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P R I N C I P L E S OF E F F E C T I V E G O V E R N A N C E

endowment to c o v e r ^ " T T ^ the eleventh hour. Ledoperating deficits with- byt rus tees wi th s t rongout board approval . In f inancial and b u s i n e s sa n 1 8 - m o n t h p e r i o d , n p P T l f f * t~1VP k n o w l e d g e , it instruct-assets tell from $34 mil- -^BL*. ed m a n a g e m e n t tol ion to S18 m i l l i o n . restructure the deal onFortunately, this board 1 J a m o r c su'id financialawakened from its nap, C O r D O I * c l t C D O ' c i r C l foo t ing , which it did.raised the funds needed In re t rospect , the CEOto save thecollege, and credits the b o a r d ' sr e v a m p e d g o v e r n a n c e k - n r * W Q Jf- Q m l p 1Q 1" 0 c o u r a g e w i t h p a v i n gso the s a m e m i s t a k e I v l l v J W o l l o 1 U I V ^ l o LKJ the Way for an acquisi-wouldn't happen again." tion that is more likely

These examples not- to succeed,w i t h s t a n d i n g , s u c c e s s ' " | H H V i l l i I P Better Organizational Per-in no t-f or- pr ofi t org a- formance. Even the bestn i z a t i o n s is m e a s u r e d laid plans can succumbn o t o n l y in financial to u n f o r e s e e n m a r k e tterms but also by fulfillment of the mission of set- forces and implementat ion problems. When a keyvice to key stakeh older s. Patients, their families, initiative "heads south," CEOs often think theyt h e c o m m u n i t y , and espec ia l ly the p o o r are can fix the situation, so they sugarcoat less-thana m o n g a hospital's s takeholders . So are its physi- s te l lar resu l ts . Th ey wor ry tha t reve al ing toocians and the employees who serve the external much to the board could bea career-limiting act.cons t i tuen t s . O the r impor t an t cons t i tuen t s may Yet, full disclosure is exactly what effective CEOsinclude the bus ines s communi ty and local gov- do when they can c o u n t on a cons truct ive reae-ernment. No s tock price judges the org aniza - t ion from the board .tion's value to its s takeholders. In s tead, a not-t in- For example, one Catholic health system spentp r o f i t ' s w o r t h is a c o m p o s i t e of cl inical out- t e n s of mil l ions of dol l a r s acqui r in g phys ic i ancomes, customer satisfaction, and improved com- practices to implement m integrated delivery svsmunity heal th s ta tus as well as its financial and tern strategy, only to see losses reach the hun-operating performance. dreds of millions. Ultimately, the CEO was tired.

H o w e v e r , one trustee says the failure wasn't inTRADEMARKS OFEFFECTIVE NOT-FOR-PROFIT BOARDS the initial decision to acquire physician practicesT h e effective corporate board knows its role is to or even the high purchase prices it paid,add value. Similarly, theeffective board of a not- "Every expert in health care said at the t ime tof o r - p r o f i t C a t h o l i c h e a l t h c a r e o r g a n i z a t i o n buy doctors* practices," herecalls . That wasn't aunders t ands tha t its work should enhan ce both board or management failure. The lapse started athe miss ion and the margin. Effective not-for- year later when the board quietly accepted muchprofi t boards add value in at least four tangible hig her tha n ant icip ated first-year losses. If theways. board hadd o n e a post-project analysis, the sys-Better High-Level Decisions. Eff ectiv e b o ar d s are a t e rn could have t aken cor rec t ive ac t ion mu chf o r u m w h e r e c o m m i t t e d and kn ow led ge ab le sooner ra ther than three years la ter . It w o u n d upt rus t ee s ra i se ha rd que s t ion s abo ut p ro po sed wr i ting offmillions of dollars as it dismant led itss t r a t e g i c b u s i n e s s and f inanc ia l t r an sac t ion s . phys ic i an ne twork . By cont ras t , the b o a r d andSounder decisions result , not because trustees are management of a hospital system inwestern News m a r t e r t h a n m a n a g e m e n t , but because of the York acted quickly to renegot ia te contract termsd e l i b e r a t i v e p r o c e s s itself. C E O s who e x p e c t and i n s t i t u t e p r o d u c t i v i t y r e q u i r e m e n t s t h a tsha rp ques t ion ing by t rus tees savvy in business restored the practices' viability andkept the netand finance doa bet ter jobedu cating their board s work intact and growing .and prepa r ing proposa l s to pas s mus te r . When An effective board also impro ves perform ancesen ior management and the board have discus- by set t ing ambit ious but realistic goals and monis ions that resemble a gradua te s chool s eminar , toritig performance. Boards that l isten passivelythe give and take has a synergistic effect, produc- to management repor t s arc not doing the i r job.in g new insights and innovative ideas. Effective bo ard s qu est io n, learn , and cha l l enge

For example , the board of a Cathol ic heal th the organizat ion to continually excel,system on the East Coas t turned down the pro- Critical Connections. No t-f or -p ro fit bo ar ds addvalueposed acquisition o f ano ther faith-based system at by keeping theorganizat ion at tuned and respon-

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sive to the c h a n g i n g n e e d s ot its dive rse cons t i t uenc ies . Somet imes t rus t ees make t ang ib lec o n n e c t i o n s t h a t s u p p o r t management's w o r k .One hospi ta l was be ing cut out of an impor t an tH M O contract because of the prior CEO 's antagonism to managed care; the new CE O c o u l d n ' teven get his phone calls returned. A trustee whoknew the H M O 's executive in t e rvened and gotth e HMO to recons ider its exclusion.

More often, the effective board discusses howwell programs and priorities reflect the needs ofkey cons t i tuents through its work, from approvin g the strategic plan to monitoring program performance , for example, some boards expl ic i t lydiscuss how well the organizat ion is meet ing theneeds of the elderly, the terminally ill, or new ethnic groups I hat have moved into the communi ty .O the r boa rds examine the re la t ionship betweenthe hospital and its physicians or the hospital andthe bus iness community.Mission and Values Consciousness. Finally, th e effect iveboard of a Catholic health care facili ty ensuresthat the mission and values are expressed and ad-v a n c e d in all the o r g a n i z a t i o n ' s w o r k . S o m eb o a r d s h a v e a m e e t i n g e v a l u a t i o n f o r m fortrustees to rate how well the meet ing incorporat ed discussion of the mission and values . Othersengage in a discernment process when considerin g a major transaction or new program.

Still others have developed performance indicators for mission effectiveness, much like the financial and quality indicators used to measure thoseaspects. Catholic Health Initiatives is implementin g a comprehensive mission effectiveness assessmeni built around 78 indicators in 10 categories,including core values integration, ethics, diversity,h e a l t h c o m m u n i t i e s , and advocacy . Boards ofC H I ' s individual facilities review the assessmentand incorporate the findings into their work andthe go als they set for thei r organizat ion.E I G H T P R I N C I P L E S F O R B U I L D I N G A N E F FE C T I V E B O A R DW hy are some boards very effective, adding valuethrough the i r work , whereas o the r boa rds arepassive at besi and meddlesome at worst?

Virtual ly all t r u s t e e s of Cathol ic heal th careorganizat ions ate commi t t ed to the mission andwant to contr ibute cons truct ively, but they oftenhave varying expectations of their roles and thatof the board itself. Some have served on boardso f s m a ll o r g a n i z a t i o n s t h a t n e e d e d h a n d s - o ntrus tee involvement to survive, whereas others aredirectors of corporat ions whose boards work at ahigh level on s t ra tegic and pol icy issues . Sometrustees fully recognize their accountability to thesponsors and the c o m m u n i t y as a whole , but o t h ers mistakenly believe their job is to represent the

interests of a single constituency such as the medical staff, the b u s i n e s s c o m m u n i t y , or a s inglegeographic area .

Trus tees are not the only ones who have differing views of how the board ought to add value.S o m e C E O s w a nt the b o a r d to be a fullyinformed pa r tne r in m a k i n g key dec i s ions , butother execut ives see a more limited role, such asproviding advice ,\nd suppor t ing the organizat ionwith key cons t i tuencies . No team can operate atopt imal effectiveness unless each member knowshis or her job and all m e m b e r s s h a r e c o m m o nexpectat ions of how they should work together .To build shared expectations, boards can discussand adopt a written set of governance principlesthat define the r o l e s, s t r u c t u r e s , c o m p o s i t i o n ,. \UL\ processes that will allow the b o a r d to addvalue throu gh its work .

Last summer, lames Small wrote in this journala b o u t c o m m o n s h o r t c o m i n g s of b o a r d s andi n t roduced the concept of governance principles( " M a k i n g B o a r d s M o r e E f f e ct i v e ," HealthProgress, M a y - J u n e 2 0 0 0 , pp. 2 8 - 3 2 ) . G o v e r n a n c e p r i n c i p l e s a r e n ' t "one s i ze fits all ."Individual boards will benefit most from developin g a cus tom set of principles throu gh an enlighte n i n g and uni fy ing pa r t i c ipa t ive proces s . As aStarting point for discussion, following are eightgovernance pr inc ip les tha t are associated wi theffective board performance.Accountability The board unders tands that its dutyis to see t ha t the organiza t ion ac t s in the bestin t e res t s of the s p o n s o r s and the s t akeholde rsw h o m it serves, including patients and the c o m muni ty. Board members bring perspect ives andk n ow l e d g e f ro m o u t s i d e e n d e a v o r s , but t heydon' t represent s ingle cons t i tuencies . The boardacts with diligence and objectivity on behalf ofthe stakeholders as a w hole .Responsibility To govern (and not manage, which ist he C E O ' s j o b ) , the board focuses its work on sixmajor responsibilit ies:

Define the ends , po l i c i e s , and goa l s of theo r g a n i z a t i o n s , b e g i n n i n g w i t h the m i s s i o n ,vision, and strategic plan

Make and support decisions that advance theends

Select the CEO, establish goals and expectat ions for the CEO and organizat ion, evaluate hiso r her p e r f o r m a n c e , and es t ab l i sh appropr i a t ecompensa t ion

M o n i t o r o r g a n i z a t i o n a l p e r f o r m a n c e andexercise accountabi l i ty for results , especially inthe areas of mission effectiveness, financial Stewardship, s t ra tegic di rect ion, qual i ty of care , andcus tom er service Use influence with key internal and external

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consti tuencies to advance the mission M\O \ vision Take responsibility for the board's own effec

tivenessExemplary Conduct Trustees exhibi t trust and respectlow aid colleagues a n d m a n a g e m e n t , h o n o r t h ec o n f i d e n t i a l i t y o f s e n si ti ve i n f o r m a t i o n , .\ndscrupulous ly observe the conf l ic t o f interest p o l i cy .Mission-Driven B o a r d c o m p o s i t i o n , s t r u c t u r e , a n dwork are des igned to enhance the miss ion, v is ion,va lues , and s t ra teg i c d i rec t i on o f t he o rgan iza t i o n .Streamlined The board 's s ize and commit tee s t ructure are as lean as possible to faci l i tate communicat ion, par t ic ipat ive d iscuss ion, M U \ efficient decis i o n - m a k i n g .Competency Board members a re chosen to b r i ngspecif ic competencies and personal character ist icsthat w i l l enhance the miss ion, v is ion , and wor k ofthe board . Comp etenc ies are deve loped fu r the rth rough o r ien ta t i on and ongo ing educa t i on .Value-Added Work The board focuses i ts meet ingsand other work on act iv i t ies that add value for theo r g a n i z a t i o n , w i t h a n e m p h a s is o n h i g h - l e v e l ,strategic matters and cr i t ical issues affect ing thefuture of the min is t ry .Continuous Self-Renewal The board regular ly eva lua tes i t s pe r fo rm an ce an d uses the resu l t s toim pro ve . The boa rd a l so eva lua tes i t s pe r fo r mance as a who le as wel l as the pe r forma nce ofthe chai rperson and ind iv idual t rus tees.

Are p r incip les such as these real ly valuable orj u s t h i g h - m i n d e d c o n ce p t s ? T h a t d e p e n d s o nwhe ther a board jus t adopts the draf t pr inc ip lesw ith l i t t le change or uses the pr inc iples as a basisto engage in a sou l - sea rch ing d i scuss ion abou twhat effect ive governance real ly is. In such a discuss ion, a board mig ht exp lore:

"Wh at does accou ntabi l i ty rea lly mean? W hoa re th e s t a k e h o l d e r s ? A r e w e a c c o u n t a b l e t othem, the sponsors , or both?"

"Should governance p r i nc ip les make re fe r ence to requi red board overs ight funct ions suchas ap pr ov ing ma jo r f inancial t r ans ac t i on s anilmon i to r i ng f i nanc ia l pe r fo rmance?"

"Docs competency based com pos i t i on p r o vide for inc lus ion o f key const i tuenc ies?"

" W h a t s o rt o f b o a r d a nd c o m m i t t e e w o r kenhances the strategic direct ion?"

There are no r ight and wrong answers to suchques t i ons , bu t t h ro ug h d i scuss ion a board candec ide on p r i nc ip les approp r ia te to i t s m iss ionand v i s ion , o rgan iza t i on , boa rd cu l tu re , and theauthor i ty confer red by the sponsors .

Moreover , t he gove rnance p r i nc ip les allow aboard to adopt specif ic best pract ices designed toenable i t to add value. For example, the pr inciple

of competency suggests the need to develop wr i t t en compe tenc ies , i ns t i t u te success ion p lann ingfo r boa rd l eaders , and deve lop o r i e n ta t i on M M \educat ion programs to enhance competenc ies.IMPROVING PERFORMANCED o governa nce princip les and best pract ices reallyaf fect board pe r forman ce, or is the i r de velopm entjust m academic exercise, the fru i ts o f which arcquick ly forgot ten? The answer depends on whathappens after a boa rd develop s i ts pr inciples .

The f i rst step is to identi fy specif ic pol ic ies .\ndstructures and present pract ices that need to bechanged to meet the standards set by the pr inciples. Develop .m implementat ion p lan and chargea com mit t ee or task force wi t h respons ib i l i ty toove rsee i t . Pe rhaps mo s t imp or ta n t , regu la r l yevaluate the board 's per formance against the governance principles and develop strategies for c o n t i nuous improvement .

E f fec t ive board pe r fo rman ce i s a g o a l , no t adest inat ion. I t requi res regular a t tent ion and f ine-tun in g , wh ich shou ld be the work o f a standingg o v e r n a n c e c o m m i t t e e , s o m e t i m e s c a l l e d t h ecommittee on trustees. I t is responsible for boardo r ien ta t i o n , educa t i on , nom ina t i ons , assessment ,b y l a w s r e v i e w , ,\nd o t h e r g o v e r n a n c e - r e l a t e dw o r k .

The issues fac ing heal th care organizat ions inthe decade ahead, capture d we l l by T i m Porter-O'Grady last year in this journal ("Governance att h e C r o s s r o a d s , " Health Progress, N o v e m b e r -December 2000 , pp . 38-41 ) make effective governance a ma tter o f the highest pr io r i ty. Th e t ime-to ensu re tha t gove rnanc e is p repa red to addvalue is not w hen a cr i t ica l dec is ion lo om s, b utlong before, when there is t ime to recru i t , s t ructure, and educate a ta lented and com m it te d teamo f d i r e c t o r s .

N O T E S1 . Ram Charan, "Boards At Work," Jossey-Bass. Sa nFrancisco. 1 998. p. 28.2. Charan. p. 1 1 .3. Betsy McKay, Nikhil Deogun, Devon Spurgeon. andJonathan Eig, "Behind the Coke Board's Refusal to LetCEO Buy Quaker Oats." Trie Wall Street Journal(online), accessed November 30, 20 00 .4 . Greg Burns. "Crunch Time At Quaker Oats." Business

Week (online), accessed September 2 3. 1 996.5. Lawton R. Burns. John Cacciamani. James Clement,and Welman Aquino, "The F all of the House of AHERF:The Al legheny Bankruptcy. " Health Affairs,January/February 20 00. vol. 1 9. no. 1 , pp. 7-41.6. "Eckerd College Board Members Rush to RestoreSchool's Endowment," Board M ember. November/December 2 000 , vol. 9. no. 1 0. p. 2.

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