Fiduciary Duties: A Compliance Challenge and Liability Risk for Rural Hospitals
Every hospital board member in America has a legal duty to their hospital. Board members are fiduciaries of their organization, and fiduciaries are subject to the highest scrutiny available under the law. The makeup of rural hospital boards around the country varies extensively. Members are often either elected or appointed by elected officials and thus represent the people of the local community. Therefore, members tend to represent geographic segments of the hospital’s service area by election or appointment.
Rural hospital board members tend to be volunteers in various occupations, often unrelated to healthcare. While typically uncompensated—or compensated a minuscule amount compared to for-profit board members—non-profit board members often accept the responsibility for one or more of three reasons. First, they are interested in ensuring that the local hospital is successful because they live in the community, are loyal to the community and the organization, or have a personal interest in the prestige of serving in the position. These circumstances can make communication about hospital operations, financials, the regulatory environment, and the complexities of revenue cycle management more challenging. Unfortunately, many do so without knowing their duties’ extent or associated liability.
A Board’s responsibility to provide oversight of the organization consists of three fiduciary duties. First, the Duty of Care requires board members to perform due diligence to make informed decisions. Second, the Duty of Loyalty requires board members to act in the organization’s best interests ahead of their interests while avoiding conflicts. Third, the Duty of Obedience requires board members to ensure that the organization does not engage in illegal or unethical activities. Remaining mindful of these three duties as the board prepares to face future challenges is paramount.
The Duty of Care
A board member must make responsible decisions and provide appropriate oversight. Before diving in, note the meaning of those two functions. First, making “responsible decisions” does not compel board members to be or become experts in hospital operations, quality of care, process improvement, healthcare regulation, healthcare finance, or any other complex area of hospital administration. Second, “appropriate oversight” does not authorize board members to control day-to-day hospital operations, personnel management, or strategy implementation.
The Duty of Care does compel board members to act in good faith and use the same degree of care, skill, and diligence that a reasonable person would use in a similar situation. This good faith effort includes two fundamental commitments to the organization.
Make Informed Decisions
Board members must make reasonable efforts to become informed before making decisions. These efforts include becoming familiar with relevant facts and understanding a decision’s potential risks, benefits, and likely outcomes. Remember, a board member might not be and is not obliged to become an expert in any subject matter.
Boards must require hospital management to provide complete and accurate information to form the basis of decisions. Board members should review data, key performance indicators, proposals, and other relevant information. Notably, the law does not require boards to perform independent investigations. Instead, the law offers board members the latitude to rely upon the information provided by management, outside professionals, and consultants.
Due Inquiry
While board members have the latitude to rely upon the information provided, their duty of care rests not solely upon accepting that information as precise and evident without inspection. The Duty of Care requires board members to make due inquiries. When strategic decisions are in debate, board members must ask questions and challenge management to convince the board. When facts raise questions about the accuracy or validity of the information, a board member must inquire further.
The Business Judgment Rule
Practically every state protects the actions of directors through the Business Judgment Rule. This rule protects board members from liability so long as they make informed decisions in the organization’s best interests and good faith without influence from self-interests. Evaluating whether board members act in a manner protected by the rule requires an assessment focused on decision-making. Board members must understand the significance and meaning of this method of review. This approach means that even if a board’s decision was substantively incorrect, courts are unlikely to impose liability when the board’s rational decision-making process satisfies these elements.
Did the board act in good faith? Did the board make efforts to become informed and exercise judgment? Did the board require adequate information? Did a reporting system exist? Did the board’s self-interests influence the decision? Boards are more likely to become subject to liability for loss when they do not satisfy these process requirements.
The Duty of Loyalty
The Duty of Loyalty is the obligation of a board member to protect an organization’s interests and avoid conflicts in which one could derive personal gain to the organization’s detriment. Board members should act in good faith and without the influence of self-interests. In protecting the organization’s interests, board members should also preserve the integrity of the organization’s decision-making, protect the confidentiality of the organization’s affairs, and always act in furtherance of the mission without bias or prejudice.
Avoiding conflicts of interest protects an organization from board actions rooted in self-interest; however, the law in most states does not prohibit an organization from conducting business with its board members if the arrangement meets certain conditions. These conditions require that the organization’s interests prevail if a conflict arises. These conditions include providing the board advance notice that the board will consider a subject in conflict, disclosing the identity of the board member with an interest in the transaction and the nature of the interest, and temporarily removing the board member from deliberation and the vote.
Disclosing and addressing conflicts of interest demonstrate a board’s compliance with ethics rules and state laws. Hospitals should define these processes in a conflict-of-interest policy for making critical decisions or approving transactions when confronted with a conflict of interest. Establishing a conflict-of-interest policy and documenting compliance with that policy can, in many cases, create a rebuttable presumption that an organization acted appropriately when approving a transaction.
The Doctrine of Corporate Opportunity. There are times when board members become aware of a business or financial opportunity because of their role as an organization’s fiduciary. For example, if a local nursing home in search of a food service vendor approaches a board member who owns a catering business to inquire whether the hospital’s dietary department can provide regular meals for nursing home residents, the Duty of Loyalty applies. Such an inquiry may entice that board member to consider the personal benefits of offering a solution through the catering business and screen the hospital rather than direct the inquiry to the hospital board for consideration.
The doctrine of corporate opportunity means that board members cannot leverage their positions to take advantage of a business or financial opportunity that may interest the organization. This prohibition includes opportunities within the scope of the organization’s current and future transactions. The Duty of Loyalty does not prohibit a board member from engaging in such an opportunity. Instead, the board member must first offer the opportunity to the organization.
The Duty of Obedience
Perhaps the most apparent fiduciary duty is the Duty of Obedience. Disappointingly, it may be the fiduciary duty most often breached by naïve volunteer board members. In some cases, breaches are not the result of naiveté but rather illicit conduct by a bad actor, often motivated by money, power, or both. The Duty of Obedience obligates board members to comply with all applicable laws, rules, and regulations. The duty also requires board members to abide by the organization’s bylaws, policies and procedures, and act in furtherance of the organization’s mission.
The Duty of Obedience also establishes limitations on the authority of boards, particularly within non-profit organizations. A board member’s conduct and the board’s authority are limited in scope by state law and the organization’s articles and bylaws. The board or a board member acting beyond the authorized scope permitted by any governing document or law may result in corporate liability to the corporation for damages resulting from the unauthorized act.
The Point: Serving Stakeholders
For a board to understand its role and the associated accountability, it must acknowledge the stakeholders and their relationships with the hospital. A hospital—and thus, the board—is accountable to patients, employees, medical staff, the local community, and those within the extended service area. Each of these relationships may give rise to some level of accountability. Because of the expanse of influence and the potential for stakeholder harm inherent in hospital decisions, the fiduciary duties of a hospital board member are among the highest standards of conduct imposed by law. Board members must understand their fiduciary duties and the implications of carelessness, apathy, and self-interests.
Please get in touch with us if you are interested in learning more about governance education for your hospital board. We are happy to provide the necessary training.
Written By: Landon Tooke, MLS, CHC, CCEP, CPCO, CHCSP, CHSRAP
Twitter: @LandonNTooke
LinkedIn: Landon Tooke