health service governance – boards or bureaucrats friday 8 november 2007

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Health service governance – boards or bureaucrats Friday 8 November 2007

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Page 1: Health service governance – boards or bureaucrats Friday 8 November 2007

Health service governance – boards or bureaucrats

Friday 8 November 2007

Page 2: Health service governance – boards or bureaucrats Friday 8 November 2007

Overview

• Governance – what is it?

• Governance – whose responsibility?

• The role of boards and the duties of directors

• Boards or bureaucrats – does it matter?

• Conclusion

Page 3: Health service governance – boards or bureaucrats Friday 8 November 2007

Governance – what is it?

• No universal agreement on the definition of governance or the structures that are necessary to achieve good governance

Corporate governance encompasses the arrangements by which the power of those in control of the strategy and direction of an entity is both delegated and limited to enhance prospects for the entity’s long-term success, taking into account risk and the environment in which it is operating.

The Uhrig Report

Page 4: Health service governance – boards or bureaucrats Friday 8 November 2007

Governance – what is it?

Accountability (conformance)

Leadership (performance)

External focus

External accountability Strategy

Internal focus

Monitoring and supervision

Policy making

Past and present oriented

Future oriented

Appoint and work through CEO

Adapted from Robert I. Tricker, International Corporate Governance: Text Readings and Cases, New York: Prentice Hall, 1994, p.149

Page 5: Health service governance – boards or bureaucrats Friday 8 November 2007

Governance – what is it?

• The governing body is responsible for ensuring that there is a strong governance system in place

• The governance system permeates the organisation – everyone has a role in good governance

• Good governance typically requires:

– Strong, visionary leadership

– Sound strategy

– Effective policy

– Sensible and clear delegations of authority

– Effective monitoring of organisational performance

– Clear systems of accountability

– Strong risk management systems

Page 6: Health service governance – boards or bureaucrats Friday 8 November 2007

Governance – what is it?

“Clinical Governance is a framework through which NHS organizations are accountable for continuously improving

the quality of their services and safeguarding high standards of care by creating an environment in which

excellence in clinical care will flourish.”

Sir Liam Donaldson, Chief Medical Officer, NHS

Page 7: Health service governance – boards or bureaucrats Friday 8 November 2007

Governance – whose responsibility?

• In large private sector companies with multiple shareholders, the power to control the strategy and direction of the entity usually is vested by the company’s owners in the Board of Directors

• ‘Community-owned’ organisations usually are structured as companies limited by guarantee. The owners are the members of the organisation, and there are various mechanisms for appointing a board to lead the company in the interests of the members as a whole

Page 8: Health service governance – boards or bureaucrats Friday 8 November 2007

Governance – whose responsibility?

“It is the Board’s responsibility to ensure good governance and to account to shareholders for their record in this regard.”

Sir Robert Hampel, UK Committee on Corporate Governance

Page 9: Health service governance – boards or bureaucrats Friday 8 November 2007

Governance – whose responsibility?

• Clinical governance is commonly discussed in the health care sector as if it were a new and distinct governance responsibility

• There has been inadequate attention paid to clinical governance in health care – there has been a culture of delegation of authority to professionals, without effective risk management or proper accountability structures

• Some stakeholders thought that clinical groups or the professional colleges were responsible for clinical governance

• There were insufficient ‘rescue’ mechanisms if self-regulation by the professions failed

Page 10: Health service governance – boards or bureaucrats Friday 8 November 2007

Governance – whose responsibility?

• It makes no legal or practical sense to define the scope of organisational governance in health care as excluding the core business of the organisation

• Clinical governance in health care is a core governance responsibility of the governing body, similar to the responsibilities of the governing body for:

– Financial governance

– Human resources governance (including governance of occupational health and safety)

– Information technology governance, etc.

• The clinical governance role is complex – most organisations are still developing structures, skills and tools

Page 11: Health service governance – boards or bureaucrats Friday 8 November 2007

Governance – whose responsibility?

“After heading two health inquiries in NSW and South Australia, I have concluded that no one runs hospitals … Hospitals in Australia have a life of their own with no clear lines of responsibility and accountability. Only the good sense of people in the system prevents it from descending into chaos. No one runs hospitals. Governance is fundamentally flawed …. A highly dysfunctional system in need of fundamental reform.”

John Menadue

Page 12: Health service governance – boards or bureaucrats Friday 8 November 2007

The role of boards and the duties of directors

• Individual directors have clearly defined legal duties:

– To exercise care, diligence and skill

– To act bona fide, and in the company’s best interests

– To not fetter their discretions

– To exercise powers only for proper corporate purposes

– To avoid conflicts of interest

• The last four are fiduciary duties (duties of utmost good faith)

Page 13: Health service governance – boards or bureaucrats Friday 8 November 2007

The role of boards and the duties of directors

• Boards must ensure compliance with the law and the company’s constitution, but otherwise in the private sector are autonomous entities, accountable only to their owners

• Directors must act in the best interests of the company as a whole, in accordance with the constitution and on behalf of the company’s shareholders or members

Page 14: Health service governance – boards or bureaucrats Friday 8 November 2007

The role of boards and the duties of directors

• The buck stops with the board:

– shareholders of non-performing companies usually will change their boards

– directors who break the law (e.g. trading whilst insolvent) may go to jail or face very significant penalties

– there are clear risks associated with being a director, which need to be managed

Page 15: Health service governance – boards or bureaucrats Friday 8 November 2007

The role of boards and the duties of directors

• There have been many examples of governance failure in both private and public sectors (health and non-health) with serious consequences (civil, criminal, reputational) for those with governance responsibilities:– National Safety Council

– National Australia Bank

– HIH Insurance

– OneTel

– Bristol Royal Infirmary

– King Edward Memorial Hospital

– Bundaberg Hospital

– Manitoba paediatric cardiac surgery

– Etc…..

Page 16: Health service governance – boards or bureaucrats Friday 8 November 2007

Governance failures

National Australia Bank

• $360 million loss due to rogue trading

• Approx 6% of turnover

“…tearing apart its governance structures and threatening to do even more damage in the future.”

“…the culture fostered the environment that provided the opportunity for the traders to incur losses, conceal them and escape detection despite ample warning signs. This enabled them to operate unchecked and flout the rules and standards … ultimately the board and CEO must accept responsibility for the ‘tone at the top’….”

Page 17: Health service governance – boards or bureaucrats Friday 8 November 2007

Governance failures

HIH Royal Commission

“The hand and influence of Williams was paramount. In itself, there was nothing inherently wrong with a strong and forceful influence guiding the affairs of the corporation … But in the modern commercial context such influence must be subject to the countervailing effect of close review, debate and questioning. This appears to have been a commodity in short supply at HIH … there were very few occasions where the board either rejected or materially changed a proposal put forward by management. The board’s independence was compromised by the influence of management in relation to its deliberations.”

Page 18: Health service governance – boards or bureaucrats Friday 8 November 2007

Governance failures

National Safety Council

• Auditors advised that $106 million of trade debtors could not be collected and that they doubted the existence of assets valued at $86.8 million. The company appeared to be irretrievably insolvent

• A $97 million claim was made by the bank against each honorary, part time director

• The case was settled with all but the chairman

In the result there was judgement for the plaintiff against the second named defendant, Maxwell Walter Eise, to the

sum of $96,704,998

Page 19: Health service governance – boards or bureaucrats Friday 8 November 2007

Governance failures

Bristol Royal Infirmary Inquiry

“It is an account of a time when there was no agreed means of assessing the quality of care. There were no standards for evaluating performance. There was confusion throughout the NHS as to who was responsible for monitoring the quality of care.

It is an account of a hospital where there was a `club culture'; an imbalance of power, with too much control in the hands of a few individuals.”

Page 20: Health service governance – boards or bureaucrats Friday 8 November 2007

Boards or bureaucrats – does it matter?

• Most public hospitals in all states and territories are owned by Government

• In most states, Government runs public hospitals directly (owner-operated) – there is no independent governance structure

• Governance responsibilities are delegated from the Minister through the bureaucracy to hospital CEOs and via hospital CEOs throughout their management teams

• In one state only at present (Victoria) public hospitals are established as companies (under the Health Services Act) and are governed by independent boards of directors

Page 21: Health service governance – boards or bureaucrats Friday 8 November 2007

Boards or bureaucrats – does it matter?

“Responding to the clear voice of the local community …. the Commonwealth will …. support the establishment of a Mersey Community Hospital Trust, comprising regional local government, business and health profession leaders, to run the hospital on behalf of the community

………

This plan has been put together by locals for locals. If the community consensus is to give it a go, and it involves no extra cost to the Tasmanian Government, I believe that this spirit of community self-help deserves encouragement and support.”

Prime Minister John Howard, 1/8/2007

Page 22: Health service governance – boards or bureaucrats Friday 8 November 2007

Boards or bureaucrats – does it matter?

States reject hospital board proposal

“State Health Ministers have resoundingly rejected Tony Abbott's proposal as a tired concept, a diversion…..

The Health Ministers say putting local boards in charge of hospitals would simply add another level of bureaucracy to the system and drain the already limited resources.

They also point out that the system of hospital boards has been tested before and was generally found not to

work.”

ABC radio, The World Today, 2/10/2007

Page 23: Health service governance – boards or bureaucrats Friday 8 November 2007

Boards or bureaucrats – does it matter?

• The objective is to establish a governance system that supports the delivery of sustainable health services

• If our system is not designed for sustainability, there will be:

– safety and quality consequences for patients

– cost consequences, because short-term solutions to support unsustainable services almost invariably generate excessive costs

– poor continuity and integration of care

– reduced community confidence in the health care system

– potential consequences for directors (reputational or legal)

Page 24: Health service governance – boards or bureaucrats Friday 8 November 2007

Boards or bureaucrats – does it matter?

“The role of government is itself a defining factor in establishing appropriate governance arrangements for statutory authorities. Governments are held accountable by the electorate for the performance of government as a whole. Where statutory authorities are failing to perform adequately, the electorate will expect governments to act. Inevitably, therefore, there is a role for Ministers in the governance of statutory authorities.”

The Uhrig Report

Page 25: Health service governance – boards or bureaucrats Friday 8 November 2007

Boards or bureaucrats – does it matter?

“There is a lack of effective governance for several of the authorities considered by the review due to several factors including unclear boundaries in their delegation, a lack of clarity in their relationships with Ministers and portfolio departments, and a lack of accountability for the exercise of their power. This lack of governance arises primarily due to a ‘hands off’ attitude assumed by many when dealing with statutory authorities. This situation is often further complicated by the presence of a board, particularly those where it is impractical for government to provide the full governing powers required to be effective.”

The Uhrig Report

Page 26: Health service governance – boards or bureaucrats Friday 8 November 2007

Boards or bureaucrats – does it matter?

Factors that diminish the effectiveness of public sector governance :

• Unclear boundaries in delegation

• Lack of clarity in relationships with Ministers and Departments

• Lack of accountability

• Difficulty recruiting people with requisite skills to the governing body

The Uhrig Report

Page 27: Health service governance – boards or bureaucrats Friday 8 November 2007

Boards or bureaucrats – does it matter?

“Where a board has limited power to act, its ability to provide governance is reduced and its existence adds another layer, potentially clouding accountabilities. Given the nature of government, the circumstances in which a board can be given full power to act are going to be rare and are most likely to be limited to those authorities which are commercial in nature.”

The Uhrig Report

Page 28: Health service governance – boards or bureaucrats Friday 8 November 2007

Boards or bureaucrats – does it matter?

• Will local community-controlled boards be ‘the answer’ to problems in Australia’s health care system?

• Is it possible for effective decisions which accord with the desires of the community to be made by community-controlled boards?

Page 29: Health service governance – boards or bureaucrats Friday 8 November 2007

Boards or bureaucrats – does it matter?

• Possibly…..

• In Victoria, boards are considered to be working well

• It can be an effective model but it’s not a ‘magic bullet’ which will solve all the problems of the health care system:

– there is still a bureaucracy, and it has a significant role in managing the performance of hospitals and their boards

– there is a significant cost (directors of metropolitan health boards in Victoria are remunerated at semi-commercial rates)

– there is a large training investment

– hospitals still face the problems of balancing demand, supply and quality

– some boards have had performance problems, necessitating Ministerial/Departmental intervention

Page 30: Health service governance – boards or bureaucrats Friday 8 November 2007

Boards or bureaucrats – does it matter?

• Other observations about boards of governance of public hospitals:

– a good bureaucracy can govern effectively – the key is appropriate delegation of authority and effective accountability systems

– the health care system is extremely complex and daunting to many lay people who may be asked to play a governance role

– many people are wary of the personal risks of being a director, particularly in a sector that is plagued by high inflation and a history of funding challenges

– most states have tried and discarded hospital governing boards in favour of direct bureaucratic governance

Page 31: Health service governance – boards or bureaucrats Friday 8 November 2007

Boards or bureaucrats – does it matter?

Issues that must be addressed in the design of the governance structure:

• Will the company be a Corporations Act company (with resulting specific legal duties for directors)?

• What if there is not a single community voice?

• What if the board is unable to govern the entity effectively (financial and clinical governance are particular challenges)

• How will the entity be capitalised?

• Will Government guarantee the hospital’s financial position?

Page 32: Health service governance – boards or bureaucrats Friday 8 November 2007

Boards or bureaucrats – does it matter?

Issues that must be addressed in the design of the governance structure (cont.):

• How will the Board’s performance be monitored?

• What if Government is not satisfied with what the board is doing?

– Will the Minister and/or Departmental secretary have rights to direct the Board in the interests of the community?

– Will the Minister have ‘step in’ rights?

Page 33: Health service governance – boards or bureaucrats Friday 8 November 2007

Conclusion

• Good governance of health care is important to the community

• Clinical and financial governance are particular challenges

• Boards of governance operate well but not perfectly in Victoria

• Other states have tried and discarded them

Page 34: Health service governance – boards or bureaucrats Friday 8 November 2007

Conclusion

• Delegations and accountabilities need to be clear

• Due attention needs to be given to selection and training of directors

• There is an ongoing monitoring and board management role for Government

• Boards are not a ‘magic bullet’ and attention needs to be paid to the governance structure, the composition of the board, the accountability of the board and the ongoing role of government

Page 35: Health service governance – boards or bureaucrats Friday 8 November 2007