Emerging Health Leaders Governance 101

Kathy OBrien Dykeman Dewhirst OBrien LLP May 23, 2013

Governance
What is governance? Why is it needed? Corporations are a person at law They make decisions and can be sued Need processes for proper decision-making and accountability Governance

Governance

Commercial corporations have shareholders who own divisible pieces of the organization (1 share, 100,000 shares) these owners want to maximize the return on their investment

Board is expected to serve this purpose

Pointer & Orlikoff, Board Work: Governing Health Care Organizations

Governance

Non-profits (non-shares) are very different they have stakeholders, not shareholders, who have a collective and indivisible interest in the organization but do not own it
Board is expected to deploy the organizations resources to protect and advance the interests of the stakeholders Represent and balance stakeholder interests Organizations are means, not ends unto themselves set organizations mission Pointer & Orlikoff, Board Work: Governing Health Care Organizations

Governance

Management is doing things right; leadership is doing the right things. Peter Drucker

WHAT IS A HOSPITAL?

Or a Community Health Centre Or a Family Health Team Or a CCAC Or a Mental Health Agency

What is a hospital?

Non-share/non-profit corporation Most are registered charities

Dont pay income tax Issue tax receipts for charitable donations
Answer: No one Really: Wrong question Question is: Who can make decisions?
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Who owns a non-profit or charity?

What is a hospital?

Who can make decisions?

Board (governance decisions) CEO/Executive Director (management decisions reports to Board; everyone else reports to CEO/ED) Members of the corporation have a specific decision-making role (AGM) set out in the Corporations Act Electing directors Receiving financial statements (transparency) Appointing auditor Approving by-laws and by-law amendments Out-of-ordinary-course decisions (increase size of Board, amalgamation, sale of substantially all assets)
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Non-share corporations & membership

Open vs. closed

Open = community members can pay $XX to become a member, attend AGM and vote to elect directors, approve by-laws

Unregulated, need oversight by community

Closed = only the directors vote at the AGM

Highly regulated, dont need oversight by community Board is sophisticated and managing millions Hospitals, foundations
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Non-share corporations & board

Hospitals legislation dictates that certain individuals must be on board (non-voting) e.g., CEO, Chief of Staff, Chief Nursing Executive unique to hospitals Otherwise, directors are elected according to process set out in the by-laws Best practice: Nominating committee, call for candidates, objective criteria, skills matrix, interviews to select best candidates Sometimes an election with voting

Someone loses (chilling effect)

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WHAT DOES THE LAW EXPECT FROM DIRECTORS?

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Duty to Govern

Boards have a legal duty to govern the organization What is governance? Not defined in any law Look to key governance reports to identify key governance duties: National Policy 58-201 (Ontario Securities Commission): Corporate Governance Guidelines
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National Policy 58-201 Role of Board

1. 2. 3. 4. Satisfying itself of the integrity of its CEO Adoption of strategic planning process Succession planning, including appointing, training and monitoring senior management Communication policy for the corporation communicate to stakeholders

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National Policy 58-201 Role of Board

5. 6. Integrity of the corporations internal control and management information system Identification of principal risks of the corporations business and ensuring the implementation of appropriate systems to manage these risks (e.g., quality of care, deficits, privacy) Developing the corporations approach to governance, including a set of corporate governance guidelines and principles

7.

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Legal Expectations

Section 43 of new Not-for-Profit Corporations Act (Ontario) [will slowly replace out-of-date Corporations Act] In carrying out his/her governance responsibilities, each director shall:

act honestly and in good faith with a view to the best interests of the corporation (fiduciary duty) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances (duty of care)

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Fiduciary Duty

Board is obligated to serve as agents of their stakeholders as a whole: Patients/clients Community Staff Government Donors Volunteers A Director breaches his or her fiduciary duty if he/she represents narrow interests or particular interest groups
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Fiduciary Duty

Directors owe their fiduciary duty to the Corporation and the best interests of the Corporation must not be confused with the interests of any of the Corporations stakeholders In resolving competing interests, directors should act to make the Corporation a better Corporation

They must respect the trust and confidence that have been reposed in them to manage the assets of the corporation in pursuit of the realization of the objects [purposes] of the Corporation
Peoples Department Stores (SCC)
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Fiduciary Duty

Fiduciary duty is why conflicts of interest are such a problem for directors if you have a conflict of interest, you may act (or be perceived to act) in your own best interests, your business best interests, your associates best interests, instead of the best interests of the corporation Every director must declare any potential or actual conflict of interest, leave the room, not participate in discussions, not vote so that fiduciary duty is not violated

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Fiduciary Duty

How does a board member know what is in the best interests of the Corporation?

Objects [in incorporating documents] Mission, vision, values Strategic plan (usu. 5-year plan) Accountability agreement with LHIN or Ministry of Health

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Standards for Non-Profits

Directors of non-profit corporations are subject to the same standard of care as directors of corporations run for profit. (Wheeliker v. Canada, Federal Court of Appeal)

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Duty of Care - Individual Test

This is an individual test The concept of diligence implies attentiveness, persistence and vigilant activity Vigilant activity read management reports and board packages ask questions where applicable

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Duty of Care

Supreme Court of Canada confirmed that the duty of care is tested against an objective standard and that the standard is not perfection Exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances Courts are more concerned about process than results:

Did the board have sufficient information? Did the board examine the information critically? Did the board allocate appropriate time to make the decision?
Peoples Department Stores (SCC)

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Defences

Business judgment rule (proper process will not be questioned) Reliance on professionals (lawyers, auditors, etc.) D&O insurance (charities can purchase only if the premiums will not render them insolvent) Good faith protection under Public Hospitals Act

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Kathy OBrien 416-967-7100 ext. 227 kob@ddohealthlaw.com

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