Wednesday, March 05, 2008

Compensation for directors of non-profits

I have been trying to think through an issue, and I am wondering if you can help. Recently, after the state's insurance companies made a required filing with the Insurance Commissioner, I noticed a story by Jeffrey Krasner in the Boston Globe that talked about compensation of Board members at the three major non-profit insurance companies in Massachusetts. It noted:

Blue Cross-Blue Shield's directors are ... paid, unlike those at most nonprofits, earning from $47,400 to $53,900 a year.

At Harvard Pilgrim Health Care, ... [d]irectors earn from about $20,000 to $30,000 a year.


Tufts Health Plan... [d]irectors earn between $11,500 and $29,000.


I think Mr. Krasner is correct that trustees and directors of most non-profits do not get paid, but there are exceptions. I personally serve on the board of one that does pay its directors. This is ISO-New England, the non-profit that supervises transactions within and reliability of the region's electric utility transmission system. ISO recruits board members with strong business background from around the country -- the kind of people who would ordinarily serve on for-profit companies -- and requires them to travel from their home cities at least once a month to Holyoke. Therefore, like the other regional ISOs in the US, it pays board members fees of the sort they might receive on a for-profit board. (Rest assured that I immediately endorse all checks I receive for this service, along with any other fees or honorariums I receive for any other outside activities, to BIDMC.)

I suppose one could make the same argument with regard to compensating board members of the insurance companies. While I do not believe that most of those members travel from outside of the region, they are the caliber of people who could easily have served on for-profit boards, and so there is an opportunity cost for them in the amount of time they devote to these non-profit corporations.

But -- and this is the big "but" -- the people who serve on the BIDMC Board and the boards of the other major hospitals in Boston are also of that caliber, i.e., major business and community leaders who incur an opportunity cost by spending time in service to those non-profits. They are expected to carry out their governance responsibilities with the same standard of care with regard to financial matters, senior executive compensation, audits, and compliance as those serving on insurance company boards, but also with special responsibility for the quality and safety of patient care.

I think we would think it somehow untoward if hospital board members were compensated. Going further, we would certainly be offended to learn that board members of other public charities like religious institutions, colleges and universities, day care centers, or town sports leagues were compensated. And yet, in each case, we expect those board members to meet a high standard of care with regard to their fiduciary responsibilities.

I do not write this to give any sense that I begrudge the insurance company board members their annual retainer and meeting fees, but I wonder how the custom evolved that they should be paid. Has it always been such, or is this a recent development? Is there is anything special expected of them in return for that payment that we do not expect of unpaid board members serving other non-profits? Looking forward, should we extend this compensation practice to other major non-profit organizations that demand a high standard of care from their board members?

17 comments:

Anonymous said...

Just a thought. . .

While health insurers, particularly in the Northeast, may have evolved from non-profit roots, I am sure as a relative outsider (caveat: I am the spouse of a physician at Mt.Auburn), that they see themselves as businesses comparable to private insurers (some of which, like Wellpoint, I believe were once non-profits). Particularly where the nominal non-profit status of formerly mutual life/disability carriers disappeared when the need for outside capital arose, why should anyone be surprised that management at firms once organized on the Blue Cross/Blue Shield model have begun to pay directors as if they were public companies?

EW

Anonymous said...

EW has hit it on the head in my opinion. Although some insurance companies are nominally non-profit, their business model is identical to the for-profits - even if that revenue excess goes to pay (sometimes exorbitant executive) salaries and other methods of "reinvestment back into the organization." In fact, the whole term "non profit" for any organization can be a giant misnomer, if one takes into account that executive salaries/bonuses/retirement/deferred compensation are paid BEFORE a company declares it doesn't have a profit.

And my answer to your last question is a resounding NO - we should not extend these payments to hospitals and the like. Therein lies a slippery slope down which human nature can be predicted to slide.

Barry Carol said...

Paul,

With all due respect, I think there is a huge difference between serving on the Board of a $1 billion per year of revenue institution like BIDMC and a town sports league or day care center. As a general rule, if you want to cast a wide net for senior people with valuable expertise, especially those who might also serve on for profit Boards, they should be paid enough to attract and hold them. If they wish, they can always donate their retainer and other fees back to your institution or some other charity. For BIDMC, $30K a year for a dozen or so Board members is not a lot of money. If you can attract accomplished people with expertise you can use, they should pay for themselves many times over. Just my opinion, of course.

Roy M. Poses MD said...

BCBS of RI also had paid its trustees. That fact has been mentioned in conjunction with its various ethical lapses. See this post on Health Care Renewal:
http://hcrenewal.blogspot.com/2004/12/mismanagement-are-us.html
on the organization's efforts to continue to pay directors, even after its CEO was fired in disgrace.

Most recently, the organization has been operating under a deferred prosecution agreement. (See this post on Health Care Renewal:
http://hcrenewal.blogspot.com/2007/12/another-day-another-deferred.html)

Of course, this is in effect a single anecdote, but it does not argue for the benefits to society of paying trustees of not-for-profits. As you correctly noted, it is almost unheard of for trustees of hospitals and universities to be paid, even though these organizations can be as large and complex as health insurance companies.

Anonymous said...

I'm not sure there is a right or wrong answer here.

Once directors of a charity are paid, they lose their state law immunity from liability. This can be cured with insurance and indemnity--except if the charity goes bankrupt. Then the compensated directors can enjoy being sued personally by the unsecured creditors. This issue arose when Boston Regional Medical Center (in Stoneham) went bankrupt a few years ago.

Paying directors may change their relationship to the institution. Will they feel more obligated to be diligent? Will they feel more obligated to the CEO who suggested their name to the nominating committee? I don't know the answer to these questions, but its food for thought.

Anonymous said...

I, for one, will never lose sleep over relatively small compensation for people with such significant fiduciary obligations, particularly over our non-profit sector. And I do believe (as does the Attorney General) that we should hold these directors accountable to those obligations. I am troubled, however, by the astonishing executive level pay of the former BCBSMA CEO, particularly in the face of the pressure that company put on the Legislature during the health care reform debate to give them the tools to control costs (e.g. please free us from statutory "mandates" such as covering IVF or diabetes care and equipment). Health care, and the business of NOT FOR PROFIT health care, leaves us all on very tricky moral terrain. We need talented people at the executive level (like you) who are driven by mission more than money -- and they exist and we can find them for less than $3 million.
I would rather see extra health care dollars go to our service workers, and techs and nurses -- who clearly aren't in the business for the cash, but whose expertise, skill, compassion (and even their smiles) can have a profound impact on healing -- which, by the way, is our "business". I vote to pay the directors and cap the executives.

Anonymous said...

I must respectfully disagree with Barry. Although it is true that a hospital is a business, it is also a sacred place where people go when they are in trouble, and many times, when they are going to die. If you've ever walked the corridors of a hospital at 3 am, you will understand some of what I mean.
With the increasing monetization of all aspects of medicine/health care (witness anon 9:09's comment), the one huge loss the public is suffering is loss of TRUST. Think how important that is when you are deathly ill.

I do not pretend to know or care about other types of boards, but hospital boards should be free of even the slightest taint of the almighty dollar. If some people don't want to serve free, fine - I wouldn't want them anyway.There are many who would be honored to be on such a board.

bev MD

Paul Levy said...

Thanks to you all! Hmm, we do not seem to have heard from any actual board members out there. (Well, maybe none of them read this blog...)

Any board members out there?

Anonymous said...

Paul.
I serve on a non-profit hospital board and one other mission driven not-for-profit organization board. My non-profit boards do not compensate directors and, in fact, because I identify with the mission of these two organizations, I am a major donor to both - giving about 30% of my income to these two organizations. While time will be the eventual judge, I believe my contribution to the success of these two organizations has been significant. I hope this doesn't sound insensitive, but I don't think these not-for-profit organizations should be expected to pay what I am worth. I am serving because I indentify with their missions and want to help. Not paying me anything avoids them thinking that paying me a small sum will make me work harder or smarter.

I also serve on three (smaller) for-profit company boards so I can am able to compare and contrast the two types. I only accept these directorships when I am confident the liability risks are insignificant and I know for sure I can trust the openness and integrity of both management and my fellow directors. I could find other directorships that might pay more, but I am not interested.

Anonymous said...

Hi Paul:

BIDMC board member here! I can see both sides of this delicate issue and am glad that you brought it up. In my opinion, being a board member of several non-profit organizations both in health care and in higher education, I vote strongly and emphatically that board members should not be paid. I feel that our time, effort, support and advice should be forthcoming on a VOLUNTARY basis, because that's what we are: volunteers!

In my personal case, I volunteer for a few reasons, i.e. my personal code of humanity compels me to act upon the concept of "giving back" to society in some aspect: time, advice, funding, etc., so that service to others can assure them the same benefits of health care and research that I receive and to insure the successful continuaton of the hospital with which I am associated. Another reason is that it makes me feel good to know that I am contributing to something that will help others, many others. Financial compensation of any amount for what I do would be contrary to both of my reasons for volunteering and I probably would not be interested.

Here's a concrete example for you: I was intrigued several years ago with the initative of "Patient Site" that BIDMC offered to its patients. I served on an advisory committee for a while and also contributed financially to its development. It makes me "feel good" every time I access Patient Site for myself, knowing that many others can communicate with their health care providers and get information on their conditions so much easier and quicker. I think it improves the overall health care of everyone who uses it because it offers patients access, knowledge and the opportunity to communicate easily - very powerful tools to help ourselves

That's why I volunteer and will continue to do so. Compensation as a board member would, in my opinion, detract from the reasons I volunteer.

Warm regards,

Bruce

Anonymous said...

Paul: I am resonding to your plea. I am a Trustee Emitus ofth eBIDMC havng served for many years as a director and for one term as Chairman of the NEDH. I serve on a number of not for profit boards, and take a great deal of ride and pleasure in each institution.

It is generally acknowledged that compensation for senior management and directors has rising far faster than prductivity for many years. The continued upward spiral has been neatly orchestrated by compensation consultants and directors who are bothe highly compensated as directors and as managers of distinct companies.

I am not surprised to see this disheartening practice move to NFP insurers, but how else can a CEO so easily gain leverage on his directors than by paying them? This is th estory of th eindependent directors of mutual funds as well. They are neatly bought off and then surrounded by counsel and indemnity insurance.

I suspect that this trend will not migrate to charities that have to resell themselves to costumers by asking for donations. That is when my contribtutions will stop.

Gregg Stone

flogerfo said...

Well Paul with the intent of being provocative, I am going to take a stab at this, having served on our board of Trustees and as the Director of a public company. For starters, in the corporate world incentives are aligned and directors usually receive cash plus a financial interest in the company, all of which is public.This financial alignment of interests is constructive. While there are exceptions, since SOX corporate boards have become much more attentive to their fiduciary responsibilities, with compliance being first and foremost. Corporate board members rarely miss a meeting, several of which are unplanned. Attendance is required and publicly monitored, including key committee meetings. Attendance is not so easy to sustain on a not-for-profit board with no compensation. On the other hand, there is no SOX equivalent to guide the compliance of the not-for-profit board and the financial incentives for both management and the board are less clear and certainly not public. There is no share price and the accounting systems are not held to the same rules. To my knowledge, the requirements for independence of Directors are not the same as in the public corporation. In fact, just the opposite. The influence of a director is often more related to gifting potential or other wherewithal. Would compensation of Directors improve their interest, engagement, and fiduciary responsibility? Why not? Would it do more good than harm? Probably so. Would it make a big difference? Maybe, worth a try.It would give the Chair a little more leverage when asking for help. By the way, I have not forgotten that the purpose of the not-for-profit is a Mission, but: no money, no mission. In any case, I hope I have achieved My mission of stimulating this discussion.

Anonymous said...

I am a board member. And it is true that there are real opportunity costs for volunteering, especially mid-career. But it is the nature of reciprocity that direct compensation would shift obligation from the mission to the payer. We are political animals, no way around it. My independence is important not only to the community at large, but to the talented community of persons who are directly compensated by the hospital.
Is it problematic that highly profitable insurance entities seek to influence the quality of care (goal#1 at BIDMC) without implementing a system of competitive rewards for best outcomes? Is quality also non-profit double-speak for profit?

Anonymous said...

This post was the first time I heard about compensated or not-compensated service on boards. From what you've said, it sounds like the board members are doing quite a lot of work and have a lot of serious responsibilities. I don't quite get the argument that if the organization is a non-profit, the board members shouldn't be paid for the work they do. I mean, non-profits pay their employees, don't they? Why are the board members different? The pay shouldn't be exorbitant, and that's hard to judge without knowing how many hours of work someone on a board puts in. But paying a reasonable fee for what sounds like lots of work and responsibility sounds fine to me.

Anonymous said...

I have been a director of several for-profit companies as well as not-for-profit organizations.

I agree with many of the comments that equate non-profit insurance companies with for-profit insurance companies. But there is one factor that I think should be paramount when discussing non-profit organizations - philanthropy. The financial viability of non-profit insurance companies, unlike the viability of our hospitals, museums,social service agencies, etc., is not dependent on philanthropy.

Our country has a long tradition of community service by its citizens and contributing either money or time to charitable organizations is part of that tradition. I see no difference between asking someone to give $250,000 to a charity and asking someone to contribute his or her time to that institution either as a volunteer or a board member.

Further, in my experience most charities are able to recruit people with substantial governance expertise to serve, without pay, on the boards of non-profit organizations. Whether they are used effectively is another issue and perhaps that is what should be discussed on your blog next.

California Doc said...

I am a physician who serves on non-profit boards without pay. I will just weigh in to agree with the many anon posts that support the concept of "giving back" and forgoing payment to non-profit board members. Direct compensation would effect how the public sees the board and, I believe, would create incentives that are not in the best interest of the organization. BTW, we are also involved in an unforgivable corporate campaign with SEIU and taking the high ground is easier with the knowledge that we are unpaid community volunteers. I also agree with the person who pointed out the perverse incentives of paid board members and compensation committees that have raised "for- profit" CEO salaries to an obscene level.

Rocko Stojiljkovic said...

Flogerfo,

You bring a very relevant dynamic into the conversation - Sarbanes-Oxley Act of 2002 (SOX). Because of Enron and the likes, after the passing of SOX, for-profit board members are legally held to a much higher standard than those serving on non-for-profit boards. Namely, the board-members have fiduciary responsibilities and are liable for actions of the senior leadership of that organization. This could take them to a court of law in case their organization is faced with a large-scale scandal. With increased liability comes increased compensation. Since SOX does not apply to non-for-profits, I have a very hard time justifying any monetary compensation for serving on a board of a non-for-profit. Besides doing service to support a mission of a chosen organization, there are many fringe benefits that come with serving on a non-for-profit board: prestige, professional networking, and personal gratification. That should be enough to attract any honorable, reputable, and competent board-member.