Good people won't do bad things? Good people will do their job overseeing a nonprofit. And if they stray from their duties, there can be consequences.
This was one of my takeaways from the following Grand Rapids Business Journal (Michigan) article. Yes, generally I believe, good folks take-on the role of serving as nonprofit board members. Of course, we know that this is not always the case and there are plenty of examples of individuals who have sought to personally gain from the nonprofit. But yes, more often than not, it's good people who govern nonprofits. And, yes, there are legal consequences if these good people fail. As I regularly illustrate, the fiduciary duties of a nonprofit board member carry weight severally and wholly (individually and as a group). The following article is again a helpful reminder of these duties. Even more helpful perhaps is the list of some (not exhaustive) questions members of a nonprofit board can ask in fulfilling their fiduciary duty. There are so many more but this is a helpful starter list.
The importance of nonprofit hospital board members
Trustees are very important. In allowing the merger between Butterworth and Blodgett hospitals that created Spectrum Health to proceed, federal Judge David McKeague ruled that the Federal Trade Commission was correct in determining that the merger would constitute a monopoly, but he ruled that the merging organizations were governed by good people, and good people, he ruled, won’t do bad things.
Hence the good names of the trustees were critical to one of the most important developments in the West Michigan health care scene.
Being recruited for and serving on the board of a nonprofit a hospital or health system is an honor. Some think it is equated to simply contributing large sums to the hospital, but the position comes with certain responsibilities. Legally, trustees are accountable for the hospital’s actions. Board members must be informed and actively participate in governance.
Board members are entrusted with overseeing the fulfillment of the hospital’s mission. They must be focused on the hospital’s performance and see that its interests are pursued faithfully.
The relationship between a board member and the hospital is a legal one, and board members have an obligation to monitor and oversee not only the organization’s financial dealings, but its ability to meet legal and regulatory standards.
People often assume that boards of nonprofit institutions are there to represent both the institution to the community and the community to the institution. However, the community voice is not a part of Michigan law. In fact, is the case of West Michigan’s largest health system, it is difficult to even determine who is on the board, in case people are wondering.
A trustee has a duty of care, which isto participate in decision-making. Decisions must be informed, meaning that the trustee has made an effort to become familiar with the facts. To do this, trustees must require management to provide enough information to let them make independent decisions. If information is invalid or incomplete, they need to ask questions. Sometimes, they must seek independent advice.
The duty of care requires that board members act in good faith to assure that information and reporting systems exist, and the reporting system is adequate to assure the board of appropriate information regarding compliance with applicable laws will come to its attention in a timely manner as a matter of ordinary operations.
Board members also have a duty of loyalty, setting aside their own interests and putting the hospital first. They also have a duty of obedience,to be faithful to the institution’s stated mission and not to act or use its resources in incompatible ways or purposes.
As long as the trustees’ decisions are made on an independent and informed basis, in good faith and in the best interests of the corporation, they are not subject to challenge. However, if a board member breaches any of these duties or otherwise harms the hospital, he or she may be personally liable for failing to comply.
Members of the hospital can sue a trustee on the organization’s behalf because of a breach of duty. Donors also may sue, claiming misuse of gifts or assets. The government can sue board members for violating state or federal laws.
Note that the board member’s responsibility is a one-sided relationship. The trustee owes allegiance to the hospital, not to the community it serves. Lacking a legal responsibility to be representative of the community served, the board member should still take up his or her community’s best interests if the hospital is running roughshod over local interests. After all, the nonprofit hospital does not pay taxes because it is expected to serve the community’s best interests.
Some items hospital trustees might want to discuss:
- Do we continually remember that we are serving the mission of a nonprofit organization, and that it is different from a for-profit corporation?
- Do we have ways to be truly informed? Does that information come from administrators, employees, friends in the community, the news media, or people on the street?
- Are we authorizing the removal of valuable property from the tax rolls through our expansions?
- Are our employment practices fair and open?
- Are we paying fair wages?
- Do we hold our administrators, who make multimillion-dollar wages, accountable for their decisions — such as multimillion-dollar cost overruns in construction projects?
- Do we hold anyone accountable if our reputation declines in the community’s eyes?
- Do we assure that capital expansions are truly needed and that they will be used to boost cost-effectiveness and efficiency?
- Are our charges as low as they can be, while still allowing a modest margin?
- Do we encourage working together with other institutions that provide similar or complementary services so as to minimize costly duplication?