Generic Management of Health Care Non-Profits, Brought to You by Leaders of (Sometimes Failed, or Bailed Out) Finance on the Board?

Introduction - Managerialism

We have frequently posted about what we have called generic management, the manager's coup d'etat, and mission-hostile management. Managerialism wraps these concepts up into a single package. The idea is that all organizations, including health care organizations, ought to be run people with generic management training and background, not necessarily by people with specific backgrounds or training in the organizations' areas of operation. Thus, for example, hospitals ought to be run by MBAs, not doctors, nurses, or public health experts. Furthermore, all organizations ought to be run according to the same basic principles of business management. These principles in turn ought to be based on current neoliberal dogma, with the prime directive that short-term revenue is the primary goal.

One Explanation - Finance Leaders Ascendant on the Boards of Health Care Non-Profits

I just found a useful article that provides one explanation for the rise of managerialism in health care non-profit organizations. It postulated that the increasing prevalence of leaders of finance firms on the baords of trustees of such organizations led to increasingly managerialistic leadership.

Thanks to a link from Naked Capitalism to a post on ShadowProof that led to an article in the Stanford Social Innovation Review by Garry W Jenkins, entitled, "The Wall Street Takeover of Nonprofit Boards." It described a study of the membership of the boards of 23 of "the nation's leading private research universities," most of which have medical schools and academic medical centers, and all of which have major biomedical and/ or health care research operations, as well as leading liberal arts colleges and large New York City non-profit organizations, including a few hospitals. (We will restrict our discussion of the quantitative results to the former group of leading universities.)

The most important result was that 40% of trustees of the universities in 2014 "had a substantial professional career in finance," up from 19% in 1989. Futhermore, in 2014, 56% of university board leadership positions were held by people from finance, up from 26% in 1989. The author noted that the prevalence of people from the finance sector on university boards was far bigger than their prevalence in the population. Only 6% of the private non-farm workforce in the US was in finance in 2012.

The author summarized his findings:

Over the past twenty-five years the compostion of the boards at some of America's most important nonprofit organizaI I has dramatically changed. Without much notice, a legion of Wall Street executives (investment bankers, hedge fund managers, and others) has taken a growing number of seats in nonprofit boardrooms. Not only that, they hold a disproportionate share of the leadership positions on these boards.

He then linked the increasing dominance of non-profit governance to the increasing tendency of these organizations to be run like for-profit businesses, that is, the rise of "managerialism."

Scholars and practitioners have documented various pressures placed on nonprofit organizations by donors and private foundations to adopt business approaches.

Although some of the pressure to adopt business approaches has come from external forces, it may also be true that the concepts and norms of philanthrocapitalism are also now carried into nonprofit organizations by the directors of public charities themselves.

He then provided a much more detailed discussion:

As financiers come to dominate the boards of leading nonprofits, it is not surprising that their approaches and priorities have made their way, very explicitly and fundamentally, into the governance of the nonprofit sector. Practices such as data-driven decision-making, an emphasis on metrics, prioritizing impact and competition, managing with three- to five-year horizons and plans, and advocating executive-style leadership and compensation have all become an essential part of the nonprofit lexicon.

Nonprofit leaders regularly hear about these finance practices from board members and donors whose native habitat is the financial services world. Moreover, nonprofit managers have come to accept them as reasonable principles upon which donors base their giving. More often than not, organizations are also expected to incorporate these principles in the management of the not-for-profit enterprises for which managers and boards share responsibility.

Although many of these business approaches may strengthen nonprofit capacity, we should also be mindful of the ways in which these same tools can morph into pathologies, ignore the costs or trade-offs associated with extending business thinking to the charitable sector, or distort organizational priorities. Numerous critics have written thoughtfully about the ways in which market-based thinking and approaches applied to the nonprofit sector provide false promise, with the potential to dilute charitable values, undermine long-term mission focus, incentivize small, incremental goals, and threaten shared governance and other forms of participatory problem-solving.

Beyond leading to the borrowing of financial concepts and tools in the boardroom, the rise in the number of nonprofit directors with ties to finance may also contribute to deeper changes in the underlying institutional values and motivations, a trend that economic sociologists refer to as the financialization of the nonprofit sector.

Financialization describes a spread of financial logics, influence, and strategies into new fields and organizations in ways that transform the culture, policies, and values of institutions. Indeed, wealthy nonprofits-like colleges, universities, and museums-have long engaged with financial markets as endowment investors, but the scope and scale of today's nonprofit borrowing, aggressive debt financing, securitization transactions, and complex real estate transactions is unprecedented. Such shifts may affect the organization's strategic direction and orientation in a number of ways, including directing board and management attention to debt service, incentivizing organizations to invest resources on activities that return higher profit margins to cover debt service, elevating the centrality and importance of financial managers in strategic planning and decision-making, and increasing the need for and power of senior staff well versed in complex financial instruments.

The list of practices above and the description of financialization sound very much like standard operating procedures of generic management which we have previously described. The discussion of pathologies above sounds similar to our discussions of how managerialism distracts from or undermines the mission.

The one quibble I have with Jenkins' discussion is that it puts almost the entire onus on the financial leaders on the boards of trustees, rather than the top managers of the organizations. It may be that increasingly financialized boards hire increasingly generic managers, but there may be a symbiosis between the two groups.

So Jenkins' conclusion seems reasonable:

if boards are to operate as designed, and if they are to be maximally effective, then the composition of nonprofit boards must be more diverse and not dominated by financiers.

But the problem of financial sector domination of health care non-profit boards may be even worse than that Jenkins describes.

The Dark Side of Finance

Even though Mr Jenkins is concerned about excess of influence of too many financially oriented people on the boards of non-profits, he is quite respectful of those in the finance field. "Individual finance professionals do bring skills, wisdom, and other positive attributes to nonprofit boards." He also wrote, "This is not to say that finance professionals care less (or more) about a nonprofit organization or its mission. Nor do I believe that all finance professionals think alike." Many finance professionals may be very well-intentioned, of course. But Jenkins seems to thus ignore the dark side of finance's recent history.

Finance firms are certainly known for the use of "financial logics, influence and strategies," and the employment of specific practices. However, after 2008, they were also known for dangerously slipshod, if not unethical, sometimes corrupt management.

In 2008, the global financial collapse/ great recession reshaped the global economy, and has been linked to the stagnation of the middle class and growth of plutocracy. There have been numerous discussions of the role of the leadership of financial organizations in these events. The blog Naked Capitalism has been covering these issues from the global financial collapse to the current day. Some of the very many excellent sources on this era include the movie Inside Job,

and books such as Predator Nation by Charles Ferguson, 13 Bankers by Simon Johnson and James Kwak, and Bailout Nation by Barry Ritholtz.

A chapter in Predator Nation was entitled "Crime and Punishment: Banking and the Bubble as Criminal Enterprises. In it, Mr Ferguson noted the following list of

prosecutable crimes committed during the bubble, the crisis, and the aftermath period by financial services firms ...

Securities fraud (many forms)
Accounting fraud (many forms)
Honest services violations (mail fraud statute)
Bribery
Perjury and making false statements to federal investigators
Sarbanes-Oxley violations (certifying false accounting statements)
RICO offences and criminal antitrust violations
Federal aid disclosure regulations (related to Federal Reserve loans)
Personal conduct offenses (many forms: drug use, tax evasion, etc)

Most of these never led to prosecution in an era of the revolving door and exceedingly lax law enforcement of actions by big corporations ("too big to jail") Yet Ferguson argued for investigation of possible illegal acts by many large companies, and specifically named Citigroup, AIG, Lehman Brothers, Goldman Sachs, JP Morgan Chase as worthy of investigation.

Many of these organizations' leaders also were on the boards of health care organizations. Since 2008, we began noting that the governance of prominent health care non-profits was often dominated by finance firms, including those implicated in the 2008 collapse, although our observations were case-based, not quantitative. The concern was not simply that health care organizations were being led into generic management and "managerialism," but that that the incompetence, unethical behavior, and corruption in the finance sector could cause equally bad problems in health care. We have no systematic proof of that, but consider some of our more colorful cases, which include leaders of the financial firms named by Mr Ferguson...

2008

What Linked the Parallel Declines of Citigroup and the Harvard University Endowment? - In 2008, the collapse of the value of the Harvard endowment occurred on the watch of Harvard Corporation (board of trustees) members half of whom were leaders of big finance firms.

The Leadership of an Elite American University - Brought to You by the People Who Brought You the Global Financial Collapse - Six of the seven "charter trustee" members of the board of Dartmouth College who led a crusade, facilitated by packing the board with self-appointed as opposed to alumni elected members, to discredit elected board dissidents were leaders of big finance firms. Of the six new people whom they packed on as "charter trustees," half were also leaders of such firms.

2009

Hedge Fund U - Bernie Madoff, the supposed finance wizard who went to jail for a huge Ponzi scheme was on the board of Yeshiva University. The chairman of the board's finance committee was Ezra Merkin, a hedge fund operator who ran a "feeder" operation for Madoff's Ponzi scheme.

A Board of Trustees, or a Social Club for the Superclass? - Of the 29 non-physician board members of the Hospital for Special Surgery, 23 had major relationships with, and many of these had leadership roles in finance firms, including such bailed out, too big to fail firms as AIG, Bank of America, Citigroup, Goldman Sachs, JP Morgan Chase, and Wachovia.

2010

Members of the Board of Now Bankrupt Lehman Brothers as Leaders of Health Care? - Members of the board of Lehman Brothers, whose failure was related to the onset of the financial crisis, also served on the boards of Vanderbilt University, the American Red Cross (as CEO), New York - Presbyterian Hospital, New York University, and Tel Aviv University.

A "Very Well Paid Boob" on the Harvard Corporation? - the university's governing board included one of the architects of the overgrowth of Citigroup, which had to be bailed out, and also of the deregulation of finance which allowed the company to be too big to fail.

Failed Leaders of Citigroup as Leaders of Health Care - The bailed out Citigroup board of directors also served on the boards of trustees of Johns Hopkins Medicine, Health System and Hospital, Brown University, Tufts University, Columbia University, Howard University, the Rockefeller Foundation, Harvard (as mentioned above), and Cornell University.

2012

New York - Presbyterian Hospital Trustee Advocated Novel Cardiac Procedure - "Reach In, Rip Out Their Heart, and Eat It Before They Die" - Richard Fuld, the former CEO of Lehman Brothers, whose failure was related to the onset of the crisis, and who once advocated, presumably only symbolically, eating the hearts of his financial competitors, was on the board of the prestigious hospital.

2014

The Medical School as Hereditary Plutocracy - Retiring Board Chair Sanford Weill of Cornell Weill Medical School Names His Own Daughter as New Chair - the board chairmanship of the medical school went from the former CEO and chairman of the bailed out, too big to fail Citigroup (see above) to his daughter, who runs her own finance firm.

Yet outside of a few grumpy bloggers, the continuing presence of leaders of too big to fail, too big to jail, often bailed out financial firms on the boards of some of our most notable health care organizations and universities has attracted almost no comment, and less concern.

Summary

The continuing dysfunction of US health care, with ever rising costs, stagnant quality, and still inadequate access, is well known. There is constant loud argumentation over "Obamacare." (Congress just passed a repeal of it, which the president has threatened to veto.) Yet there is little in depth discussion or inquiry about what is really going wrong. The really unpleasant issues rarely surface in polite discussion. We have called this aversion to direct discussion of big problems the anechoic effect.

So I hope that there is more discusison of who gets to lead health care organizations, and who gets to sit on the boards that exercise stewarship over them. We need far more light shined on who runs the health care system, using what practices, to what ends, for the benefits of whom.

True health care reform would enable transparent, honest, accountable governance and leadership that puts patients' and the public's health over ideology, self-interest, and self-enrichment.