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Leadership Forum (December 2003)

Author: James A. Rice, Ph.D., FACHE President, International Health Summit, UK and USA Vice Chairman, The Governance Institute USA Director, Cambridge International Health Leadership Program, UK.

OECD Principles of Corporate Governance

Over the past decade, the world has witnessed a significant transformation in the role of the private sector in economic development and job creation. As more and more countries have adopted market-based approaches to economic policy, there has been an increasing awareness of the importance of private corporations for the welfare of individuals.

A good corporate governance regime is central to the efficient use of corporate capital. Good corporate governance also helps to ensure that corporations take into account the interests of a wide range of constituencies, as well as of the communities within which they operate, and that their boards are accountable to the company and the shareholders. This, in turn, helps to assure that corporations operate for the benefit of society as a whole. It helps to maintain the confidence of investors - both foreign and domestic - and to attract more long-term capital. OECD 2000, "Principles of Corporate Governance," Paris


The Fall 2003 web-based poll of over 300 health sector leaders from 59 countries suggests similar governance rigor is needed within the boards of both public and private hospitals. Continuous hospital performance improvement will require continuous hospital board/governance improvements.

There are approximately 200 countries in the world, and all are dissatisfied with the performance of their health sectors. All are concerned over their nation's capacity to afford the simultaneous achievement of four societal goals:

  • equitable access for all population groups to services that restore as well as enhance health;
  • effectiveness of services to enhance health and well-being;
  • efficiency in how scarce resources are expended to achieve desired health outcomes; and
  • choice by citizens of how best they want choose their health insurance plan, hospital and physician.

As leaders in public and private health sectors wrestle with how best to "optimize" the outputs and outcomes of health sector investments, a debate continues over the degree of funds that should be consumed by the acute care hospital sector vis a vis other institutions and public health protection/promotion investments. Various studies suggest 40-60% of societal funds for health sectors are consumed by hospitals. Who is expected to oversee these allocations to help assure the society receives good "value for money" invested? Increasing central ministries are concluding new, community based boards should assume this burden, especially if these boards possess certain attributes of objectivity, multi-sectoral experiences, and broad diversity of perspectives.

In most countries, a majority of the beds are operated by the public or governmental sector of society. This trend has been changing over the past decade. As nations evolve and their economies expand, there has been increasing market and public policy developments to enable and encourage private hospitals. With ageing societies there is a steady increase in demand for acute hospital capacity (both numbers and beds) in developing as well as developed countries.

A number of factors are now interacting to fuel interest in the development of effective hospital boards that can balance the interests of the public, the local economy, the physicians, and the economic vitality of the hospital.


Top 5 Forces Driving Interest in Board Work

Public Sector:

1. Decentralize responsibility from central Ministry of Health to local provinces and municipalities;

2. Establish QUANGOs or semiautonomous bodies for government budget load-shedding;

3. Liberalize civil service and public procurement constraints to efficiency;

4. Incent more cost-effective behavior by changing to activity or output-based (e.g. DRG) type payment systems;

5. Expand sophistication of leaders and their support infrastructure

Private Sector:

1. Explosion of outsourcing options for administrative and clinical departments;

2. Calls to earn physician loyalty;

3. Push for new medical and IT capital investments;

4. Demands for customer service enhancements from assertive middle and upper income markets;

5. Need for regulatory flexibility

All these factors have catalyzed global interest in "policies and practices" that enable, encourage and energize local hospital boards (mostly volunteers) to help manage the sensitive interface between national health priorities, unique local community health needs, availability of local economic realities, and operational performance challenges of local hospital managers.

This survey has generated new insights into an expanding reliance on local hospital boards to enhance hospital performance. Follow-up studies in selected countries are anticipated to be conducted with national hospital associations and ministries of health.


Governance Defined: Heritage and Heroes

Governance is a process of controlling the use of assets and resources to accomplish an explicit societal or organizational mission/purpose. Preker and Harding of The World Bank speak about the multiple levels of governance related to the world's health:

  • Supra: global or cross-national governance to address international pandemics;
  • Macro: multi-sectoral governance within a nation that addresses policy sets that control the behavior and use of resources in the broader economy;
  • Meso: societal governance where the ministry of health seeks to promulgate policies and allocate resources among providers, payers, and technology-pharma producers to not just restore health, but to protect and promote health; and
  • Micro: institutional governance which speaks about the control of a specific hospital or health insurance plan's resources for mission accomplishment.

This research study is focused on the micro or institutional level of governance for acute care hospitals across the globe. The Governance Institute for US not-for-profit hospitals defines hospital governance as that set of structures and processes that define (a) the strategic direction for the organization (mission, vision, values, goals), and then (b) the means by which resources (human, technological, political, capital and other financial) are assembled and allocated to achieve the strategic direction. In an increasing number of countries, the process of governing the affairs of the hospital is not just in the hands of government bureaucrats or hospital managers, but managers that are hired by, and work for, a board of directors or trustees. This group of medical, civic and community leaders have been empowered by the owners of the hospital (either a public body of the government or a private, non-governmental group of volunteers or a private, commercial group of shareholders) to "hold in trust" the hospital's assets for the optimal accomplishment of its mission and strategic goals. In some political economies like the U.S., Canada or Australia, these not-for-profit hospitals are proved special tax-exempt status as a means of governmental encouragement for cost effective service delivery.


Governance Levers for Transparency, Accountability and Performance Improvement:

Hospital board performance across the globe varies by country, and in public versus private hospitals. This section of the report scans the main roles and responsibilities for hospital boards, and then draws conclusions regarding the relative effectiveness of public versus private hospital boards. Selected country profiles are also identified.

The Survey's international panel of health sector leaders define the top 5 responsibilities for public and private hospital boards. (The full report cites top 12 factors). Particular importance is assigned to:

  • Strategic planning
  • Monitoring organizational performance
  • Clinical quality assurance
  • Patient safety
  • Annual budgeting
  • Board Performance Needs Improvement

While private hospital boards are judged to be more effective than public hospital boards 52.6% vs. 17.1% effective (at least 4 on 5 point scale), both types of boards will need to become smarter and faster in their governance decision-making to address the panel's top 12 board performance indicators. Hospital boards will be held to an increasingly higher standard of accountability and transparency. Growing global awareness of the need for hospitals to balance a historical focus on finances with the modern challenge of patient safety and good clinical quality outcomes is evident in this survey.


Factors Facilitating Hospital Governance

The survey participants prioritized 24 strategies to improve the effectiveness of hospital boards. There is a much closer consensus on what needs to be done to enhance board performance of public and private hospitals than was evidenced for the obstacles to great governance. The top 5 enhancement strategies are:

Study governance best practices46.345.3
Enhance quality of information for board work33.833.1
Improve recruitment processes33.122.6
Enhance board-physician interactions27.029.7
Improve initial board orientation23.620.3

The survey suggest that across the globe, all boards will need to invest more in their continuing education and in stronger physician-hospital relationships. Public hospital boards, relative to private boards, need to do a better job of recruiting board talent (10.5 difference); have smaller boards (difference of 5.1); train CEOs in board development (3.4%); and improve board performance evaluations (3.3%).


Managing the Governance Process: Developing Good Board Members

According to Ram Charon, author of Boards at Work, "the governance committee can handle the details of a peer review process, but the board as a whole must agree on the characteristics of a good director."

A good director should:

  • Clearly understand the obligations and responsibilities as a director\
  • Clearly understand the roles and responsibilities of the board
  • Know the difference between governance and management
  • Know the organization's mission, strategic plan, and current policies
  • Understand basic financial planning, management, and health economics
  • Know the organization's current financial position - Be up-to-date on healthcare issues and trends
  • Understand community demographics and needs
  • Accept that change is a constant companion
  • Dare to be great and innovate

Board members self-assessments should assess the degree to which these basic attributes occur in the board. The specifics of an ongoing (usually annual) board member performance assessment process should be carefully thought out and suited to each particular board. For example, one organization with staggered terms of membership uses the governance committee review process. They use their nine-member governance committee, along with general counsel and the CEO, to evaluate the three or four directors who are up each year for renomination. The evaluation consists of a discussion of how each person is doing against the following six criteria;

1. Contribution to the board

2. Interest in corporate matters

3. Level of knowledge of the corporation

4. Participation in committee activities

5. Attendance

6. Conflict of interest


Hospital and health system trustees face major governance challenges that continuously test their skills, creativity and leadership. Today's health care environment requires confident, highly skilled, forward-thinking strategic leaders who consistently exhibit the leadership qualities essential to governance and organizational success.

How can collaboration best enable the development of multimedia and web based tool kits for CGE? The survey respondents offer 10 key initiatives to accelerate our collective journey toward world class Governance effectiveness:

1. Publish a generic "Guide to Great Hospital Governance" that is available in both print and easy to customize electronic formats;

2. Develop website chat room for hospital board members around the world to access best practices;

3. Develop interactive CD-ROM that provides library of practical informational tools for board member orientation and education;

4. Provide web-based, board member self assessment survey tool for use in annual board evaluations; and

5. Provide easy to use and update, 3-ring binder with collection of sample hospital board policies;

6. Publish a quarterly, electronic newsletter on international insights into hospital board best practices;

7. Publish series of short 8 minute video tapes (in European and U.S. formats) that feature interviews with world class board leaders, advisors, and CEOs regarding governance trends, issues and best practices;

8. Convene regional seminars on board best practices;

9. Develop series of "Webinars" for web based seminars; and

10. Publish international directory of expert governance advisors and annotated bibliography of useful reference materials.

Dr. James A. Rice

For additional information on the results of this survey, please contact James Rice


Further Reading

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