A University President on Commission

The Miami Herald reported on the latest thing in executive compensation for leaders of academia (and academic medicine):

Florida State University's new president will have a larger salary than his predecessor, T.K. Wetherell, and stands to make even more in bonuses as a reward for big-time fundraising.

FSU trustees chairman Jim Smith confirmed Monday that Eric Barron has signed a contract that includes a base salary of $395,000 a year in state and private dollars, plus the chance to earn annual bonuses of $100,000 for every $100 million in private donations raised. He'll also get free housing and a car, Smith said, as well as a retention bonus of $200,000 after a few years.

Housing and car allowances have become standard fare for university president contracts, and in recent years Florida's university presidents have ranked among the top in the country for salary and compensation packages. But the bonus provision in Barron's five-year contract is a signal that the trustees want to see FSU's $447-million endowment grow by $1 billion over the next five years.

'We said $1 billion in five years, and we're serious about that,' Smith said Monday. FSU's trustees gave him the authority to negotiate with Barron, 58, and sign a contract.

Note that Florida State University is the parent institution for the Florida State University College of Medicine.

We have all heard jokes that university presidents now need to spend more time fund raising than doing anything else. Also, we have all heard the phase "no margin, no mission" too many times. However, in this case, the search for margin seems to have completely trumped the mission. As the article implied, I have not previously heard of a university president who gets bonuses only according to how much money he or she raises. I also have not previously heard of such bonuses being based simply on a percentage of the money raised. Thus effectively, the new president is being paid on commission, the commissions being based purely on fund-raising.

The problems are obvious.  First, structuring a bonus so that it is only a function of fund-raising raises fund-raising above upholding the university's mission.  Yet the board of the university has a duty of obedience, which  "requires board members to be faithful to the organization's mission. They are not permitted to act in a way that is inconsistent with the central goals of the organization."  Making the university president's bonus solely dependent on the dollar amount of funds raised would seem to violate that duty.

Second, structuring a bonus so that it is only a function of fund-raising suggests that where or how the funds are raised is no longer important.  Fund-raising done wrong can lead to conflicts of interest, obligations to unsavory people, or other ethical or legal issues.  Yet the proposed bonus would apparently be paid according to the amount paid, no matter what.

Perhaps in this era of "greed is good," such a brutal reminder that academics are now expected to care more about revenue that teaching and research should not be a surprise.  But if the only incentive the university president has is fund-raising, what sort of academic institution do we expect will result?

Non-Profit Health Care Organization Executives: Pay Them Millions or Lose Them?

CareSource is a US not-for-profit managed care organization for Medicaid patients.  This week, the Dayton (Ohio) Daily News ran an investigative series on its leadership and governance which may provide a larger lesson on the disconnect between the high ideals and high costs of the dysfunctional US health care system. 

The main issue uncovered by the investigation was CareSource's generosity to its CEO.  As reported in "CareSource CEO's compensation grew faster than revenues at nonprofit,"

From 2005 to 2008, CareSource more than doubled its total revenues — from $770 million to $1.8 billion.

It’s now the nation’s third largest nonprofit Medicaid HMO.

But CareSource’s phenomenal revenue growth was no match for the increase in total compensation for Chief Executive Pamela Morris, whose pay more than tripled — from $877,000 in 2005 to $2.9 million in 2008, according to IRS filings.

Did Pay Buy Performance?

Not only did the CEO's pay grow much faster than the organization she lead, it also seemed disproportionate to what ratings of the organization's performance are available.

In America’s Best Health Plans for 2009-2010 — a survey conducted by U.S. News & World Report and the National Committee for Quality Assurance (NCQA) — CareSource ranked 72nd in patient satisfaction and quality of care among 82 HMOs participating in the study. It was the lowest ranking among the four participating Ohio Medicaid plans.

"We Don't Want to Lose Her"

The chair of the organization's Board of Directors claimed that such pay was necessary to secure the CEO's loyalty, per the Daily News,

Ellen Leffak, chairwoman of the CareSource board, said a separate committee of the board sets the top executive salaries with the help of a consultant. The committee monitors what is being paid at both for-profit and non-profit competitors.

Leffak said Morris is worth her multimillion-dollar compensation.

'We don’t want to lose her' to another HMO, Leffak said. 'She has provided outstanding service to the organization and we think she should be adequately compensated.'

The implication, which perhaps Ms Leffak did not mean to openly convey, was that Ms Morris' dedication to the organization and its not-for-profit mission were less important than her desire for a multi-million dollar paycheck.  (Parenthetically, Ms Leffak also failed to specify how Ms Morris' service was determined to be "outstanding,")

Furthermore, The Daily News also reported:

CareSource officials say Morris’ pay hike, which included a $1.2 million incentive payout in 2008 from her supplemental retirement plan, is in line with salaries paid top executives with similar experience at its for-profit competitors. Morris is 61 and has been with CareSource for 24 years.

The newspaper provided a table of CEO compensation at such for-profit competitors. The best-paid CEO in the table was Heath G Schiesser of Wellcare Health Plans, who received $8,077,718. The article did not mention that not onlyh is Wellcare for profit, but it claims to be a "nation-wide" operation.  It also did not mention that in August, 2009, Wellcare paid a fine for findings, which it did not contest, that it paid political contributions in Florida that violated state law (see post here).  Also, in May, 2009 we posted about WellCare's submission to a deferred prosecution agreemeent based on charges that it defrauded state programs by inflating its expenses. In 2007, we posted about how the state of Connecticut stopped WellCare from running a plan for poor children after the company refused to reveal what it was paying physicians, and why it was failing to pay for particular services. So WellCare has paid three penalties for three different kinds of unethical behavior in the last two years.

To be clear, it was the newspaper that stated Wellcare ought to be a standard of comparison, not Ms Leffak, Ms Morrison, or any CareSource official.  However, the choice of comparison further suggests how money may trump mission.

Competing Against Stock Options
Meanwhile, the Dayton Daily News published another article ("Critics question hospitals' CEO on CareSource board) which suggested that the governance of CareSource may have resonated with the notion that the leadership of not-for-profit health care organizations may be more motivated by money than mission.

Since the HMO’s inception in 1983, Tom Breitenbach, chief executive of Premier Health Partners, has had a hand in shaping CareSource. He continues today on the governing board of its parent, CareSource Management Group Services.

But in recent months, health care officials and providers have raised questions about whether the head of the region’s largest hospital system should sit on the board of the parent organization of the region’s largest source of Medicaid payments.

'How can that not be a conflict of interest?' said Dr. Larry Litscher, a Dayton area urologist. 'They (the CareSource board members) have to determine the reimbursement levels' for hospitals and doctors providing service to CareSource patients. 'How can that not be interpreted as a big advantage for the hospitals?'

But beyond the issue of conflict of interest, last year, the Dayton Daily News reported on Mr Breitenbach's own incentives:

In 2001, as Premier Health Partners Chief Executive Tom Breitenbach neared age 55, he was given an executive investment plan in addition to his supplemental retirement benefits that paid him nearly $9 million from 2002 to 2007. The requirements were that Breitenbach assume the risk of the investment and stay on as head of Premier until age 60.

In 2001, MedAmerica Health Systems Corp., the parent company of Premier Health Partners and six smaller for-profit subsidiaries, found a novel way to help keep Breitenbach at the helm — they invested some of the supplemental retirement benefits he had accrued over 25 years into an executive option plan of mutual funds, in which Breitenbach assumed all risk. Breitenbach cashed out $6.7 million from the plan in 2003, another $660,000 in 2006 and a final payment of $1.5 million in 2007, for a total of $8.9 million, IRS documents show.

Also, according to the MedAmerica Health Systems 2007 Form 990 (available through Guidestar), Mr Breitbach's total compensation was $4,044,915.

Again, the reason to pay so well seemed to be the fear that in the absence of for-profit levels of compensation, executives of not-for-profit organizations would quit to seek higher recompense in the for-profit world.

In setting compensation levels, local hospital officials say they must compete with for-profit enterprises that can offer top executives hefty stock options, country club memberships and other perks that nonprofits can't. 'For-profit or nonprofit, it really has to do with attracting and retaining talent,' said Pete Luongo, who sits on the compensation committee of Kettering Adventist Healthcare, the parent of Kettering Health Network and its six hospitals.

The implication is that not-for-profit health care organizations can and should hire people who care more about the level of compensation offered than the not-for-profit organizations' lofty missions.

In this case, CareSource Says its mission is:

to make a difference in the lives of underserved people by improving their health care.

At CareSource, our mission is one we take to heart. In fact, we call our mission our 'heartbeat.' It is the essence of our company, and our unwavering dedication to it is a hallmark of our success.

Our Vision is to be an innovative leader in the management of quality public-sector health care programs.

Premier Health Partners says its mission is:

We will build healthier communities with others who share our commitment to provide high-quality, cost-competitive health care services.

What cognitive dissonance is created by an organization dedicated to serving the "underserved" and another which espouses "cost-competitive" health care lead by CEOs who can only be retained by making them multi-millionaires. 


Summary and Conclusions
Leaders of not-for-profit organizations, starting with their boards of trustees, are supposed to subscribe to the duty of  obedience, "to be faithful to the organization's mission,"  and the duty of loyalty, " give undivided allegiance when making decisions affecting the organization." Presumably, that can be extended to the requirement that the top hired executives of not-for-profit put the mission ahead of their own personal gain.  Thus, boards of trustees who feel that they can only retain hired CEOs by pay so high that they will not be tempted by offers from for-profit corporations have failed in their duty by hiring CEOs who put their personal financial interests ahead of the mission. 

I believe that the compensation given to CareSource and Premier Health Care CEOs, and the rationale for it, are not anomalies.  There have been many other reports about leaders of not-for-profit health care organizations compensated enough to make them multi-millionaires, justified mainly by the need to provide pay "competitive" with that available from for-profit corporations  (e.g., see posts here and here).  Yet not-for-profit CEOs mercenary enough so that they can only be retained by for-profit levels of pay seem to be exactly the sort of people who should not be running what are supposed to be mission-oriented organizations.  Of course, the problem is only amplified when the same mercenary CEOs sit on each others' boards.

When money becomes the only value for health care leaders, the health care system will cost a lot, but provide neither health nor care.  The only way to improve health care is to give it leadership that values health and caring for it more than money.    

Why Have Governing Boards Forsaken Their Duties? - Ideas from Silverglate and Malchow

We have posted frequently about the governance and leadership of academic medical organizations. While one would think that health care organizations, and especially academic health care organizations ought to be held to a particularly high standard of governance, we have noted how their governance is often unrepresentative of key constituencies, opaque, unaccountable, unsupportive of the academic and health care mission, and not subject to codes of ethics. How the governance of organizations with such exemplary missions and sterling reputations got this way has been unclear.

Now there are new insights from the ongoing discussion of one of the most interesting and controversial cases of disputed organizational governance. We have often come back to the example of Dartmouth College, of which Dartmouth Medical School is a significant component. We most recently discussed here an ongoing dispute about the extent that the institution's board of trustees ought to represent the alumni at large, or instead, ought to be a self-elected body not clearly accountable to anyone else. (For our take on this complex case, start here and follow the links backward.) The latest development in the case is a lawsuit filed by Dartmouth alumni challenging an increase in the number of self-elected, or "charter" trustees, which they charged broke an 1891 agreement that established numerical parity between alumni-elected and charter trustees.

Soon after this lawsuit was filed, an important article by Harvey Silverglate (one of the founders of FIRE, the Foundation for Individual Rights in Education) and Joseph Malchow appeared. For those interested in the case, the article includes extensive detail, with multiple citations, on all the twists and turns of the case, and is very much worth reading. (See this post on FIRE's Torch blog for more background and discussion.)

However, the article also features extensive scholarship on governance of US not-for-profit institutions, focused on academic institutions (including medical academia), and with relevance to other not-for-profit or non-governmental health care organizations. In particular, the article sheds light on how the governance of such organizations has become so degraded.

First, Silverglate and Malchow summarized the duties of governing boards:

Traditionally, fiduciary duty [of the board of trustees] has been understood as having two components: the duty of loyalty and the duty of care. The duty of loyalty requires a fiduciary to act in a manner he or she reasonably believes to be in the best interests of the organization. The duty of care obliges directors to inform themselves of reasonably available information prior to making a business decision. More recently, courts have considered the duty to act in good faith [the duty of obedience] as a fiduciary requirement. This component, similar to the duty of care, is satisfied when a director makes informed decisions without conflicts of interest.

The question central to the dispute regarding Dartmouth governance is to what or to whom do fiduciaries owe their duty. Corporate directors have a relatively straightforward task of serving the corporation and its shareholders. In the case of a charitable trust, however, which generally does not have 'ascertainable beneficiaries who can enforce their rights,' the duty of fiduciaries is instead directed toward fulfilling or furthering the organization’s mission

So just to summarize, considerable discussion, scholarship, and I believe some some laws support the notion that the board of a not-for-profit organization is obliged to take reasonable care to make informed decisions free of conflicts of interest to uphold the organization's mission.

However, currently, many boards value deference to the organization's (usually hired) top managers and avoidance of internal conflict within the board more highly than these obligations:

Dartmouth, to be sure, is far from the only place where fealty to organizational leaders—and the notion of 'going along in order to get along' —has been placed before true fiduciary duty.

Silverglate and Malchow have some important ideas about how we came to this.

Not-for-profits became more like for-profit corporations:

During the 1980s, traditional nonprofit organizations supported by donations and governed by donors and volunteers became increasingly displaced by professionally staffed commercial nonprofits, supported by grants, contracts, and earned income, and governed by insider boards. The shift in governance was armored by progressively professionalized and entrepreneurial management, which was perceived to be more adept at control of the ebb and flow of funds in the American market.

Top hired not-for-profit executives assumed more power at the expense of other constituencies, including the professionals who did the work:

By the 1990s, with faculty power firmly institutionalized at colleges and universities, a notion that university presidents were bereft of power took hold. The AGB [Association of Governing Boards], in 1996, argued that university presidents needed to regain power with a pivotal document of its own: Renewing the Academic Presidency: Stronger Leadership for Tougher Times. Though this outlook was applied to varying degrees at colleges and universities, an imperative toward greater executive power in universities was thus established.

Presidential and professorial decision-making power, combined with the rise of the administrative bureaucracy in academia, have generally relegated trustees to a secondary role in campus affairs.

Attempts at reforming governance were inappropriately based on a for-profit corporate model, and particularly the need to project unity and avoid confrontation among the leadership trumped transparency:

Aligning academic boards with the cultural trends of increased critical oversight has obvious benefits, but some boards have moved to adopt the norms of for-profit corporate governance that are simply not applicable to the university context. Admittedly, this is a thin distinction when considered on a theoretical level. But in practical terms, misguided nonprofit reforms—some of which, upon close examination, actually violate an institution’s mission—are readily evident.

For example, some nonprofit boards have emphasized the adoption of formal nondisclosure pledges or confidentiality agreements that step well beyond nondisclosure of proprietary information. This is hardly uncommon in the business sector, where bottom-line strictures demand a certain degree of internal accord and non-transparency. And though there is evidence that nonprofit board directors have, from time to time, attempted to hush public dissent, only recently have dominant majorities of some nonprofit boards proposed and ratified binding pledges not to publicly air differences. According to a 2006 BoardSource publication, 'If a board member does not support a decision for whatever reason, [he or] she has a responsibility to remain silent or step down from the board.' (Recall the resignation offer made to Zywicki before his second term was denied.)

These directives, written in highly influential publications in the realm of university governance, disregard the important role that public discussion has on decision-making at universities and nonprofits in general. 'In the nonprofit context, nondisclosure agreements or the use of 'executive session' rules to curtail debates about policy and procedure depart from established norms. They shut down opportunities for public dialogue and for communication with other concerned and influential parties, including reporters,' nonprofit specialist Norman I. Silber wrote in the Oregon Law Review.

Emphasis on raising money rather than upholding the mission has lead to board deference to hired executives.

Fidelity to institutional leaders, rather than institutional mission, is now paramount in higher education, as deviation from accepted decisions is perceived as potentially shrinking the donor base. Administrators cringe at public disagreement; rather than focusing on the long-term likelihood that competing ideas will result in implementation of the fittest, they tend to focus on the short-term possibility that a particular alumni subset may be offended. This shortsighted outlook is not only an insult to the intelligence of alumni and other constituencies, but it is ultimately detrimental to the institution, as established ideas are enthroned and unchallenged. It is also based on false premises: as in the case of Dartmouth, there is no established correlation between public criticism and donor decline.

Boards are increasingly composed of executives of for-profit corporations, particularly in the finance field, who may grant the same deference to the organizations' leaders that they would like from their own board. That is, hired executives identify more with other executives than with the organizations they are supposed to be leading:

Judge Cabranes noted that trustees, especially business executives, tend to act toward university presidents as they wish their boards would act toward them—deferentially. And the phenomenon of board members believing they serve at the pleasure of the executive is what one nonprofit attorney and blogger, has termed 'upside down board.' The ascendance of the hedge-fund community, a peculiar province of graduates of elite institutions, has contributed to the prevalence of the upside down board....

The article suggests some issues that need to be addressed to make governance more accountable, transparent, ethical and honest. Boards need to be reminded of their duties, and that their loyalty should be to the mission, not the organization's executives, or the views of the board's majority. Transparency and open discussion are more important than projecting the (sometimes false) impression of unity. New board members should be chosen for their loyalty to the mission rather than their similarity to and congeniality with current board members.

I strongly suggest that anyone who cares about how health care organizations are run ought to read Silverglate and Malchow's full article. It should be required reading for current and would-be board members of academic and health care not-for-profit organizations (but I will not hold my breath waiting for them to read it.)