Workbook 3
Microgovernance: The Changing Roles of the Board and Management
What is the difference between governance and management?
This question and defining the relative roles and responsibilities of the board and management are dominant and recurring themes in both governance theory and practice. The focus has traditionally been on determining a fixed line in the sand between the work of the board and the work of management. The discussion is driven by two fundamental and cherished assumptions. The first is that in fact there is such a line and that boards should not cross it. The second is that if boards do cross it, they are immediately and inappropriately engaging in management activities. In other words, these boards are guilty of “micromanagement.”
The first assumption that there is a bright line in the sand between governance and management is clearly untrue, based upon many examinations of how boards actually function. Governance experts and practitioners have long observed that boards and management appropriately define their roles and responsibilities in different ways based upon characteristics unique to each organization. For example, boards often, and appropriately, become more involved in day-to-day operations when their organizations are in crisis. A performance turnaround or an abrupt CEO departure typically requires the board to take a more active role in operations until the crisis passes and greater stability returns.
Further, boards of organizations that are not in crisis define their roles and responsibilities differently across different areas. A board with members who have a deep understanding and expertise in quality and patient safety may engage with management and medical staff differently in this area than they do, for example, in overseeing executive performance if the board has less knowledge and comfort with executive evaluations. A subsidiary board within a larger system with a sole focus on quality and credentialing is more likely to engage differently and in more detail with management on these issues than is a system board with more and broader responsibilities.
Over time, as board composition and the relative priority of issues facing the organization change and as the CEO position turns over, the way the board and management engage in overseeing different areas tends to shift as well. Effective boards are aware of and consciously control these shifts. They routinely review the implications of these evolving demarcation points and how they affect the structure and function of the governance/ management partnership.
Some degree of variation among organizations in governance and management roles is appropriate, based on differing internal situations and needs. However, intensifying external forces now require serious re-examination of the second time-honored assumption: that boards performing roles and functions once considered the sole province of management are guilty of the ultimate governance sin of “micromanagement.”
Today, an unprecedented level of fluid complexity in health care demands that board behavior once considered to be micromanagement is now required behavior for boards that want to govern effectively and manage risks. Rather than regard these activities as inappropriate micromanagement, we believe that they constitute a new, appropriate role and are worthy of a new term: “microgovernance.”
Questions for Discussion
1. Has your board recently had an explicit discussion with management about the distinctions between governance and management roles?
2. If so, did the outcome of your discussion suggest that the board is behaving differently from past practices?
3. If not, are the board’s more recent roles and behaviors pushing beyond the boundaries of its traditional focus; in other words, is your board practicing microgovernance? If so, how?
External Forces Driving Microgovernance
Here are just a few of the many external forces that boards and executives should take into account as they reflect on the changing balance between governance and management in their organizations and the emergence of microgovernance.
New Internal Revenue Service Reporting Requirements. Hospitals are now required to provide more detail on IRS Form 990, and much of it is about governance. In terms of microgovernance, the Form 990 now requires the board to indicate whether it reviewed the form before it was submitted to the IRS. This raises the likelihood that boards may soon be required to sign off on the Form 990 and be accountable for its accuracy as well.
SOX Migration. While the Sarbanes-Oxley Act applies primarily to public companies, its reach exceeds its grasp in driving microgovernance in health care organizations and other nonprofits. The increased focus on specific governance structures and functions and the call for more independent board oversight are resulting in a level and depth of documented structural and functional change that didn’t exist before. As a result, more boards are now microgoverning by: holding regular executive sessions without management present; ensuring that board committees, such as executive compensation or audit committees, are composed of only outside, independent members; and taking pains to address issues such as board size and ongoing board education and document how they are doing so.
Greater Regulatory Creep. IRS scrutiny of and penalties for excess benefit transactions are also forcing boards to be more focused and diligent in overseeing executive compensation and performance evaluations. The IRS and the Stark legislation are similarly affecting board oversight of physician contracts, practice acquisitions and other deals. Levels of board involvement that would have been considered micromanagement 10 years ago are now commonplace. Boards are now microgoverning by interviewing, negotiating with, hiring and paying for external compensation consultants to assist them in overseeing executive compensation without running afoul of the IRS, state attorneys general, and other regulators. These consultants report directly to the board or one of its committees. Often, board members write the compensation report and present the results to the full board. Boards also are reviewing specific market and other comparability data to determine appropriate executive compensation levels. They also are required to follow specific processes to meet the IRS “rebuttable presumption of reasonableness” standard. All of these requirements have narrowed the board’s focus and upped the level of detail of board involvement.
The Creep Goes On. A variety of sources now mandate that boards oversee the external audit function at a greater level of detail. Boards are now involved in numbers crunching, writing the board’s audit committee report, and engaging and overseeing external consultants in ways similar to those described for oversight of executive compensation and performance.
Heightened Scrutiny and Accountability in Board Oversight of Quality and Safety. There is growing recognition both of the importance of quality and safety—and that the board is ultimately accountable. As of Oct. 1, the Centers for Medicare & Medicaid Services (CMS) will no longer reimburse hospitals for eight “never events” and recently proposed adding nine more events. WellPoint and other commercial insurers identified and will withhold payment for 11 such events. Never events are errors in medical care that are clearly identifiable, preventable and have serious consequences for patients. (See Trustee, March 2008.) In order to competently oversee this aspect of organizational performance, boards need to know the specific never events affecting hospital reimbursement and their economic impact, require the medical staff and management to develop and implement protocols to prevent them and diligently oversee the integrity of hospital reporting to ensure that all never events have been identified and addressed. Further, boards must take an active role in establishing and overseeing organizational processes designed to prevent and respond to such never events.
Patient Stories. Organizations such as the Institute for Healthcare Improvement (IHI) are recommending that boards put a personal face on quality issues. More boards are inviting patients and families to share their hospital experiences—both positive and negative—at board or quality committee meetings. This type of activity, which clearly would have been viewed as micromanagement in the recent past, is an appropriate example of emerging microgovernance.
Governance and Creditworthiness. Bond issuers and insurers have clearly demonstrated that they understand the critical link between creditworthiness and good governance. An assessment of the integrity and robustness of an organization’s governance structure and function is now a common criterion for issuing, rating and setting the terms for hospitals to access capital through debt. What used to be the exclusive domain of management, interacting and negotiating with creditors and rating agencies, is now a newly necessary and critical governance function.
Board Education and Trustee Certification. More boards are taking an active role in overseeing the education of their members, spurred on by requirements such as the recent New Jersey law requiring minimum levels of education for boards. Another response is the growing movement toward trustee certification/credentialing (see the February 2006 Trustee Workbook). Expect to see more boards developing specific policies requiring board education; evaluating board and board member performance on this criterion; and taking advantage of tailored courses, such as the board quality curriculum offered by the Center for Healthcare Governance, to develop specific competencies.
Transforming and Monitoring Organizational Culture. Organizational culture has migrated from below the board’s radar screen to being recognized as primarily a management responsibility to increasingly and appropriately occupying the board’s time. Employee and physician satisfaction; staff shortages, turnover and retention; and never events are just some of the issues driving increased attention to organizational culture and the role of leadership in establishing and maintaining it. Boards are spending more time assessing their organization’s culture and crafting and implementing initiatives to change and improve it. Ongoing monitoring of the culture, particularly in terms of its impact on quality, patient safety, and efficiency, is another example of the new, more focused function of governance.
Tax-Exemption. Justifying tax-exempt status in response to greater scrutiny from federal and local government agencies and the media is challenging boards to understand and communicate with key stakeholders about this issue at new levels of detail and intensity. Boards now need to understand how their hospitals provide community benefit, the dollar value of the services that are eligible to be included and how they relate to and justify the organization’s tax-exempt status.
Increasing competition with insurers. As hospitals face both increasing competition from a variety of sources as well as decreasing reimbursement they are more often going head to head with commercial insurers to increase profitability. Overseeing hospital contracting with insurers now requires an unprecedented level of board understanding and involvement. Increasingly, effective boards must know the profit and loss potential for different payers, help develop strategy for participating in commercial insurance markets, and be ready to take the heat when conflict between their organization and an insurer plays out in the media.
More Focused Oversight of Organizational Improvement. Most health care organizations have already picked the low-hanging fruit when it comes to improving operational performance. Continued improvement requires more challenging initiatives that in turn often requires boards to gain a deeper understanding and even participate in these complex initiatives. Areas such as revenue cycle enhancement or patient flow oversight would have been considered way outside of the board’s purview in the past. Now, because of the impact on hospital revenue and capacity, boards need to be aware of issues such as how the revenue cycle, coding processes, and patient flow efficiency dramatically affect reimbursement and profitability.
Oversight of Physician Relations and Demographics. Much is being written and discussed about the need for a new model of physician-hospital relationships that will redefine or replace the traditional medical staff (see the January 2008 Trustee Workbook); however, less is known about what new model(s) might be most effective. Boards are spending more of their time trying to understand these issues and their impact on the current and likely future composition of the medical staff and, more importantly, to help develop new models of hospital-physician engagement that are mutually beneficial for all participants.
Increasing Liability. The Department of Justice is now preparing its attorneys to prosecute health care organizations and their boards for poor quality under the False Claims Act and Medicare Fraud and Abuse. Hospitals can expect more of this activity at federal and state levels as payment and quality are increasingly linked in an effort to drive quality improvement and cost efficiency. If hospitals and their boards do not take action to improve or if they knowingly profit from poor quality or from failing to take action against providers of poor quality, they are likely to be held increasingly accountable and liable. Boards are becoming more focused on risk management to protect themselves and their organizations from liability and sanctions.
IT Adoption, Oversight and Resource Allocation. Boards must ensure that appropriate investments in technology are made, that these investments are linked to the organization’s strategies and goals and that technology is maintained, enhanced and used appropriately over time. More boards are adding information technology (IT) committees and getting more deeply involved in the hospital IT transformation.
Although the list of issues discussed above is long, it is by no means exhaustive. Taken separately, each issue may not indicate a shift in the required or appropriate level of board attention or involvement. However, when examined as a whole, it is easy to see that the more detailed level of understanding and engagement required for boards to effectively oversee these issues signals a shift toward microgovernance as a necessary and appropriate approach in the overall governance model. Boards engaged in these required and necessary activities are not inappropriately micromanaging; they are appropriately microgoverning.
Questions for Discussion
1. Is your board more involved now than in the recent past in microgovernance issues such as those discussed above?
2. If not, what are the issues in which your board should be involved?
3. How would the list of issues your board is dealing with today look different from a list the board might have compiled 10 years ago?
Microgovernance vs. Strategic Governance: Finding the Right Balance
The trend toward microgovernance notwithstanding, boards still must perform the big-picture, strategic functions of governance. Boards have long brought true value to their organizations by maintaining a high-level focus unencumbered by the demands of day-to-day operational management. Therefore, as they take on an expanded role that includes both microgovernance and strategic focus, an emerging challenge for boards will be finding the right balance and productive relationship between these different and potentially contradictory approaches to governing. Microgovernance should not replace or supplant strategic governance; but the reverse is also true: Strategic governance clearly cannot be the board’s only focus in light of all the forces and challenges facing health care organizations.
As they grapple with expanding their governance role, boards must pay careful attention to appropriately weighing this balance. They must reconsider how to best apportion their meeting time to practice both strategic governance and microgovernance effectively. They must control and balance the information they receive and consider the implications these very different approaches to governing will have on board composition, orientation and education. They must also reconsider their board committee structure and determine how best to control and appropriately shift their focus and function, as necessary.
Exercise: Find the Balance
To begin consciously crafting the balance between your board’s microgovernance and strategic functions, list all of the issues your board has dealt with over the past year. Then, based on the level of direct and detailed involvement the board had with these issues, ask board members to place them into either the microgovernance or strategic category. Ask management to categorize these issues as well. Then, have the board and management together consider the following questions:
1. How do we define microgovernance versus strategic governance?
2. Where does the majority of our board’s microgovernance activities occur—at the full board or committee level? What impact is this activity likely to have on how our board and board committees function?
3. How does acknowledging and balancing the board’s microgovernance and strategic functions affect other board practices, such as board member selection, orientation, education and performance evaluation?
4. What implications does this expanded governance role have on the time the board spends discharging its governance responsibilities? How might this change the expectations we have for board service?
Tips on Effective Microgovernance
Once you have crafted the balance of functions for your board, here are a few tips on effective microgovernance:
1. Conduct with the CEO a detailed assessment of the roles and responsibilities of both the board and management in terms of how they are changing in relation to each other. Identify the specific areas that the board is or should be involved in that would fall under the category of microgovernance.
2. Don’t drift into microgovernance. Boards should assess the detailed issues and regulatory pressures facing their organizations and boards and determine with management what level of involvement it would take for trustees and executives to best address these issues. The results of this assessment can help identify areas the board has become more involved in and help predict likely areas for greater board involvement in the future.
3. Regular discussions about microgovernance and the changing board and management roles are crucial to the health of this leadership partnership. Ongoing communication can help identify how relative roles and responsibilities are changing and foster agreement on what issues need to be addressed and which ones may require less attention over time.
4. Appropriately balancing where the board needs to be strategic and where it needs to pay more attention to detail also requires assessing the impact on governance processes. As the balance shifts, for example, boards need to determine when they should function as a whole versus when to use their committees, ensure that no individual agendas are pursued, and engage in ongoing assessments of how shifts affect what the CEO is accountable for and the impact on CEO performance goals.
5. As boards work to appropriately balance their roles and responsibilities with those of management, they also should consider similarly assessing and addressing their relationship with the medical staff and how to best address emerging issues such as an increased focus on credentialing or the need to redefine medical staff structure.
6. Don’t lose sight of the board’s strategic focus. Even as boards need to gain a more detailed understanding of and involvement in certain issues, they should seek to see the big picture, rather than get increasingly involved in detail.
CONCLUSION
The appropriate role of the board, as well as the distinction between governance and management, is a moving target that will never be set in stone. These roles are clearly changing significantly and faster than ever before as the forces and challenges affecting health care become more volatile and intense. Microgovernance is now a key component of board work. Together with their CEOs, boards must regularly reflect on how issues that drive microgovernance change the way the CEO and board lead together in order to establish and continuously refine the unique governance/management balance essential to ongoing organizational survival and success. In this reflection, microgovernance must be recognized as an emerging, important and appropriate role of the board.
This article 1st appeared in the July 2008 issue of Trustee Magazine.
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