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Shared-services boards rife with conflict of interest potential: O'Brien

Hospitals need to guard against conflicts of interest that can arise among the directors they nominate to sit on boards of shared-services organizations, Toronto health lawyer Kathy O’Brien tells AdvocateDaily.com.

“It sometimes puts these nominee directors in a pretty difficult position,” says O’Brien, partner with DDO Health Law.

As a lawyer who advises health-sector organizations and non-profits on governance and procurement, O’Brien trains hospital executives on how to manage conflict issues, and she stresses one key point:

“Just because you’re sitting on the board as a nominee or a representative of somebody else, that doesn't make your duty to this corporation any less,” she says.

Shared-services organizations in the health sector — such as Greater Toronto’s Plexxus and Shared Services West — have increased in number over the past 10 years, O’Brien says.

Hospitals have banded together to create these entities, which provide such services as linen cleaning, procurement, and warehousing.

These organizations manage non-core functions, which allows hospitals to concentrate on patient care, she says.

Because medical facilities are often the primary revenue source and main customers of these organizations, they regularly nominate hospital CEOs and other executives to sit on their boards, O'Brien adds. 

“That just opens the door for a whole bunch of potential conflicts of interest,” she says. “That CEO is sitting there wearing a bunch of hats. He’s acting as the CEO of his home hospital organization at the same time that he’s at the board table as a director of this shared-services organization, and those interests don't always align.” 

The case law clearly states, however, that nominee directors have a legal obligation to act in the best interests of the organization on whose board they sit, she says.

At her seminars, O’Brien tells these directors, “I get that your home hospital has needs. They may have specific expectations of this shared-services organization, which is providing services to you and that you're funding in part. And you can absolutely communicate those needs. You can even be an advocate,” she says.

“But when it comes to voting and making decisions, you still have to vote in the best interests of the shared-services organization and not in the best interests of your home hospital. At the end of the day, that's where your loyalty lies.”

So if a nominee director’s hospital makes a decision that can negatively and materially impact the shared-services organization, they are obliged to disclose that to the board, O’Brien tells them. “And that often comes as a big surprise when I give my training.”

For instance, if a CEO knows their hospital wants to pull out of the shared-services organization, they have an obligation to speak up, she says.

“The case law says you can't sandbag the corporation if you’re a director.”

A conflict can also arise when a nominee director receives confidential information from the board that will affect their hospital, O’Brien says. In that case, the director should press the board to develop a communications strategy to quickly get this information out to members and customers, she says.

“What sometimes creates the conflict at the board is if a hospital CEO is sitting there saying, ‘You know what? The services you're providing to me as a customer aren't satisfactory. I'm not happy. My linen's dirty. It's arrived late,’” O’Brien says.

“And I try to say, ‘You know, if there is a customer issue, there's a place to lodge those complaints. And that's usually under your services contract. And it's probably not the board where you need to raise that.’"

It’s a question of raising concerns in the right forum because not everything is a board issue, she says.

O’Brien recommends that every year, upon appointment to the board, a nominee director be asked to sign a document acknowledging their duty to act in the best interests of the shared-services organization and that, "They are not going to be able to wear their hospital hat when sitting at the board.”

While still being able to share their home hospital's concerns and advocate on their behalf, the nominee director will need to agree to disclose any information they may have from the home organization that can have a negative material impact on the shared-services organization, she says.

It’s just a case of everybody knowing the rules, so nobody’s surprised, O'Brien adds.

She recommends that shared-services organizations have independent directors — with no ties to the member bodies. Free of inherent conflicts of interest, there is less chance for a perception of bias, she says.

“Otherwise, it's sort of a very complex, incestuous relationship.”

Independent directors are becoming increasingly common on these boards, says O'Brien, who foresees a time when they will be the sole board members.

“That requires a loosening of control that I don't think the health sector is quite ready for yet,” she adds.

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