Law & Governance
Narrowing the Gap between Not-for-Profit and Public Company Boards*
The Evolution of Hospital GovernanceThe expectations of governance in the Ontario hospital sector have changed profoundly since Medicare was established in 1970. In the first two decades of Medicare, boards functioned primarily as community fundraisers and advocates for government funding. Directors were selected for community stature, philanthropic contributions and connections with government and the business community. Directors saw their primary responsibility as "lending their name" and providing financial support. Hospital administrators, as they were then called, dominated hospital strategy, with the boards taking little interest in the business, strategic direction or decision-making of the organization.
In 1992, the Ontario Minister of Health commissioned a review of the Public Hospitals Act, which was first proclaimed in 1931, to address the "vastly changed nature of health care and of the hospital, the increasing complexity of hospital management and operations and the movement toward a more accountable and better managed provincial health care system". The review called for "all hospital boards and other stakeholders [to] have a common understanding of what is meant by hospital governance and of the distinction between governance and management … and for a clear definition of hospital accountability to its patients, the public and the government"2. Regrettably, the recommendations of the Public Hospitals Act Review were, for the most part, not implemented. At the same time, the concept of "governance" as a learned art or skill began to develop broad currency in the hospital and broader not-for-profit sector, through the work of such governance theorists as John Carver3.
In the private sector, there was a similar awakening to the concept of "governance" as a defined function of the board of directors requiring the fulfillment of specific roles and responsibilities and associated skills and competencies. The 1994 Toronto Stock Exchange Report, Where Were the Directors?4, was the seminal work which triggered the first among a series of corporate governance guidelines issued by regulatory bodies and corporate governance watch-dogs over the past decade. These corporate governance guidelines led to a renewed focus on governance in the not-for-profit sector including the Broadbent Report on Voluntary Sector Governance and Accountability in 19995 and the Reaching For Excellence Report on Governance and Performance Reporting at the Princess Margaret Hospital Foundation in 20016.
A catalyst for governance renewal in the Ontario hospital sector was the amalgamation directions issued to many hospitals across the province from 1996 to 2000. The new boards of the amalgamated hospitals quickly learned that they had to focus on reform of their governance structures and processes and to develop new governance policy frameworks in order to effectively govern these complex, newly merged multi-site organizations.
While most amalgamated hospitals engaged in governance renewal in the late 1990s, the majority of other hospitals had not updated their governance policies or practices. Consequently, the Ontario hospital sector has experienced significant governance challenges over the past decade. This is a consequence of an outdated Public Hospitals Act, no shared understanding between government and providers of what constitutes effective governance and accountability, and significant financial challenges in the face of increasing public expectations and demands for service.
Between 1997 and 2004, these pressures led to 22 operational reviews ordered by government, the appointment of several hospital supervisors, formal governance reviews in a number of hospitals, a " third-party review" of hospital governance and operations in 2003, and the creation of a Joint Task Force between the Ministry of Health and Long Term Care (MOHLTC) and the Ontario Hospital Association (OHA) to develop a hospital accountability framework. Significant weaknesses in hospital governance and accountability were exposed by these reviews.
On a more positive note, they have precipitated an increased focus on governance best practices in the Ontario hospital sector.
In 2004, the OHA identified governance renewal as one of its strategic priorities and jointly commissioned with the MOHLTC a report on hospital governance and accountability.7 In late 2004, the OHA established the Governance Leadership Council, a "blue-ribbon panel" of predominantly private sector leaders in corporate governance, to advise on the application of governance best practices to the hospital sector. Under the auspices of the Governance Leadership Council, the OHA released its Guide to Good Governance in October 20058, which provides sample tools and templates to be utilized by hospital boards in reviewing their governance policies and practices. Not surprisingly, in the wake of these initiatives, governance reviews and renewal processes have recently been completed, or are currently underway, in numerous Ontario hospitals.
Governance renewal in the hospital sector is also being significantly influenced by the increased governance regulation in the private sector, both in Canada and internationally, arising from numerous recent corporate scandals. For example, the impact of the Sarbanes-Oxley legislation in the US is being felt in the Ontario hospital sector, through much greater focus on the creation of an audit committee of only elected directors, enterprise risk management and mechanisms for enhanced performance monitoring. The corporate governance guidelines of the TSX, the Ontario Securities Commission and the Canadian Coalition for Good Governance, while focused on private sector companies, are becoming a benchmark for assessing governance best practice in the hospital sector. Another interesting indicator of the increasing focus on governance best practice in the hospital sector is that several hospital directors and CEOs have recently enrolled in the ICD Directors Education Program.
The New Realities for Hospital BoardsThe bar has been raised even higher for governance in the hospital sector in Ontario as a result of two recent pieces of legislation which have profoundly altered the accountability requirements in both the hospital and the broader health sector. Bill 8, Commitment to the Future of Medicare Act9 and Bill 36, The Local Health System Integration Act10, have imposed unprecedented new accountability obligations on the boards of directors of Ontario's hospitals and other health service providers. Specifically, the board is now required by law to enter into a signed accountability agreement with the MOHLTC, and to establish with the CEO a performance agreement that is aligned with the accountability agreement. There are legislated penalties, which become applicable in 2007, for non-compliance including fines imposed on the CEO. While the impact of this legislation is only beginning to be felt, it has already triggered much greater attention to rigorous performance measures and regular performance monitoring by the board against the accountability agreement. The legislation has also created some concern about board and individual director liability in the event of non-compliance.
Increased attention to performance monitoring at the governance level has also been accelerated by the Annual OHA Hospital Report, which compares clinical performance across hospitals. Further, Federal, Provincial and Territorial Accords have established reporting requirements at the provincial level in return for the allocation of federal funding of certain health services. In Ontario, for example, individual hospitals must now report publicly on wait times for designated procedures, resulting in the ability to compare performance across hospitals. Boards of directors are not only being held accountable for this performance but are giving much greater attention to enterprise risk management, including reputational risk arising from sub-optimal performance.
Another interesting development, a direct application of recent corporate governance guidelines, is the introduction of the informal session of elected (independent) directors at the conclusion of every board meeting, in the absence of the CEO and physician board members. This practice has been introduced in numerous hospitals within the past year to facilitate a candid reflection among the elected directors on the quality of information received from the CEO to inform board decisions and the quality of decision-making by the board. This practice is not, however, without its challenges. First, there is some inconsistency in differentiation of subject-matter between the in-camera session of formal board meetings and the informal session following board meetings. Secondly, in the hospital context, the "related directors", who are therefore excluded from this session include the medical staff representatives, who are on the board by law and do not necessarily believe that they should be excluded. Finally, Bill 123, Transparency in Public Matters Act11, will, if approved, make it illegal to hold any board meetings of public sector corporations in camera, except to discuss a limited number of matters prescribed in the legislation.
In conclusion, Ontario hospitals have, like public companies, been significantly challenged by fundamental changes in the expectations of governance. Not surprisingly, as in the private sector, while there are strong signs of significant improvement in governance, there is a substantial cultural hurdle that many boards and indeed CEOs are struggling with as they address the new expectations.
About the Author(s)
Maureen A. Quigley, Health Strategies Facilitator and Advisor, Maureen Quigley and Associates Inc. and Graham W.S. Scott C.M.Q.C., Senior Partner, McMillan Binch Mendelsohn LLP.
Acknowledgment* Reprinted with permission from the April 2006 edition of the Director newsletter, published by the Institute of Corporate Directors (www.icd.ca).
1 Douglas, Lynn. "What if not-for-profit boards challenged themselves to meet the standards of for-profit boards?" Director Issue 122, October 2005.
2 Into the 21st Century: Ontario Public Hospitals, Report of the Steering Committee, Public Hospitals Act Review, February 1992 ES 1-3.
3 Carver, John. Boards That Make a Difference: A New Design for Leadership in Nonprofit and Public Organizations, 1990.
4 The Toronto Stock Exchange, Where were the Directors? Guidelines for Improved Corporate Governance in Canada, December 1994.
5 Broadbent Panel on Accountability and Governance in the Voluntary Sector, Building on Strength, Improving Governance and Accountability in Canada's Voluntary Sector, February 1999.
6 Princess Margaret Hospital Foundation and the Canadian Comprehensive Auditing Foundation, Reaching For Excellence: Governance and Performance Reporting at the Princess Margaret Hospital Foundation, 2001.
7 Quigley, Maureen A. and Scott, Graham W.S. Hospital Governance and Accountability in Ontario, A Report for the Ontario Hospital Association, April 2004.
8 Governance Centre of Excellence, Ontario Hospital Association, Guide to Good Governance, November 2005.
9 The Commitment to the Future of Medicare Act, 2004.
10 Bill 36, The Local Health System Integration Act, 2005.
11 Bill 123, Transparency in Public Matters Act, 2004.
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