Mid-Atlantic Health Law TOPICS

While there is no mandate that all organizations have a board of directors, boards are, nevertheless, ubiquitous in the United States for both for-profit and not-for-profit companies.

In the for-profit realm, owners of small businesses manage those businesses. However, as businesses grow and professional management emerges, owners often believe that they need someone to represent their interests. Thus, boards of directors are created.

In the not-for-profit world, boards of trustees, now almost uniformly called boards of directors, perform a similar proxy function, namely to represent the interests of the community in dealing with the professional management of the not-for-profit organization.

Notwithstanding the enormous responsibilities of these board members, individuals are usually thrust into the role of a director with little or no training. There are no schools that teach people how to be board members.

In fact, most board orientation programs only address egregious behavior. The board member is warned not to break certain rules. For example, board members are told that their personal wealth might be in jeopardy if they breach the confidences that they learn in the board room, or if they steal a corporate opportunity, or if they earn a greater than fair market fee from a relationship they have with the company. In other words, board members are told what not to do, they are not told what to do.

Congress recently entered this arena with the Sarbanes-Oxley Act. Sarbanes-Oxley throws paper and process at certain corporate misbehavior. The Act basically assumes that recent corporate excesses were the result of board members having been deceived by management. Although this may have been true in some instances, recent corporate excesses were perhaps not just the result of bad information, but also the result of board members not understanding their job.

Instead of just focusing on don'ts, board training should also focus on the board member's job description, and more specifically, focus on the following seven or eight principles.

1. Ultimate Authority and Accountability

Board members must understand that the board of directors has ultimate and total authority over the company. With this authority comes ultimate and total accountability for all that occurs at the company.

Accountability is not liability. Being "accountable," does not mean that individual board members are financially liable for all that occurs. They are not. Board members are not personally liable for bad decisions, provided that those decisions are made with due care, do not involve self-dealing, and are made in the good faith belief that the decisions are in the best interests of the company.

Being "accountable," however, is a mindset. Board members need to take a proprietary interest in the company, and live the notion that everything that occurs at the company is occurring on their "watch."

2. Mission

Every board member needs to know the mission of the company. The board member must understand what the company is attempting to accomplish.

Moreover, to the extent that the company is a for-profit company, the board member should not misconstrue his or her proxy relationship with the stockholders. If the board member believes that his or her job is to represent the interests of stockholders, and that the stockholders' only interest is to make money, then the board member will miss the point.

The mission of the Walt Disney Company in its heydey was "to make people happy." The mission of the Walt Disney Company was not to make money for its stockholders. If the Walt Disney Company does not make people happy, it will not make money for its stockholders.

Stockholders are served by the board selecting and affirming strategies that are consistent with the company's mission, including prudently investing in the future, while rejecting strategies that are inconsistent or tangential to the company's mission.

3. Constituents

The board member must understand the relevant constituents of the company. Every company operates within a larger context, and part of the board's role is to be sensitive to that larger context. Companies have customers, suppliers, employees, referral sources and communities in which they exist. The company's actions impact all of these constituencies. It is the board member's job to be sensitive to these impacts, and to be sensitive to the subtle differences that actions will have on these different constituencies.

For example, hospitals sometimes forget that their doctors and third party payors are not enemies, but important constituents. Therefore, it is important for the board to stay above the fray, and remind management to nurture the hospital's relationship with these players.

Obviously, the owners or stockholders of a for-profit company are one of the company's constituencies. However, determining who are the "owners" of a not-for-profit company is more difficult. For whom are the board members a proxy? Perhaps in a community hospital, it is the patients. Perhaps at a college, it is the students. Perhaps at a university, it is the community interested in the advancement of science. Whoever the "owners" are, it is essential for board members to identify them.

4. Ends and Means

Most of the foregoing has been directed toward end results. Clearly one of a board member's jobs is to help select, affirm and reject ends. However, another essential function for board members is to focus on the means to those ends. It is the board's job to limit the behavior of management. Some means are simply not acceptable.

Moreover, while the CEO of a company is primarily responsible for setting the tone for the organization, the board also has a role. The board needs to let the CEO know if the tone he or she is setting is or is not appropriate. The board also leads by example. Board excesses allow executive excesses.

5. Discipline

Boards can also help impose discipline on an organization by establishing regular rhythms. Certain actions must come before the board at certain times of the year. Boards should also make sure that management presents facts before it recommends actions. Further, the board should demand that management clearly articulates facts and recommended actions, because the inability to explain a matter succinctly is usually evidence of a lack of understanding of the matter.

It should also be remembered that boards are not problem-solving organisms. Management should not bring a problem to the board, and ask the board to solve the problem. Management should explain the problem, and present suggested solutions to the board for affirmation, modification or rejection.

6. Boards are not Management

Similarly, boards should recognize that they are not management. Boards should not be doing management's job. In fact, boards only have one employee, the CEO. Direct interaction between directors and members of the management team, other than the CEO, should be limited.

Boards also have to recognize that they act as a whole. For Star Trek fans, boards are like the "Borg." Boards are a collective. They only exist when they are meeting. Board action can only occur at a meeting or by a "unanimous" written consent. Single board members, even the Chairman of the Board, have no individual portfolio of power. A board member has no business visiting the HR Director to tell the HR Director how to do his or her job. Similarly, board committees should be doing pre-board work, and not sub-board work.

7. Demand Excellence

The primary job of the board of directors is to demand excellent performance from the CEO. It is the CEO who is in charge of the company. The board should not expect miracles, but the board should expect the CEO to achieve continuous improvement in the company's performance.

8. Not-for-Profits

The only difference between the job description of a board member of a for-profit versus a not-for-profit company is an eighth principle. Part of the job description of a board member of a charity should be the philanthropic support of that charity.

The reason a company is organized as a not-for-profit is because the marketplace will not support the company's mission. Accordingly, by definition every not-for-profit needs philanthropic support. Since board members should lead by example, personal financial support of the charitable organization is a necessary part of the not-for-profit board member's job description.

Adhering to the foregoing seven or eight principles is not easy, but appropriate for directors of for-profit and not-for-profit companies. Moreover, these principles will not be spontaneously generated in the minds of board members upon their joining a board. Boards should regularly talk about these principles so that the company's directors eventually "walk the talk."

The author acknowledges that portions of the foregoing are derived from John Carver's Boards that Make a Difference, John Wiley & Sons, 1997.