ADVISING THE NONPROFIT BOARD

JOHN H. FISHER, II, CHC

Ruder Ware, LLSC

500 First Street, Suite 8000

P.O. Box 8050

Wausau, WI 54402-8050

715.845.4336

ROBERT M. CHARLES

Liebmann, Conway, Olejniczak & Jerry, S.C.

Attorneys and Counselors at Law

231 South Adams Street

P.O. Box 23200

Green Bay, WI 54305-3200

  1. BACKGROUND AND GOALS
  1. Directors and nonprofit organizations generally get involved voluntarily in order to give back to the community and the organization which they serve. Potential directors generally do not give thought to their specific fiduciary obligations or their obligations to oversee compliance with the many complex laws that are applicable in the healthcare industry.
  1. It is important for legal counsel to healthcare organizations to be certain that directors and trustees have knowledge of their duties and obligations. Specifically, corporate counsel should advise the board on a regular basis with respect to:
  1. The basic fiduciary obligations of oversight, care, loyalty and obedience;
  1. The duty of the Board of Directors regarding oversight of corporate compliance programs;
  1. The manner that the fiduciary obligations are exercised with respect to major healthcare transactions; and
  1. Developments affecting overall Board structure and oversight responsibilities.
  1. This presentation will outline the general obligations of members of a nonprofit board of directors. Common law, statutory, case law and regulatory factors defining a director’s duty of care will be outlined. These general obligations will be applied to some common oversight areas and decisions that are being presented to nonprofit boards in today’s fast-moving healthcare environment.
  1. SIGNIFICANT TRENDS AFFECTING DIRECTOR RESPONSIBILITIES
  1. To apply the same standard as for-profit corporations.
  1. Nonprofits are under more scrutiny in the wake of for-profit scandals.
  1. Increased focus on the role of governing boards overseeing operations and compliance.
  1. State enforcement actions challenging nonprofits.
  1. More IRS scrutiny over Board structure and conflicts of interest.
  1. More aggressive regulators.
  1. Mandatory and more robust compliance program responsibilities.
  1. Complex transactions.
  1. Responsible Corporate Officer Doctrine (Park Doctrine).
  1. Federal and State enforcement preferences directed toward individuals.
  1. OIG push toward more assertive exercise of Board of Director oversight.
  1. ROLE OF CORPORATE COUNSEL ADVISING THE BOARD ON THE NATURE OF ITS DUTIES
  1. Attorneys advise Boards in a variety of settings.
  1. Outside Counsel
  • Working with management on transactions, regulatory issues, compliance.

(1)Duties of the Board may be in the background of this advice.

(2)Management is obligated to fulfill the general oversight direction of the Board of Directors.

  • Addressing the Board with respect to a major transaction.
  • Occasionally directly advising the Board with respect to compliance obligations.
  • Sometime asked to provide “in-service” training to new Directors as part of a training program.
  1. In-House Counsel
  • Has much more ongoing contact with Board of Directors.
  • Often present at committee meetings.
  • Asked for ongoing input regarding legal issues that arise.
  • Often asked to attend Board meetings to give updates on legal/business issues.
  • Side note – Attorney/Client privilege issue with respect to in-house counsel. Privilege is not a certain thing and courts have drawn a distinction based on whether in-house counsel is providing strictly legal advice. Business advice is not subject to the attorney/client privilege. Mixed legal and business advice is at risk of possible recovery by private litigants or government investigators.
  1. Compliance Officer
  • Retain outside counsel when privilege is important.
  • Often arises in the context of compliance, self disclosure, investigation.
  • Ongoing contact with the Board of Directors regarding compliance issues.
  • Must report directly to the Board of Directors.
  • Must make regular reports to the Board of Directors regarding compliance program activities. Annually at the very minimum.
  • As part of compliance training obligations, must make certain that Board members are appropriately trained regarding their responsibilities over the compliance program, the compliance process, and significant risk areas that affect the organization.
  1. Compliance Officer/Legal Counsel Dual Role
  • Roles as compliance officer and legal counsel may conflict.
  • OIG clearly dislikes dual role compliance officers.

(1)Evidence that the compliance program may not be effective.

(2)No reliance on attorney-client privilege.

  • Duty to advise the Board with respect to the risks.
  1. Duty of Legal Counsel
  1. Given current health care environment, nonprofit directors need more expansive counseling regarding their duty of care obligations.
  1. Proper Board education on the nature and extent of their duties can greatly decrease compliance risk and enhance the quality of decision-making.
  1. Advise the Board on the nature of their duties when they are presented with consideration of a major decision.
  1. Advise the Board periodically on the general nature of their obligations.
  1. Advise incoming Board members on the nature of their duties and obligations.
  1. Advise the Board regarding their obligations to oversee the compliance program of their institution.
  • General compliance requirements.
  • Compliance processes.
  • Duties to seek answers.
  • Put processes in place.
  • Be certain that compliance is being addressed.
  • Independence in effectiveness reviews.
  1. GENERAL DUTIES OF NONPROFIT BOARD
  1. Regulatory Agencies are Pushing for More Board Engagement
  1. Federal Sentencing Guidelines
  1. OIG Industry Guidance
  1. Daniel Levison Article
  • DHH Inspector General
  • “Trustee Engagement and Hospital Success”
  • Trustee Magazine, July 2010
  1. State Attorneys General
  1. Sarbanes-Oxley Model
  1. Duties and Responsibilities of Board Directors of a Nonprofit Board
  1. Revised Model Nonprofit Corporations Act (1987)
  • Move toward same duties as directors in for-profit corporations.
  • Modern trend away from trust principals.
  • Distinction is that trustees can be held responsible for simple negligence as opposed to corporate fiduciary concepts of good faith, reasonable belief.
  • But some state Attorney Generals have attempted to apply the trust standard.

(1)Community Asset theory

(2)No market oversight theory

(3)Minnesota AG attempted to force the appointment of two directors in HealthPoint (2003)

  1. Director duties arise in several contexts
  • Decision-making Function – Involving specific decisions on particular board action:

(1)Entering a contract

(2)Purchasing a practice

(3)Merger or Acquisition

(4)Medical Staff Credentialing

  • Oversight Function

(1)Overseeing day-to-day activities

(2)Assure management meets operational obligations

(3)Some examples

(a)Compliance Program Oversight

(b)Quality and Safety Oversight

  • Management Function

(1)All corporate powers are exercised through delegation from the Board of Directors.

(2)The Board is ultimately responsible for the management of the corporation.

  1. General Duties
  • Common law

(1)Historically, there has been very little precedence on which to advise nonprofit hospital boards on the nature of their duties. It was unclear whether corporate or trust principles were applicable.

(2)Recent cases and model rules tend toward the application of general corporate standards of care.

(3)State Attorney General actions and governmental regulators are providing some additional definition of the duty of nonprofit hospital boards.

  • Primary Duties Adopted in Model Act

(1)Duty of care – requires a director to use the care of an ordinary prudent person under similar circumstances.

(2)Duty of loyalty – required a director to act in the interest of the organization and not in the personal interests of the director or in the interests of another entity.

(3)Duty of obedience – requires nonprofit directors to further the purposes of the organization as defined in articles, bylaws, mission statement.

  • The Model Act provides that a director fulfills his duty of care if he acts in good faith, with the care of an ordinary prudent person under similar circumstances, and reasonably believes his actions are in the best interest of the organization.

(1)Ordinary prudent person

(a)Informed, practical judgment and common sense;

(b)Does not require excessive caution; and

(c)Does not require special skills (ordinary).

  • Generally requires making informed decisions based on a reasonable inquiry.

(1)Attend meetings, review information, request additional information when warranted.

(2)Further inquiry if circumstances seem suspicious or information seems incomplete.

  • Good faith with a “reasonable belief”

(1)Fact-based inquiry into the state of mind of the director when making an important corporate decision.

(2)Did actions of the director reflect honesty and good faith?

(3)Allegiance to the interests of the organization.

(4)Conflict plays a factor (Sibley Hospital Case).

(5)Was there a subjective belief that the action was in the best interest of the organization?

  • In a “like position” and under “similar circumstances”

(1)Evaluated given the unique nature of the organization.

(2)Similar size and level of sophistication

  • Concept of duty of care recognizes differences in the background and experience of directors

(1)Directors who are also in operational control.

(2)Directors retained for their expertise in a certain area.

  • Business Judgment Rule – a director will normally not be held liable if the director make a decision in good faith, is disinterested, is reasonably informed, and rationally believes the decision is being made in the best interests of the organization. A finding of gross negligence or recklessness will overcome the presumption of the business judgment rule.

(1)The Business Judgment Rule has been uniformly applied in the “for-profit” arena; even when there have been obvious flaws and imperfections in the board’s decision-making process.

(2)Exercise of good faith and due care has been sufficient to sustain the presumptions of the Business Judgment Rule.

(a)See for example, In re Walt Disney Derivative Litigation, Case No. 411, 2005 (Del. June 8, 2006)

(3)“Best practices” are not necessary in order to sustain a finding that a director’s actions were taken in “good faith.”

(4)Open question – will state charity enforcers or a court reviewing the decision of a nonprofit Board apply the same analysis?

(a)Are there distinctions with nonprofit organizations?

(b)They are supposed to serve the public benefits.

(c)There is not the same element of “market remedy” in the nonprofit sector.

(5)Examples:

(a)Maryland Insurance Commissioner issued a lengthy report on the conversion of a nonprofit to for-profit status (2003). Asserted that the Business Judgment Rule “has no application” to a regulatory approval proceeding.

(b)Health Midwest v. Kline involved a challenge to the sale of Health Midwest to HCA. The court upheld the application of the Business Judgment Rule and declined to apply charitable trust law.

(c)Tennessee ex. rel. Adventist Health Care System/Sunbelt Health Care v. Nashville Hospital – The court noted the Attorney General’s approval of a sale to a lower priced suitor.

(6)Counsel should assure that Boards are making “good faith” decisions based on adequate information when taking major actions.

  • Reliance on experts – Directors are permitted to rely on expert advice as a long as it is reasonable for them to do so. A director is generally permitted to rely on information, opinions, reports or statements, including financial statements and other financial data, if prepared and presented by: (1) one or more officers or employees of the corporation whom the director reasonably believes to be reliable and competent in the matters presented; (2) legal counsel, public accountants or other persons as to matters the director reasonably believes are within the person’s professional or expert competence; and (3) a committee of the board of which the director is not a member, as to matters within its jurisdiction if the director reasonably believes the committee merits confidence.
  1. General board responsibilities
  • Serve as trustee, advisor, benefactor.

(1)Preserve and protect the organization’s assets.

(2)Ensure organization’s continued activities in pursuit of its charitable purposes.

(3)Ensure that the organization acts in prudent and effective manner.

(4)Have duty of loyalty; care; obedience; to act in good faith with diligence, care and skill.

(5)Act as advisers to the organization’s employees and members with respect to the organization’s “business.”

  • Establish goals and policies

(1)Establish long-term goals and operating policies.

(2)Ensure that goals and policies are clearly articulated, observed in the course of day-to-day operations, and modified when their modification is in the best interests of the organization.

  • Ensure continuity
  1. Specific responsibilities
  • Mission statement

(1)Use as a guide in determining the propriety of proposed activities.

(2)Assists the Board and staff in focusing and clarifying the organization’s basic goals.

  • Strategic goals

(1)Long-term goals used for advance-planning purposes.

  • Operational goals and objectives

(1)Blueprint for achieving the strategic goals and fulfilling the mission statement.

(2)Developed by executive staff and approved by the board after consideration.

(3)Include discrete, quantifiable tasks and deadlines for their accomplishment.

(4)Serve as a basis for budget development and evaluating staff and board performance.

  • Operation Issues

(1)Exercising authority to approve or disapprove new projects, capital expenditures and other activities.

(2)“Rubber stamping” of staff requests may constitute a violation of the directors’ duty of care.

(3)Directors should ask for whatever information is reasonably necessary to make proper decisions.

(4)Solicit staff opinions.

  • Budget and Finance

(1)Review and approve (or disapprove) budgets prepared by staff.

(2)Monitor financial performance by reviewing interim financial statements prepared by staff.

(3)Engage independent CPA’s to review (or audit) annual financial statements and report to the board.

(4)Take reasonable steps to ensure the security of the organization’s funds and other assets.

(5)Maintain the organization’s exempt status and consult with attorneys or accountants regarding avoidance of tax penalties for improper activities or unrelated business income.

(6)Consult with qualified insurance brokers and obtain appropriate types and amounts of insurance.

(7)Direct appropriate and secure investment of the organization’s assets as required by the Internal Revenue Code and by the Uniform Fiduciaries Act.

  • Compliance with laws and regulations
  • Supervision and oversight of quality and patient safety
  1. Liability of Board Members Under Wisconsin Statute
  1. Limited liability
  • Self dealing - A contract or transaction between a corporation and one or more of its officers is not void or voidable under Wisconsin law if any of the following occurs:

(1)The director’s interest in the transaction is disclosed to the board that authorizes, approves, or ratifies the contract or transaction by a vote of consent sufficient for the purpose without counting the votes or consents of the interested directors;

(2)The director’s interest is disclosed or known to the members entitled to vote and they authorize, approve, or ratify such contract or transaction by vote or written consent; and

(3)The contract or transaction is fair and reasonable to the corporation.

  • Criminal conduct - Officers may be held personally liable for violations of criminal law unless they had reasonable cause to believe their conduct was lawful or no reasonable cause to believe their conduct was unlawful.
  • Responsible Corporate Officer Doctrine (Park Doctrine)

(1)Wisconsin Health Law Update presentation January 27, 2012

(a)Thomas Storm, Wisconsin Department of Justice.

(b)Current trend is to look toward both high and low level individuals.

(c)Tendency away from excluding the hospital because of impact on the community.

(d)Focus on individuals.

(e)Wisconsin DHS recently (2011) created an Office of Inspector General and centralized many of the state’s fraud prevention activities.

  • Willful misconduct - Officers may be held personally liable for willful misconduct; however, the statute does not define what constitutes willful misconduct.
  • Exceptions from limited liability - personal immunity provided to non-stock corporate officers and directors does not apply to any of the following:

(1)A civil or criminal proceeding brought by or on behalf of any governmental unit, authority, or agency (unless brought in its capacity as a private party or contractor).

(2)A proceeding brought by any person for a violation of state or federal law where the proceeding is brought pursuant to an express private right of action created by state or federal statute.

(3)The liability of a director under section 181.29 of the Wisconsin Statutes (making loans to officers).

  • Reliance on other sources - Directors are permitted by statute to rely upon information, opinions, reports, or statements, including financial statements and other financial data, if prepared or presented by any of the following:

(1)An officer or employee of the corporation whom the officer believes in good faith to be reliable and competent in the matters presented.

(2)Legal counsel, public accountants, or other persons as to matters the officer believes in good faith are within the person’s professional or expert competence.

(3)In the case of reliance by a director, a committee of the board of which the director is not a member, if the director believes in good faith that the committee merits confidence.

  1. 2009 – Wisconsin Adopts Uniform Prudent Management of Institutional Funds Act
  1. Replaced the Uniform Management of Financial Institutions Act & eliminated the historic dollar value rule for endowment spending
  1. Amended provisions governing the release and modification of restrictions on charitable funds
  1. Main purpose – Provides uniform and fundamental rules for the investment of funds held by charitable institutions and expenditure of funds donated as endowments to institutions.

(1)To ensure that assets are invested prudently in diversified investments that sought growth as well as income

(2)To ensure that appreciation of assets could prudently be spent for the purposes of any endowment funds held by charitable institution.

  1. Standard of care – requires investment “in good faith and with care an ordinarily prudent person in a like position would exercise under similar circumstances and that investments costs are appropriate and reasonable.”
  1. Permits prudent expenditure of both appreciation and income.
  1. Institutions, “may appropriate for expenditure of accumulate so much of an endowment fund as the institution determines to be prudent for the uses, benefits, purposes and duration for which the endowment fund is established.”
  1. State may adopt rebuttable presumption of imprudence if institution expends an amount greater than 7% of its fair market value of a fund over three years.
  1. Donor intent is more broadly protected
  1. Practical Impact/Guidance for Boards
  • A nonprofit Board may want to establish a separate committee responsible for ensuring compliance with UPMIFA.
  • Specifically the Committee would be required to do the following:

(1)Consider the charitable purposes of the institution and the purposes of the institutional fund;