membership is just as healthy for an organization as gradual, planned turnover in management and staff.
Third, board size can also be improved upon in many instances. Boards function best if they are a workable size. Boards of excellence usually have not more than twelve and not fewer than seven members. Boards larger or smaller than that are generally ineffective. Within this range, the smaller the board the more likely it will remain focused. Err on the side of seven for board size.
Finally, board committees are to be avoided whenever possible. They are the number one reason why boards’ actions often contradict their intended role. Boards that are excellent at governance today have no executive committees. Executive committees alienate non-executive board members, duplicate workload for staff and thus drive up the costs of governance, add no real value that cannot be contributed at a board meeting, and often create the situations that get boards into trouble – such as secretive CEO contracts with dubious terms and conditions. It is often heard that other board committees are needed to perform the detail work of the board. By definition, a Board should not have detail work. Committees pull boards into micro-management where they do not belong. But what about the finance committee? Well, what about it? Budgets are a means to an end, and it is the end that Boards should be interested in not the means. Simple financial ratio analysis on one page of paper along with a certificate signed by the CEO stating that all legally required remittances have been made is all a Board (as a whole) requires unless there are extraordinary items which could materially harm the organization. Boards should focus on capital, investments and the bottom-line.
One exception to the no-committee rule is when boards have the CEO, and maybe other managers or staff, sitting as board members. In these circumstances an audit committee, a CEO compensation committee and a governance committee should be formed of only the non-management board members to remove obvious conflicts of interest.
Accountability – Taking The Governance Exam
As mentioned above, governance is not the responsibility of a board alone; and definitely is not the responsibility of a CEO acting in isolation from his/her Board. The Board governs by dealing conceptually with only the whole, and personally only with the CEO. Only the Board by majority vote has authority over the CEO. The CEO is accountable only to the Board as a whole for the corporation’s performance. If the Board has done its job of clearly articulating strategic directions then the CEO is responsible for achieving them on time, within budget, and on target. However, strategic ends should be mutually developed by the Board and its CEO to ensure that they are realistic, doable and measurable.
In long-term care there are four dimensions of accountability. First there is “political accountability” for the facility’s achievement of funder (government) imposed mandates. Second, there is “commercial accountability” – is the facility better off than previously? Third, there is “clinical accountability” for resident/client outcomes and quality of life. Finally, there is “community accountability” for the facility’s stewardship of funds raised or promises made. Boards are accountable on all four fronts within the scope of their mission.
There is also a cost to governance. There are the obvious costs associated with hosting meetings and board members’ opportunity costs in attending meetings. But these are small compared to the costs associated with management and staff supporting board activities, errors made by the board requiring rework by management and staff, and ineffective governance-management-organization relationships. One empirical rule of thumb is that the cost of governance averages five percent of an organization’s operating budget. Boards will never be perfect but an effective governing board will consciously try to minimize all of these costs and avoid them if possible. In evaluating a Board’s performance simply ask two questions, “did the Board add more to the corporation than it cost?” and “is the organization better off this year over last year?”. To pass, the answers to both questions need to be quantifiable “yes’s”. The answer, today, is often not positive.
Conclusion
Remember the baby-boomers? Remember how they all retire between 2013 and 2028? Well, the majority of physicians and nurses are baby-boomers too and the shortages currently being experienced in those two professions will get worse. Before then, a whole generation of administrators will retire.
Is there a shortage of competent board members for long-term care? In a country of thirty-one million people that is hard to believe. As long-term care facilities across the land recruit new administrators and more nurses and physicians, they also need to proactively recruit competent board members to lead members of the industry through the “long-term care decades” of 2010-2050. Having boards of good, public-spirited citizens alone will not be good enough – just ask the survivors at The Ottawa Hospital, Hamilton Health Sciences Corporation, or the Grand River Hospital in Kitchener, Ontario where boards were fired and replaced with a Provincial supervisor. Just ask the thousands of trustees dismissed in the wake of regionalization across the country over the last five years.
But do not cringe or hide. Do not run away from or ignore the big picture of governance. Tackle it like any other school subject. Work smart, study, do your homework and pass the exam. Only then will you get straight A’s in governance.