Barry S. Bader, president of Bader & Associates, Potomac, Maryland, is a nationally known governance consultant, speaker and retreat facilitator specializing in not-for-profit hospitals and health systems. He is one of a select group of The Governance Institute’s “Governance Advisors.” He is also the publisher of the Great Boards newsletter and website. Find out more about Bader & Associates and its consulting services on the Great Boards website.
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We’re working on three stories for the spring issue of the Great Boards newsletter. Here’s a preview:
The Board’s Role in Compensation Oversight for Employed Physicians
In August, 2009, Covenant Medical Center of Waterloo, Iowa, agreed to pay $4.5 million to settle allegations of healthcare fraud arising from its financial relationships with five employed physicians. The Covenant case has drawn increasing attention to how hospitals should determine appropriate compensation for employed physicians, and how hospital boards should oversee physician compensation. We consulted an expert, Dan Grauman, president & CEO of DGA Partners of Philadelphia. DGA’s consultants help healthcare organizations and their legal counsel to document and determine fair market value of physician compensation, and to structure equitable compensation for employed physicians.
“Boards should consider forming Physician Compensation Committees,” says Grauman. “They need to develop a physician compensation policy, including specific guidelines on the process of determining appropriate compensation for each and every physician. The committee should also set policies pertaining to the actual physician compensation models, in terms of mechanisms used to compute compensation. Once the board committee has developed guidelines and standards, they should be reviewed annually for consistency with fair market value. If certain physicians appear to be paid more than fair market value, the committee should ask whether there are reasons that explain these anomalies, or else require plans to correct the situation.”
Applying Sarbanes Oxley to the Board’s Quality Oversight Role
Could applying key elements of Sarbanes-Oxley to hospital boards’ responsibility for oversight of clinical quality improve the board’s effectiveness? The idea has merit, argues David B. Nash, MD, MD, Dean, Jefferson School of Population Health and an expert on quality who has chaired a large health system’s board quality committee.
In this commentary, Barry Bader draws on Nash’s suggestion and offers eight SOX-styled practices that could enhance board oversight of quality. Food for thought.
Focusing Boards on the Right Quality Measures
Hospital and health system boards are being overwhelmed by a multitude of quality indicators. Some liken the situation to the biblical Tower of Babel.
Great Boards editor Elaine Zablocki is interviewing leaders about how they are rethinking the most important quality measures for boards to review. Among the major themes she’s hearing are these:
In addition, boards are asking for quality measures to be displayed in more powerful dashboard formats that combine increased information with a simpler graphic format. “We married the quality report with the financial report,” George Kerwin, president and CEO of Bellin Health Systems, Green Bay, Wisconsin, tells us. “We decided that every time we make a financial report, we will also make a quality report, one that gives substance to the scorecard. We’re not just going to toss out a bunch of weird numbers that people don’t understand. When you discuss a financial report, you talk about certain aspects that require explanation; we do exactly the same thing with the quality report.”
Coming soon
The spring issue of Great Boards is due for publication in March.
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The question, “Who is an independent director?” has received renewed interest because of recent revisions to the IRS Form 990. The IRS requires filing organizations to determine and state on the new Form 990 how many of their board members are “independent.”
This Governance Advisors column, reprinted on the Great Boards website (look under “Effective Governance Practices”) with the permission of The Governance Institute, explains the new IRS definition, argues that hospitals should adopt stronger standards for their audit and compensation committees, and discusses whether physicians on the medical staff may be classified as “independent” when they serve on the board.
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The winter issue of the Great Boards newsletter is available now at GreatBoards.org. The issue features two articles:
APP is a success story. It has contracts with 10 health plans and paid out more than $28 million in incentives last year to physicians who achieved quality goals in more than 30 improvement initiatives.
THP recently received a favorable ruling from the Federal Trade Commission as it launches a similar effort to unite the local hospital, employed physicians and independent docs in a clinical integration program. THP hopes to sign contracts with local health plans that will reward providers for providing better care.
With payment reforms from Congress on the horizon, PHOs are coming back from the dead as a mechanism to align hospitals and physicians into accountable care organizations.
What is a board portal? It’s a Web-based, online workspace devoted exclusively to the board. It offers directors confidential access to board materials, past and present, and provides tools that make it easier to prepare for board meetings. In this article and an accompanying Buyers Guide (under “Current Issue”), my colleague and governance consultant Linda Battaglini talks to users, describes the 10 essential features of board portals, and compares four commercially available products. Don’t buy or build a board portal unless you read this!
Read and download the winter issue now.
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A study just published in Health Affairs on Hospital Governance And The Quality Of Care, by Harvard faculty Ashish K. Jha and Arnold M. Epstein asserts that “fewer than half of (responding not-for-profit hospital) boards rated quality of care as one of their two top priorities, and only a minority reported receiving training in quality.”
The study has a lot of important and legitimate findings. For example, it found a positive correlation between high-performing hospitals and many practices for board oversight of quality. For example, boards of high-performing hospitals (measured by quality objective indicators) are more likely to:
Unfortunately, the headlines are that just 44% of boards rank quality as one of their “top two priorities,” and that just 32% boards has received training in quality. These findings are misleading.
First off, concluding quality isn’t a board priority because it isn’t in the top two is an arbitrary judgment. It’s probably a reflection of the financial pressures hospitals currently face.
Second, more boards do need training in clinical quality to understand how to interpret quality reports and how to engage with clinical leaders to set quality goals and exercise accountability. However, I think the survey understates the degree of education on quality boards have received. Many hospital boards have had some exposure to quality education at either conferences or as an integral part of board or committee work but didn’t consider these to be “training in clinical quality” on the survey.
Health Affairs is widely read by policy makers, and the authors “suggest that governing boards may be an important target for intervention for policymakers hoping to improve care in U.S. hospitals.”
That is a patently bad idea even though it would generate business for consultants like me and organizations like The Governance Institute and the Institute for Healthcare Improvement, which already deliver education for boards on quality. Boards are organized in various ways, and some rely heavily on committees for oversight. Many conduct education as an integral part of their board and committee work. Requiring that every board member go to conferences to be trained and credentialed in clinical quality would be a waste of resources.
So, do look at this study for guidance on practices to enhance your board’s quality oversight work — but educate any press or policy makers who ask that some sort of mandatory board education is not what we need.
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(This post is edited from my commentary on board culture in Governance Structure and Practices, The Governance Institute’s 2009 Biennial Survey of Hospitals and Healthcare Systems, just published this month.)
Perhaps the most critical aspect of governance is also the most elusive to define, measure, and create. It is culture, variously defined as “the way we do things around here” or “the way people behave when no one is looking.” Organizational culture is a mix of an organization’s formal rules and rituals, its espoused values (behaviors it professes), and its values in practice (behaviors it demonstrates and rewards).
Like their organizations, governing boards have a culture too. The pivotal importance of culture in distinguishing the effective from the ineffectual board has been apparent at least since the downfall of the Enron Corporation. Observers attributed Enron’s collapse in part to a passive, management-driven board of directors. Despite talented members and a well-defined structure, directors failed to ask hard questions or display the independence needed to detect egregious accounting irregularities and unethical conduct by senior executives.
“What distinguishes exemplary boards is that they are robust, effective social systems,” wrote professor Jeffrey A. Sonnenfeld in Harvard Business Review. He describes the culture of great boards as “strong, high-functioning work groups whose members trust and challenge one another and engage directly with senior managers on critical issues facing corporations.”
Lawrence D. Prybil, a University of Iowa professor and healthcare governance expert, compared governance structures, practices, and aspects of culture in high- and low-performing health systems. Prybil found that boards in high-performing systems exhibit “three dimensions of board culture” and nine specific behaviors under these dimensions:
Robust engagement
• Board meetings are characterized by high enthusiasm.
• Constructive deliberation is encouraged at board meetings.
• Respectful disagreement and dissent are welcome at board meetings.
• The board consistently is actively engaged in discourse and decision-making processes. Most board members are willing to express their views and constructively challenge each other in the management team.
Mutual trust and willingness to take action
• The board’s actions demonstrate commitment to our organization’s mission.
• The board tracks our organization’s performance (financial and clinical) and actions are taken when performance does not meet our targets.
• There is an atmosphere of mutual trust among the board members.
Commitment to high standards
• The board systematically defines its needs for expertise and recruits new members to meet these needs.
• Board leadership holds board members to high standards of performance.
Evaluating Your Board’s Culture: Taking a New Trustee’s Perspective
Board culture is inherently difficult to evaluate. Current members and management are likely to have a positive bias about the culture they have created.
A more objective approach is to assume the perspective of a new trustee. How would a newly minted board member describe his or her first impressions of the board? A new board member is likely to have a number of questions in mind as they begin their board service:
• What is my role?
• Who is really in charge here? Does management drive this board, or does the board dominate management—or is there a healthy balance in place, with respect for mutual roles and responsibilities?
• Do the leaders truly want my advice and opinions, or do they prefer that I “go with the flow?’” If I offer dissenting views, will I be thanked — or punished?
• If my input is genuinely desired, what’s the best way to make my voice heard in order to influence policies and decisions? In other words, how does the board’s decision-making process really work?
• What are the real values of the board, and are the same values reflected in the organization’s behavior? Are mission and quality just nice words or real drivers of organizational behavior?
To see how your new trustee might answer these questions, consider the following “first impressions:”
• New trustee orientation: Is the new trustee required to participate in orientation? Does the orientation process have the attention of top management and board leadership? Is the program well designed, and is it made clear that board members are expected to be actively engaged in candid questioning and discussion?
• First meetings: What messages are sent at the new director’s first committee and board meetings? Do the chairs welcome discussion or frown on comments that slow things down? Who delivers reports: committee chairs (implying board leadership is engaged) or senior management responsible for reporting to the board in various areas of oversight? How much time does the agenda allocate for open discussion as opposed to listening to and approving reports and recommendations?
• Attendance: What messages are sent about attendance expectations? Are meetings fully attended or are a lot of empty chairs scattered around the table? Do some members come late and leave early? Are interruptions from pagers and Blackberry-type devices common or rare?
• Access to board chair and CEO: What impressions does the new director get of what his or her relationship with the board chair and CEO will be? Do these individuals have a one-on-one meeting with all new directors to hear first-hand their interests and aspirations for board service? Are the leaders open to further dialogue?
• Team environment: What impressions does the director get about the board’s interest in developing trust and teamwork? Is a picture book of directors and senior management given to board members? Do other directors and senior management introduce themselves?
• Information packet: What impressions does the new director draw from the information packet provided to the board and board committees? Does the information facilitate easy review of the issues and trends critical to governance responsibility? Conversely, is the board packet a thick and incomprehensible stack of papers, or alternatively, a collection of summaries so general and rosy that directors cannot exercise reasonable oversight?
• Education: Does the board have an active continuing education program tailored to the board’s most important responsibilities? Is there an annual retreat at which directors are actively engaged? Are directors encouraged to gain first-hand information about the organization through directors’ rounds, patient safety rounds, and similar activities?
• Board self-assessment: What impressions does the new director draw from his or her first board self-assessment process? Does the process appear routine or thorough?
Assessing and improving a board’s culture is not nearly as straightforward as making changes to board size, committee structure, written policies, or meeting frequency, but without a commitment to the development of an active and responsible governance culture, changes in the rules and rituals of governance are likely to have a minimal effect on board performance.
On the other hand, talking about the kind of culture the board wants to create and then designing structures, policies, and practices that will facilitate development of that culture can be a much more effective way for a board to continually improve itself.
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Last week, I attended a symposium on clinical integration sponsored by Advocate Physician Partners of Chicago. APP is arguably the country’s most successful physician-hospital organization (PHO) at linking hospitals and physicians to contract collectively with health plans, improve clinical outcomes, reduce costs, and share savings with physicians.
In the winter issue of Great Boards, I’ll examine whether clinically integrated PHOs are a viable mechanism to align the financial incentives for hospitals and physicians to manage costs and improve quality. So I came to learn more about APP’s success story, and whether other system’s boards and leadership should pursue this alignment strategy.
And a success it is.
Out of the 5,200 medical staff members practicing in Advocate’s hospitals, APP includes 900 primary care physicians and 2,500 specialists, as well as eight acute care general and two childrens hospitals. APP has signed contracts with 10 health plans for 280,000 capitated lives and 700,000 PPO lives. APP has clearance from the Federal Trade Commission to negotiate contracts for all its members because of its clinical integration program, in which providers agree to follow best practice guidelines designed to improve quality at lower cost.
In 2009, the clinical integration program is engaging physicians in 37 initiatives designed to meet or exceed goals for 107 measures for clinical outcomes, efficiency, medical and technological infrastructure, patient safety and patient satisfaction. For example, the diabetes care initiative focuses physicians on eight measures of how well diabetes patients are managed outside the hospital, to prevent costly hospitalizations, premature deaths, and diabetic complications such as blindness and kidney failure, In 2009, the program preserved an estimated 9,000 years of eyesight and 6,800 years free of kidney disease, and extended lives an estimated 5,700 years.
APP also boasts success with clinical integration programs designed to achieve smoking cessation, screen for and treat depression, improve asthma outcomes, administer childhood immunizations, prescribe generic drugs, and use appropriate drugs to treat coronary artery disease and heart failure. For the details, see a copy of APP’s 2009 Value Report.
As a result, APP’s physicians received more than $28 million in clinical integration incentive payments in 2008. The average payout was about $10,000 per physician, but some high-performing, busy clinicians earned in the neighborhood of $20,000 in incentives.
Some 800 of APP’s physicians are employed by Advocate, but the rest are private practitioners, and about 1800 medical staff members are not part of the PHO, so APP is a good model to examine whether hospital-employed physicians and independent practitioners can collaborate to achieve common quality and economic goals.
Here are a few of my takeaways from the symposium:
• What’s in this for physicians? If a PHO has a genuine clinical integration program, “physicians can align with each other and hospitals to distinguish themselves in the market on the basis of quality; justify higher reimbursement; and conduct collective negotiations with health plans,” said Thomas Babbo, a partner with Hogan Marren, Ltd. and the legal architect of the clinical integration program. “This is about quality and about getting better reimbursement from payers precisely because of this ability to drive better quality. This is value-based, collective bargaining for physicians. It’s not something to apologize for,” so long as it’s genuinely intended to improve quality.
• Should you ask the FTC’s permission? Although the Federal Trade Commission has issued a number of advisory opinions describing the characteristics of a clinical integration program that would justify collective contract negotiation by physicians, Babbo generally advises clients to actively engage the FTC up-front regarding what they’re doing, but not to go through this formal process The process is lengthy, the PHO must delay clinical integration while it’s waiting for the opinion, and there’s a risk the FTC will find some aspect of the program to fault. Instead, he recommends following the existing guidelines laid out by the FTC and U.S. Department of Justice since 1996, and in earlier opinions for other PHOs, such as the Greater Rochester IPA and Tri-State Health Partners.
• Since Advocate has a successful medical group of employed physicians, why does it need a PHO? The PHO recognizes that “9 out of 10 Americans get their medical care from a solo or small group practice,” explains Lee B. Sacks, M.D., president of APP. Among APP’s approximately 600 primary care physicians in private practice (not employed by Advocate), 300 (50%) are in solo practice, almost 200 are in two or three person practices, and less than 250 are in practices of 20 or fewer physicians. These physicians are not interested in larger groups or hospital employment. “APP is a bridge between Advocate’s employed and independent physicians.”
• Will payers play? “You have to have payers in the market who are willing to pay you” an incentive for quality, says Sacks. Since the PHO seeks higher fees from health plans, it has to demonstrate its value proposition, i.e., better outcomes and more efficient healthcare at a lower overall price. Even then, health plans will be reluctant to pay higher fee schedules on the promise of lower overall costs. Babbo recommends going to local employers and making the case for the value proposition of clinical integration directly to them, such as smoking cessation programs that decrease absenteeism and lower healthcare costs. The employers can then become an ally of the PHO when seeking contracts with health plans. Sacks, adds, “Health systems are usually among the largest local employers, so working with the benefits team of the partnered system is an opportunity to demonstrate value to other employers.” In our winter issue, I’ll describe APP in further detail, including its membership criteria, infrastructure, financial incentives, and governance structure, which is physician driven and physician led. I’ll also describe the startup efforts by Tri-State Health Partners in Hagerstown, Maryland, the most recent PHO to get a favorable advisory opinion from the Federal Trade Commission.
Clinically integrated PHOs are one of a number of possible mechanisms for hospital physician alignment and integration. You can read about others, including case studies, on the Great Boards website.
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Has your board’s periodic self-evaluation process become a mundane exercise that generates little interest or results? If so, the board could be in a self-evaluation rut. Typical indicators include:
1. A nationally recognized self evaluation survey yields high scores every year.
2. The board spends hardly any time discussing survey results.
3. Some of the survey questions don’t apply or seem marginally important.
4. The board stopped doing regular self assessments because they weren’t productive.
Regular board self-assessment is like a regular physical exam by a physician. The test results might be fine, but missing scheduled check-ups could result in delayed detection of serious illness. A good physician doesn’t just check vital signs and lab values – she asks the all important questions: “Is anything bothering you? Has anything changed since the last time I saw you? Would you like to talk about ways to be even healthier?”
A good board self assessment process works the same way. A board needs an opportunity, every year or two, to step back and reflect on its work, makeup, structures and practices. I have rarely seen a board didn’t come away from a well-designed self-evaluation process with a number of ideas to improve itself. Great governance is a continuous journey, not a destination.
Here are six alternatives to “self evaluation as usual.” Some work better with a governance facilitator and some don’t, and all can enable a board to break free of the self evaluation rut.
1. Change the questions. National best practice questionnaires (I use the The Governance Institute’s very good survey most often) are invaluable, especially if scores are so-so, but what is the board learning if all the scores are high every year? Instead, in some years, why not develop a customized set of several open-ended questions about various elements of governance, such as “Is the board’s role clear?”, “Are we spending enough meeting time on forwarding looking, critical issues?”, and “What critical competencies will our board need in the future?” Compile the results into a discussion document for a self evaluation retreat or discussion. Challenge the board’s thinking in advance with articles on leading edge governance practices.
2. Establish the board’s work priorities and education agenda for the coming year. Most CEOs do a good job keeping their boards educated and informed. They’ll hit the mark even better if the board has the opportunity annually to discuss the major issues on which it wants to focus time for discussion and education. This discussion can often be coupled with discussion of either standardized questionnaire results or a customized survey.
3. Rigorously evaluate your committees. If your board relies on an active, working committee structure, ask each committee to conduct a rigorous self assessment and summarize the results for discussion at a self evaluation retreat or special session. Don’t re-invent the wheel- we published sample committee self assessment questions in the Summer 2008 issue of Great Boards.
4. Pick a focus. Who says self assessment must cover the waterfront every time? Why not pick just one or two big topics or questions to discuss, such as:
• How can we develop of culture of commitment and active engagement?
• How should the board carry out its responsibilities for quality oversight?
• As our organization and the environment change, what are the competencies we should seek in our “board of the future”?
• Should we evaluate individual trustees, and if so, how we can do it in a helpful, non threatening manner?
• What will the Form 990 mean for the way the board approaches its definition of independence, conflict of interest policy, and oversight of executive compensation, community benefit, corporate compliance, and financial integrity?
5. Ask a governance expert to “kick the tires.” Great leaders regularly invite outside experts to take an objective look their organizations, compare what they see to effective practices elsewhere, provide education and facilitate a discussion of opportunities for improvement. Hospitals often call in experts in such areas as revenue cycle improvement, physician practice management, clinical product lines and long-term strategic planning. A governance expert can do the same for the board.
6. Engage in a comprehensive governance assessment and redesign process. A comprehensive assessment usually involves not just kicking the tires but examining all aspects of a governance structure that has multiple, overlapping or large boards, redundant committees and meetings, and little turnover. Boards often want a top-to-bottom assessment a year or so after a major organizational change as a merger or major acquisition. Bringing on a new CEO is an ideal for either a “kick the tires” or comprehensive assessment.
Board self assessment can be a re-energizing and productive process. If it isn’t, don’t abandon the practice – improve it!
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The fall issue of Great Boards includes articles on public transparency and problem prevention techniques.
First, we look at how charitable organizations are responding to outside pressures for greater transparency by providing more and more information to the public on their executive pay, community benefits, quality, prices and governance practices. More important we asked hospitals and health system leaders if all the exposure made any difference? Surprisingly, it does. We heard stories of better media relations, increased trust from business and government leaders, and increased public use of hospital websites. As Joel Wernick, President and CEO of Phoebe Putney Health System in Albany, Georgia, said: “You can put a lot of criticism to rest pretty darn quickly if you just make information easily available.”
Next, I interview Michael A. Roberto, author of a fascinating and practical new book called, “Know What You Don’t Know: How Great Leaders Prevent Problems Before They Happen.” Roberto applies his seven techniques to governance and suggests some ways boards can work creatively and proactively to support management.
Read both stories on the Great Boards website at http://www.greatboards.org/.
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The Governance Institute is launching a new webinar series. I will be presenting at the first one, along with John Harris, a principal at DGA Partners in Philadelphia, on “Physician–Hospital Alignment: Successful Strategies and Board Leadership.” The webinar will be held Monday, October 12, at 2 p.m. Eastern time. For further information go to, GovernanceInstitute.com/webinars.
Here’s brief overview:
Webinar title: “Physician–Hospital Alignment: Successful Strategies and Board Leadership”
Monday, October 12, from 2 pm – 3 pm eastern time
Program Overview: Aligning with physicians is now a top priority for hospitals. Rapid strategic change is being driven by dynamic shifts in financial incentives, the competitive marketplace, quality measurements, proposed health reforms in Washington, physicians’ lifestyle concerns, and a changing social compact between hospitals and physicians.
Many hospitals see that their relationships with physicians have reached a tipping point. As a result, new models — clinically integrated PHOs, hospital-affiliated medical groups, and so on — are emerging to successfully align interests. Hospital boards and senior management must have a solid understanding of the challenges and opportunities presented by this evolving strategic issue.
Webinar objectives: This Webinar will:
* Explore the dynamics that make physician–hospital alignment imperative
* Identify the most successful models for physician–hospital alignment—and ways to assess which model(s) is/are most likely to win your physicians’ support and succeed
* Explain the board’s role in development of an alignment strategy, including 12 questions boards should ask about their hospital’s physician alignment strategy
* Describe practical approaches for building communications, trust, and engagement in leadership with and by aligned physicians
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Executives face the challenge of determining how soon and how much to engage the board in discussions before a final deal is consummated and ready for formal approval.
It’s tempting to keep information about a potential merger or strategic alliance in a small, management-driven circle, but surprising the whole board with a done deal is a never a good idea. Pre-cooked mergers and alliances that trample on some stakeholders’ turf can trigger a backlash from powerful directors, physicians and other stakeholders – and could scuttle a sensible strategic partnership. It also deprives the executive team of the insights and M&A experience that directors may have.
Conversely, fishbowl negotiations are a prescription for disaster. Getting a lot of directors enmeshed in the details of deal making or letting news leak out prematurely to stakeholders, especially medical staffs, also will kill a deal and embarrass the other partner.
The answer is finding the right balance, consistent with a board’s unique culture — some boards are accustomed to having a lot of involvement, while others vest great discretion in their CEOs and board leaders. The CEO and board leaders should clearly think through the right process for engagement of directors so the final decision has broad stakeholder support and benefits from the insights and experience of directors.
Whether an organization is joining a larger system, engaging in a merger or alliance of equals, or adding a new member to its existing system, the board’s involvement in the negotiation process usually involves these steps:
1. Get general consent from the full board to look at strategic alliances. This is best done as part of the ongoing strategic planning process. Directors may ask, “Why do we need to engage in a merger or alliance – can’t we do well just as we are?” A five-year, strategic financial projection can help answer that question. The full board should buy into the rationale for why the organization needs to grow and what it hopes to achieve through a merger or strategic alliance – e.g., access to capital, critical economic mass, market strength, improved quality. The strategic planning process may involve directors in broadly analyzing a number of potential strategic partners to determine who would be the ideal fit. The amount of detail the full board gets into at this early, pre-negotiation stage, will vary and requires careful judgment by the CEO and board leaders.
2. Choose a small group of the board’s leaders to be more closely informed about merger and alliance discussions. This could the board’s executive committee, strategic planning, or an “ad hoc strategic partnerships task force.” The group should draw from the board’s most influential leaders, including the chair and the board’s best strategic thinkers in terms of mission, strategy, business, finance, culture, and quality. Although merger and alliance talks occur mostly between the parties’ CEOs and senior executives, this committee or task force is the CEO’s “Governance A-team” for the board’s engagement in merger and alliance discussions.
3. Form a steering committee of leaders from both or all parties. The steering committee will include some of each board’s “A-teams.” The steering team should be small, probably 3-4 directors from each party plus the CEOs. Each member must sign a confidentiality agreement. It’s this group that addresses the key questions common to all partnership discussions, such as who will be the CEO and who’s on the board. It will identify and then answer questions specific to each deal, such as, will all parties be part of an obligated financial group, what will happen to existing foundation assets, and will a specific amount of capital be invested in particular facilities? Mergers with Catholic organizations must address the impact of the Ethical and Religious Directives of the Catholic Church and the values of religious sponsors.
4. Prepare the committee to address the key questions. The steering committee should be briefed on the range of structural options for joining organizations, and the pro’s and con’s of each option. It should also examine the case for a merger or alliance, including a strategic and financial analysis projecting what a combined organization might look like. And of course, the parties should learn about each other’s mission, values, culture, facilities, programs and people. If a partnership is the right thing to do, trust and a sense of cultural compatibility should build during the course of the steering team’s learning process.
5. Candidly explore the key questions (deal points) and options. This is the steering committee’s major work, to explore options and reach agreement on a vision and the key “deal points,” including the most appropriate type of corporate structure to achieve the strategic and financial aims, governance structure and authority, board composition and selection method, management succession plan, and other key issues.
6. Go back to each board at appropriate “plateaus” in the process. The leaders on the steering committee can’t get so far ahead that other board members feel they have no voice – but again, everyone can’t be involved in the negotiations. So, at one or more key places in the negotiation process, the board chairs should update their boards, seek feedback if appropriate, and ensure the board is still behind the partnership efforts.
7. Reach agreement on the key questions. The steering committee should reach agreement on the key deal points. All the key issues must be addressed. Such potentially controversial issues as the governance structure and the management succession process should be settled here, not left to due diligence.
8. Sign an MOU. The deal points form the basis of a Memorandum of Understanding, which generally states that the parties have agreed to merge or align, and will enter a period of due diligence to iron out final financial and legal aspects of the deal. Since MOUs are often made public, the steering committee should ensure that a communications plan to key stakeholders and the public is ready to go. The plan should stress the vision and benefits of the proposed arrangement.
9. Review the results of the due diligence. Each board, through its committee structure, should thoroughly review the results of the due diligence process and the proposed affiliation agreement.
10. Grant final approval. Each board votes final approval of the combination.
Outside experts in three areas – law, finance, and governance — generally make valuable contributions to a merger or alliance process. The governance consultant often also serves as a facilitator for the process.
If the negotiation process strikes the right balance of governance input but not meddling, it will build trust and a positive culture for successful governance and operation of the emergent organization.
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