Is your board financially savvy? - Management Issues - Education programs for executives and board members discussed

Healthcare Financial Management, Dec, 2002 by Jim Summers, Michael Nowicki

What do Pfizer, McDonald's, Motorola, Dow Chemical, the New York Stock Exchange, and Eastman Kodak have in common, besides being well known? They all sent board members and senior executives to a three-day education program sponsored by the University of Pennsylvania, Stanford University; and the University of Chicago business schools to help them better understand their management and governance roles.

The newspaper account of this three-day program reported that only 32 percent of the 80 attendees from these and other corporations were able to correctly answer a multiple-choice question on the definition of re-tained earnings. (a) Apparently, many of these executives and board members lacked knowledge of basic financial management.

Their confusion extended beyond finance and accounting definitions. When asked to whom their fiduciary loyalties were directed, some said shareholders, some said stakeholders generally, and some said the CEO specifically.

Education programs for executives and board members should be considered a positive outgrowth of the recent accounting scandals. Ignorance of the organization's actions can be no more legally acceptable than ignorance of the law. The newspaper article indicated that a primary lesson for the attendees was to tell the truth. But beyond this ethics lesson, the fact that the leadership of some of the largest U.S. firms apparently lack knowledge of basic finance is worrisome. We in the healthcare industry had assumed that these organizations were run by the best and the brightest.

Then we began to wonder how knowledgeable healthcare organization board members are about finance. Politicians appoint the boards of many government-owned facilities. Many not-for-profit organizations' board members are recruited because of their ties to a particular constituency; such as physicians or a special-interest community group, not because of their knowledge of organizational finance. Although we would like to believe board members of investor-owned healthcare organizations are knowledgeable about finance, the newspaper account about the top corporations makes us wonder.

Healthcare Finance

Healthcare organization board members need to understand financial management to capably fulfill their governance duties. Can your board members answer the following questions, or at least debate them intelligently?

* Are the healthcare organization's physicians employed by the organization? What is the extent of potential liability for the organization as a result of the actions of its nonemployed physicians, and what mechanisms are in place to reduce this liability?

* What does "not-for-profit" mean?

* What are the measures of profitability for not-for-profit and for-profit healthcare organizations?

* What does third-party reimbursement mean? What constitutes the various types of payers, such as indemnity, managed care, PPO, Medicare, and Medicaid? What are the differences among costs, charges, and collections or any of the myriad contractual adjustments various provider contracts allow?

* To whom do healthcare organization board members owe a fiduciary responsibility?

* What obligations does the organization have to take care of patients with no or insufficient means of payment?

Board Training

If your board members cannot answer these questions, they need to be educated. Basic knowledge of healthcare finance is critical for board members. Fraud and abuse concerning Medicare payment and lack of corporate responsibility are serious problems that the government is investigating. The public is rightly angry and distrustful concerning the illegal, fraudulent, or questionable activities of corporate leaders who are abusing accounting practices. We owe it to our board members to educate them about the organization, how it is structured relative to the medical staff and to other healthcare organizations, how it gets paid, to whom it owes its fiduciary obligations, and how to read the organization's financial reports.

Although the last two bulleted questions have debatable answers, those debates will help focus attention on the organization's mission. Indeed, with regulatory agencies increasing their board oversight efforts, having a good board education program in place may be essential in recruiting conscientious board members and demonstrating that negligent board appointments are not occurring.

We need to ensure that healthcare organization board members possess the knowledge necessary to fulfill their role. Training of board members should start before they join the board and continue during their tenure. Healthcare organizations should review the method they use when appointing board members to ensure that it enables them to identify board members who are qualified upon appointment or become qualified soon after.

Role of the CFO

Given the importance of understanding financial information when the public has reason to doubt the integrity of the organization and the management, CFOs have more of a role to play than ever before when it comes to board-member education even if not the selection. CFOs should be asked to join the CEO to discuss with the board the needed qualifications for new board members. CFOs should be tapped to help bring the current board members up to speed on the financial issues facing the organization.