New GAO Study To Question The Financial Viability Of CCRCs
Given the economic times we’re negotiating, the stakes are higher than ever for boards of directors. Whether they’re on corporate, proprietary, or not-for-profit boards, board members must deliver meaningful results.
“Part of [good governance] involves reaching a clarity of roles and responsibilities between the board and management,” suggested Michael F. Slavik, CPA and Principal, Health Care at LarsonAllen in Randolph, Massachusetts. “What I see in practice runs the gamut from boards that operate almost as management to those that are strategic in nature and focus on the overall direction of the organization. Clearly, the board must monitor the organization from the standpoints of risk, strategy, and succession. And board members must have talents that represent the organization’s priorities.”
Not-for-profit senior living organizations and their governing bodies appear to be going through a culture change, according to Slavik’s observations. “In the past, it took a lot of time for the organization to ‘turn the ship’ in response to situations or crises in the facility or to industry trends,” he said. “They’re realizing now that they must create more nimble operating and governance structures so they can react more quickly.”
Boards also need to have their sights on more than a one-year operating cycle, with contingency plans in place in case things don’t go as expected or outside influences such as the economy affect their plans. “It’s pretty easy for boards to get a grasp on where the organization stands right now just by looking at the financial data,” he said. “Until they answer the question of where they want to be 10-15 years out and what level of financial health they feel is appropriate for the organization, it’s hard to go from point A to point B in an efficient manner.” Therefore, Slavik advocates to his clients that their boards incorporate a longer timeframe into their financial monitoring to understand the types of capital they plan to expend, to make sure the organization remains marketable, to keep the infrastructure in the necessary operating condition and to implement additional strategies that may be necessary.
The board/management relationship also must be a dynamic partnership—flexible, adaptable, and adjustable—that is grounded in trust, according to Rick Stiffney, President and CEO of MHS Alliance in Goshen, Indiana. Stiffney, who has consulted with dozens of boards on governance issues over the years, cites a relatively simple framework for the work of a not-for-profit board, as captured in Governance as Leadership (Chait, Taylor, and Ryan, John Wiley & Sons, 2005):
1. Fiduciary work, or stewarding limited resources
2. Strategic work, or setting goals and evaluating results
3. Generative work, or understanding the core reason for being in the business
It’s also helpful to have a board committee or task force responsible for growing the board. More than simply having a nominating committee, it involves thinking about board assessment, board performance, and policy development.
Who’s on (the) board?
Beatitudes Campus, a CCRC in Phoenix, Arizona, was established more than 40 years ago as an outreach of the Church of the Beatitudes, also in Phoenix. Originally, church pastors served as the executive officers and operated the community. Today, the bylaws require a minimum number of board members drawn from the church, but a professional executive serves as CEO. The 21-member board also includes two ex-officio members that represent resident organizations. Other board members, drawn from the local community, are selected based on their individual talents and their ability to fulfill the organization’s needs. The board’s finance committee, for example, is composed of accountants, business attorneys and investment managers.
About five years ago, Beatitudes Campus embarked on an $85 million redevelopment project that tripled the number of residents to 900 and enhanced the board’s role as both a fiduciary and a policymaking body. “We had to deal with harder issues,” said Michael R. Scheurich, a lawyer with Mariscal, Weeks, McIntyre & Friedlander and chairman of the Beatitudes board. “And since we had board openings, we brought on folks with a strong background and experience in that area.”
Generally, though, not-for-profits are moving away from thinking primarily in representational terms with regard to their governing boards, according to Stiffney. “Rather than looking for members with specific expertise, they’re looking for people with more of a worldview—people with the perspective and insight that can really help advance the organization strategically.”
Nevertheless, investors and rating agencies continue to look at board composition to see how member talents and skill sets complement those of management. They want to make sure that the board has the experience to fully understand the ramifications of any strategies the organization may be undertaking—such as a development project. “That’s healthy for the organization and looked at positively by the outside world,” Slavik suggested. Even so, board members should also be able to engage strategically and think profoundly about the future of the organization and to hold management accountable.
It’s also important and helpful to have people on the board who have personal relationships with the donor community. “But I wouldn’t put people on the governing board just because they’re donors,” said Stiffley. “I’d put them there because they provide strategic perspective.”
Risking the undue influence of big donors doesn’t appear to be an issue for not-for-profit senior living organizations. Many have avoided that type of situation by setting up an affiliated foundation that adheres to the policies set by the organization’s board and putting the “big bucks” people on the foundation’s board. Beatitudes Campus, for example, has a separate foundation charged with stewarding all charitable gifts and contributions, foundation scholarships and aid for residents in need.
Evaluating board performance
Board members have a fiduciary responsibility to move the organization in the right direction and help monitor risks. Knowing that each board member understands and is aligned with the mission and vision of the organization is also critical, and taking the board’s pulse on a regular basis ensures that the organization has engaged individuals on its board. That’s particularly important as the industry creates more nimble organizations—the culture change that Slavik mentioned.
Board performance may be evaluated as a group or individually. A board chair or board development committee member may be able to facilitate a group board assessment and discussion. It’s often helpful, however, to bring in an outside facilitator or consultant so the board chair is free to participate in the discussion.
Boards with review policies in place often evaluate performance annually or every two years. Some evaluate individual board members at the time of reappointment to provide feedback to the nominating committee. MHS Alliance offers a board assessment instrument on its website (www.mhsonline.org) that allows board members an opportunity to critique their own performance and evaluate the group’s performance against metrics that may be set out in a strategic plan, in board policies, or in standards set by accreditation services.
Financial accountability and regulations
Most not-for-profit senior living organizations have some kind of tax-exempt bond financing, so debt covenants must be honored and bondholders are constantly looking over the organization’s “shoulders.” Add independent annual audits to that, and board members should be getting considerable feedback on performance as it relates to financial standards and expectations.
So is more regulation needed? At the urging of the Senate Special Committee on Aging, the Government Accountability Office (GAO) is currently undertaking a study of CCRCs to understand their structure(s), evaluate their financial viability and current regulations, and determine best practices. The study was prompted primarily by a fear that CCRC entrance fees and lifecare contracts, upon which residents depend, might be at risk should the CCRC become insolvent. In recent years, though, CCRCs have lessened their reliance on entrance fees, turnover, contributions and investment income to support operations, according to Slavik. Rather, they’re depending more on monthly fees and operating efficiencies.
“CCRCs will always have some reliance on entrance fees, turnover and investment income just because of the way they’re financed,” he added. “The balance between the entrance fee and monthly fees simply allows different ways for people to pay for the services over time. But to the extent the reliance on entrance fees is mitigated, the organization will be stronger.”
Not-for-profits are also looking at regulatory legislation such as Sarbanes-Oxley in anticipation that those standards could be applied to them, according to Scheurich, but transparent financial dealings and independent boards that take the fulfillment of fiduciary obligations seriously are ideas that not-for-profits understand. “They know that they have to govern themselves with the same care as for-profits and publicly traded companies,” he said. “So far, we haven’t seen catastrophic financial failures in these communities or people being dispossessed of their homes, which would support an outcry for more regulations.”
“The aging services sector is already highly regulated,” added Stiffney. “On the other hand, there is considerable unevenness in the regulations among the various states. And that’s problematic. So while I generally lean in the direction of less regulation, it might be reasonable to even out the regulation of the field throughout the country.”