The Role of the Trustee, Are you Ready?

The Role of the Trustee, Are you Ready? CHHSM Annual Meeting March 5, 2006 Amy A. Hayman Edwin Eng Senior Vice President Vice President ahayman@cainbrothers.comeeng@cainbrothers.com

Table of Contents • The obligations of a not for profit Board member • Fiduciary obligations • How to act as a Trustee • Role of a Good Board Member • How should a Board member learn • How to Assure Good Stewardship of Financial Resources

The Leadership Obligations of a Not For Profit Board Member • Understand fiduciary obligations • Know the role of a good Board member • Know the goals of the Organization • Know how the Organization operates • Know how to become educated on key issues • Independence

Some nonprofit boards have moved to strengthen the board: • Staff oversight • Assurance of quality standards • Oversight of management (especially CEO) • Development of long range plans • Financial focus • Operating budgets • Capital plans

While These Changes Have Resulted in Stronger Organizations . . .

Unfortunately . . . They Are Not Enough • Nonprofit health care now more like a business • Multi-site Systems complicate fiduciary duty • Creditors may litigate if they suffer losses • AGs more likely to second-guess trustees • If non-profit, trustee protected unless display ‘willful misconduct’

Understand Fiduciary Obligations • Duty of Care - A trustee must perform duties: • In good faith • In the best interests of the Organization • With such care as an ordinary person would use • Duty of Loyalty – Exercise their power in the interest of the Organization relating to: • Conflicts of Interest – do not use position to personal advantage • Corporate opportunity • Confidentiality • Duty of Mission – Must work to achieve mission of Organization • Challenges in difficult times to balance mission against need to act quickly • Must have process that considers reasonable alternatives consistent with the mission • If trouble arises, non-profits face scrutiny from AGs and creditors

Best Practices for Trustees: Adopt Business Model Governance Structures & Reporting • Workable board size & committees (including Finance, Investment & Audit) • Get board members with needed business expertise • Educate about obligations, liability, and reporting requirements • Independent board members assert responsibility to challenge management: periodic direct access to outside advisors. • Regular monthly financial reporting • Conflict of interest policies

Best Practices for Trustees: Manage Assets & Liabilities, Not Just Operations • Assess financial risk already in balance sheet • Develop financing, risk & investment guidelines and objectives • Treasury expertise in large systems or outsourced advice • Monitor & oversee

Best Practices for Trustees: Oversee Financial Stability & Take Action in Time of Trouble Regular Review • Compare Costs & Cash to Competing Facilities • Detailed Financial & Audit Reviews by Trustees with Business Experience • Request Management Analysis & Recommendations • Periodic Outside Review

Warning Signs • Increase in AR or AP • Decrease in Operating Margin • Decrease in Cash • Decrease in Occupancy • Problems Measuring & Reporting Financial & Operating Performance

Warning Signs (cont.) • Negative Variance to Budget • Inability to Respond to Regulatory Actions • Turnover of Staff, Legal or Accounting Advisors • Rating Agency Downgrade or Negative Outlook • Violation of Covenants • Lack of Financial Independence (e.g. preferred loans to management) • Management Recommends New Ventures when Internal Operations Not Controlled

The Role of a Good Board Member • Be active: attend and participate in meetings • Accept increased accountability • Analyze key decisions of management team • Focus on major decisions • Avoid diminishing CEO’s role • Know when to trust management and when to consult with outside experts for information without management in attendance • Attorneys, Auditors, Consultants, Bankers • Stay up-to-date with continuing education activities • Know the goals of your organization • Make sure the goals are defined and that you understand • Make sure your actions enhance your organization’s goals • Be aware of how your facility operates

Can the Board Rely Upon Management? • Most of the time: absolutely yes • Most management teams operate with high integrity and intelligence • Most can be trusted • To provide appropriate information and • To act responsibly on behalf of the organization

When to Seek Outside Advice • In good times • There are times when management’s judgment, regardless of its motivation or prior history, needs to be analyzed • Most members of a Board and managers dislike this process and try to avoid it • These are the times when Board needs to assert its role as the ultimate fiduciary of the organization

When to Seek Outside Advice • In bad times • Poor decisions and reckless behavior will threaten the overall organization and the individual liability of the members of the Board • When an organization gets out of balance: • No questioning of management • No use of independent experts • Culture of passivity • Lack of input from staff • In time this may result in: • Poor strategy • Bad decisions • Poor operational results • Potential for greater problems

When to Seek Outside Advice • Board members need independent advice on: • Management performance and compensation • Measurement of performance • Revenue cycle problems • Resident turnover, inability to collect cash • Operational efficiency • Program, number of employees, supply costs • Regulatory compliance • Initiation of new technologies • Audit and management letter • Change in business model • Acquisitions • Acceptance of Increased risk • Start ups, expansions, repositioning • Entering new lines of business • indirectly or not at all related to core mission

Financial Stewardship • Financial Stewardship – “The responsibility of managing resources wisely and executing these responsibilities with integrity and ethical conduct” • Resources include: • Time • Money • People • Property • Responsibilities include: • Spending wisely as if money were your own • Purchasing wisely • Being accountable for your actions, property and time • Encouraging others to be good stewards

Financial Stewardship • Role of Financial Stewardship is paramount within overall governance as it underpins both performance and compliance objectives • What Board member must do • Provide stewardship to ensure organization’s ongoing health and viability and compliance with legislative requirements • Board and management need to take a long range view of stewardship • How Board member provides financial stewardship • Establish appropriate governance structures • Provide leadership and vision to achieve objectives • Select, support and monitor CEO • Validate compensation plans • Ensure fair, effective and compliant employee relations • Ensure effective strategy, planning and budgeting; ensure adequate resources; monitor progress • Establish control mechanisms • Manage risk • Comply with financial reporting requirements • Enhance organization’s image

The Role of the Trustee, Are you Ready?