Effective Governance: Who Decides What?

Will Latham, MBA
President, Latham Consulting Group, Inc., Chattanooga, TN

Over the years, you may have heard the old saying that “Nothing happens until someone sells something.” With regard to anesthesia groups, we have found that “Nothing (good) happens until the group has effective governance.”

Without effective governance:

• The group lacks the ability to develop and focus on a vision. Unanimity is required in every decision.
• Issues are discussed ad nauseam.
• There is an over-emphasis on protecting the rights of every individual. 
• Responsibility is given, but without the needed authority to carry out the responsibility.
• There is confusion over the difference between governance and management.
• Only unimportant issues are resolved, and the group spends little (if any) time focusing on issues of strategic importance.

Modes of Medical Group Governance

One of the more important aspects of effective medical group governance is determining who has the authority to make decisions about various issues.

We have found that a medical group’s system of governance can be categorized by one of seven modes (see Exhibit 1). Each of these modes has positives and negatives, but many groups are finding that it is counter-productive to include all shareholders in all decisions.

A group may miss capitalizing on important opportunities or avoiding significant threats because of the challenges of getting everyone together to work through an issue. Or, the group might be of such a size that it is no longer feasible to expect all shareholders to become sufficiently knowledgeable about all of the issues to make well-informed decisions.

Delegating Authority

Whatever the reason, the most effective anesthesia groups find that it makes sense to empower a subset of the group to make certain decisions for the entire group. Depending on your corporate structure, this subset might be called the “board,” the “executive committee” or the “management committee.” (We will use the term “board” in this article.) The board is often assigned a number of governance responsibilities, but is often not provided the needed level of authority to carry out those responsibilities.

Every group has to choose the level of authority it will extend to the board. Exhibit 2 provides a checklist of issues that: 1) might be reserved for the shareholders, or 2) can be decided by the board, president or manager without coming back to the next higher level for approval.

Supermajority Issues

Many groups require supermajority votes on certain (sometimes all!) issues shown in Exhibit 2. Supermajority votes could require a vote of two-thirds or three-fourths of the shareholders (although we have seen supermajority thresholds as low as 60 percent and as high as 100 percent).

What is often not recognized is that supermajority votes tend to protect the individual rather than the group. Accordingly, many groups are stymied in moving forward even when a significant majority of the group wants to pursue a given initiative.

Our belief is that supermajority votes have their place, but that: 1) they should be limited to a small set of extremely important issues; and 2) the supermajority threshold should be fairly low (two-thirds rather than three-fourths).

Which issues might require a supermajority? Typically, they include:

• Amending the shareholders’ (buy/sell) agreement.
• Amending the shareholders’ employment agreement.
• Amending the group’s bylaws.
• Decision to sell the entity and/or the assets of the entity.
• Decision to dissolve the entity.
• Decision to merge the entity with another entity or any other business.
• Discharging a shareholder physician.

Other important and controversial issues might affect shareholders’ lifestyle, such as changes in the compensation system, adding or deleting a site of service or making a physician a shareholder that could be considered for supermajority status. Every group needs to decide which issues should be supermajority issues, but in general, we believe the fewer issues, the better.

Governance versus Management

As a board tries to do its work, it’s often tempted to move from “governance/oversight” to micromanagement of the organization. The best way to way to avoid this is to focus the board on setting policy rather than on making decisions.

A policy is a statement that guides and constrains the subsequent decision-making. The goal of setting policy is to specify the ends rather than the means.

In setting policy, the board should identify what is to be accomplished and determine a range of acceptable and unacceptable means for achieving these objectives. This could include a set of directives for how the group will operate in the future, or instructions to management.

To help the board avoid micromanagement, it’s often helpful to remind them that they don’t have to (and shouldn’t) make each and every decision. The board has options, which include:

• Requesting proposals and recommendations from management (or a committee) prior to making a decision. Example: “We need to avoid problem X. Management: develop a set of alternative methods to achieve this end.”
• Delegating decision-making authority with constraints. Example: “We need to avoid problem X. Management: develop a set of alternative methods to achieve this end, but it must cost less than $50,000.”
• Delegating decisions with exceptions. Example: “We need to avoid problem X. Management: develop a set of alternative methods to achieve this end, but it must be a process solution rather than a technology solution.”
• Retaining authority and making decisions itself.

The most effective boards always think: “Is this something that management should decide once we’ve provided guidelines?” The best boards spend most of their time setting policy and then delegating responsibility to others to carry out tasks rather than trying to do everything themselves.

Key Questions for the Board

The following is a checklist of questions that the board should ask as it processes individual issues.

1. Has this issue been processed yet by a committee?
2. Is this issue strategic or operational/ tactical?
3. Is this issue related to one of the key responsibilities of governance?
   •  Set mission, vision and values
   •  Move group toward strategic goals
   •  Oversight
   •  Deal with disruptive physicians
   •  Evaluate management
   •  Evaluate board performance
   •  Over-communicate with constituents
4. Is this within the board’s authority to decide?
5. Is this something that management should decide on once we’ve provided guidelines, constraints, exceptions?
6. When the decision is being made:
   • What is the board’s expectation with regard to timing?
   • Does management have sufficient resources to meet those expectations?
7. Periodically – Do the board’s priorities and management’s priorities match?

Careful thought in assigning responsibility and authority for various types of decisions will help your organization develop the structure it needs to function more efficiently and effectively.

Will Latham, MBA is President of Latham Consulting Group, Inc., which helps medical group physicians make decisions, resolve conflict and move forward. For more than 25 years Mr. Latham has assisted medical groups in the areas of strategy and planning, governance and organizational effectiveness, and mergers, alliances and networks. During this time he has facilitated over 900 meetings or retreats for medical groups; helped hundreds of medical groups develop strategic plans to guide their growth and development; helped over 130 medical groups improve their governance systems and change their compensation plans; and advised and facilitated the mergers of over 120 medical practices representing over 1,200 physicians. Mr. Latham has an MBA from the University of North Carolina in Charlotte. He is a frequent speaker at local, state, national and specialty-specific healthcare conferences. Mr. Latham can be reached at (704) 365-8889 or wlatham@lathamconsulting.com.