Annual Executive Compensation Survey Is Out

Hospital CEO compensation is moderating, as a result of a tough economy, increased transparency and closer public scrutiny, according to the annual survey published by Modern Healthcare and Sullivan, Cotter and Associates. Median total compensation of CEOs of health systems rose just 2.6% in 2010, and 0.2% last year — way down from 9.7% in 2008.

But that hardly means boards can breath easy thinking regulators will be satiated.

To the contrary, attorneys general in New Hampshire and Massachusetts are looking at CEO pay. The revised IRS Form 990 (see Sullivan Cotter’s summary) will provide new fuel for tax examiners to assess not-for-profit hospitals’ compliance with tax exemption requirements.

Many observers believe that as the health care reform law kicks in and hospitals receive millions of dollars in revenues from previously uninsured patients, regulators will scrutinize and even try to cap hospital CEO pay. Don’t believe it could happen? Think about federal bailouts of financial institutions and subsequent targeting of executive pay.

The lesson for boards: Be sure you’re doing a thorough, objective job overseeing executive compensation and community benefit. Past issues of the Great Boards newsletter include articles on best practices to oversee executive compensation and community benefit, respectively, plus a summary of changes in the IRS Form 990. If your board hasn’t checked its policies and practices in these areas lately, or asked your general counsel or compensation advisor for an independent assessment, now would be a good time.

Who Is an Independent Director?

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.

NEW ISSUE OF GREAT BOARDS NEWSLETTER IS AVAILABLE

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/.

IRS Official Links Good Governance and Tax Exemption

IRS is actively promoting “good governance” to an unprecedented degree.
“Somewhat controversially – at least to some – we have advanced the notion that there is a link between good governance and tax compliance,” Sarah Hall Ingram, IRS Commissioner, Tax Exempt and Government Entities, told a meeting at Georgetown University Law Center last week. Her speech is available online.

“I’m not interested in trying to usurp the business judgment of an organization’s officers or board of directors or trustees. Nor am I a micro-economist concerned with whether an organization is maximally efficient in the way it provides its charitable services to the public. I do think, however, that a tax-exempt charity should actually provide charity; it should provide some meaningful and measurable benefit or service to the public.”

Ingram said good governance includes at least three things: a clear and well-communicated mission; transparency about its governance and charitable works; and “an engaged, informed and independent” board that has “real responsibility and authority. It must, for example, be able to implement, in the life of the organization, the rules against inurement and self-dealing.” The board should also have principles regarding proper use and safeguarding of assets, supported by policies and practices that address executive compensation, protect against conflicts of interest, and support independent financial reviews, she said.

For an in-depth look at the new IRS Form 990, see the summer issue of the Great Boards newsletter, available June 29.

New Form 990 is Must Reading for Boards

The new IRS Form 990, the primary way not-for-profits report their performance to the IRS, dramatically expands what hospitals must report. Examples of what’s new include:

  • How many directors are “independent” (using new IRS definition)?
  • How much community benefit does the hospital provide (using new standardized definitions)?
  • How does the board determine executive compensation?
  • How is the board conflict of interest policy enforced?
  • Do board members have business or family ties with each other?
  • Does the board review the 990 before it’s submitted IRS (hint: don’t answer “no”)?

The summer issue of Great Boards will dissect the new Form 990 and offer expert opinions on what boards should do NOW to prepare. In the meantime, see a recent speech from IRS’ Director of Exempt Organizations Lois Lerner and full copies of the form, schedules, and instructions on the IRS website.

Board policies, conduct at issue as Hackensack CEO resigns

A successful and highly regarded hospital CEO has resigned amidst a “federal corruption trial that raised questions about the hospital and his leadership,” according to the June 4 issue of the Hackensack Chronicle. John Ferguson, president and CEO of Hackensack University Medical Center (HUMC) in New Jersey for 23 years, drew national recognition for the hospital’s quality and financial performance.

However, in April former State Sen. Joseph Coniglio was found guilty on six federal corruption charges stemming from his employment as a $5,000-a-month consultant for the hospital. Coniglio was convicted for using his political influence to steer millions of dollars in state grants toward HUMC while employed by the hospital. At the trial, several hospital officials testified, under grant of immunity, that they were pressured to hire Coniglio by “notable members of the hospital’s boards.” Mr. Ferguson has not been charged with any wrongdoing.

However, said the Chronicle, the HUMC board has retained two New York City law firms to review the hospital’s governance policies. After Coniglio’s conviction, The Record published an article that explored the political links of various board members and their business connections to HUMC.

This sad story, still unfolding, should be a reminder to boards that governance ethics, particularly conflicts of interests, are in the spotlight. The old rules that tolerated some back-scratching no longer apply. Boards need to have, and more important, enforce rigorous conflict of interest policies. An audit committee composed of only independent directors, with no material conflicts, should review every disclosed conflict and take appropriate steps to see that the board’s fiduciary duty of loyalty is upheld.

(For more on addressing conflicts of interest, go to this story in Great Boards.)

Boards: More Transparency About Community Benefit is Coming

“Much is given by hospitals, more is asked,” read the headline in the May 31 Boston Globe. And that pretty much sums it up.

Not-for-profit hospitals provide enormous sums in charity care and other community benefits, with less and less ability to pass costs on to private payers. Yet, the Globe asserts, the tax exemptions that not-for-profits get call on them to do even more.

“Nonprofits (are) reaping more in tax breaks than they report in charity work. Some say that must change,” the Globe asserts. The assertion is arguable depending on how community benefit is defined, but the implication is clear: hospitals need to do a better job telling their story to local media and political leaders.

Boards take note: Hospitals are losing the public relations battle, and that can only result in losing political battles down the road.

Washington is listening. Sen. Charles Grassley of Iowa believes federal regulations may be needed to require not for profit hospitals to do more charity work than their profit-making peers. “I want the IRS to go back and establish a difference so we can have the expectation that if you’re a nonprofit and you get these [tax] benefits, you ought to serve the public adequately,” Grassley told the Globe. The hospital industry led by AHA, is fighting back, according to the Wall Street Journal blog.

The new Form 990 from the Internal Revenue Service will finally provide an apples to apples (if still imperfect) comparison among institutions of community benefit broadly defined, not just charity care. Bad debt and Medicare shortfalls are shown but not counted, but still, the new Form 990 is a start toward more objective comparisons. And the Globe story won’t be the last to put local hospitals in the spotlight.

Until now, boards have paid scant attention to the Form 990. They’ve assumed their hospitals do good works and offer appropriate financial assistance to the poor and near-poor, but most boards not have looked at real data to back up their assumptions. That must change.

Boards need to know what their Form 990 says about their community benefit and financial assistance policies, assess whether they’re doing enough and allocating resources effectively, and then aggressively prod management to get their story out. They also can support advocacy efforts to head off hasty legislation that could penalize charitable hospitals based on arbitrary charity care formulas.

The fall issue of the Great Boards newsletter will cover the new Form 990 in depth, including other expanded sections on board conflicts of interest and executive compensation. In the meantime, check these past issues (Fall 2006 and Spring 2008) .