TESTIMONY HEALTHCARE ASSOCIATION OF NEW YORK STATE HEALTHCARE TRUSTEES OF NEW YORK STATE BEFORE THE

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1 TESTIMONY OF HEALTHCARE ASSOCIATION OF NEW YORK STATE AND HEALTHCARE TRUSTEES OF NEW YORK STATE BEFORE THE NEW YORK STATE SENATE COMMITTEE ON CORPORATIONS, AUTHORITIES, AND COMMISSIONS ON NOT-FOR-PROFIT GOVERNANCE May 22, 2013 Albany, New York

2 The Healthcare Association of New York State (HANYS) and Healthcare Trustees of New York State (HTNYS) appreciate the opportunity to testify before the Senate Committee on Corporations, Authorities, and Commissions on legislation sponsored by Senators Ranzenhofer and Marcellino regarding not-for-profit governance, executive compensation oversight, and related issues. Our testimony focuses on three bills: S.3755-A by Senator Ranzenhofer, S.5198/A.7337 sponsored by Senator Ranzenhofer and Assembly Member Brennan, at the request of the Department of Law and S.5197/A.7338 sponsored by Senator Marcellino and Assembly Member Englebright, at the request of the Department of Law. For ease of reference, S.3755-A is referred to by number or the Senate legislation and the others will be referred to by number or the Attorney General s legislation. HANYS is a not-for-profit trade association representing nearly all not-for-profit and public hospitals and health systems, hospital-based nursing homes, home health agencies, hospices, and similar health care entities throughout New York State. HTNYS is an unincorporated membership association representing trustees of governing bodies of HANYS member institutions. New York s hospital and nursing home communities are unique in the United States in that none of these entities is a publicly-traded corporation. As a result, the institutional core of our entire health care system, particularly the hospital sector, is overwhelmingly comprised of charitable not-for-profit corporations. Therefore, the legislation under consideration is significantly important to, and will materially impact, HANYS, HTNYS, and our respective members. HANYS and HTNYS have partnered to provide leadership regarding not-for-profit governance by the issuance of guidance and best practices information. In 2004, our organizations jointly published Non-Profit Corporate Accountability: A Guidebook to provide in-depth information and advice on several governance issues. Although published nearly ten years ago, the Guidebook remains very relevant today. Highlighting the primary features of good governance, 2

3 the Guidebook provided guidance and recommendations, based on publications by leading private and government sources, regarding: governance principals; the relationship between corporate compliance and accountability; code of ethics; conflict of interest policies; the role of an audit committee; internal controls; reporting financial and related information; and executive compensation and interested party transactions. It is striking that these issues are some of the most significant matters addressed by the Senate and Attorney General legislation. HANYS and HTNYS are pleased that elected leaders recognize the importance of these issues in the conduct of New York s not-for-profit sector. We also applaud the legislation for proposing to deal with these issues in a meaningful and constructive manner, rejecting the notion that punitive and heavy-handed solutions would promote good governance practices. The Senate and Attorney General s legislation are currently similar and include proposed statutory language regarding the following: audit oversight; executive compensation oversight; conflict of interest policies; related party transactions; the reduction of several process and approval requirements to accomplish worthwhile non-profit corporate changes; improved governance of trusts; and whistleblower protections. 3

4 The Senate bill seeks to rationalize the approval process for the incorporation of entities regulated by specific agencies, such as the Department of Health (DOH), and includes new provisions for the change of control of a not-for-profit. HANYS and HTNYS believe that these are important issues to address and each legislative proposal does so in a meaningful and reasonable fashion. While we have recommendations regarding particular details, we specifically support each legislative proposal s provisions regarding conflict of interest policies, audit oversight, executive compensation oversight, related party transactions, the streamlining of many current statutory process requirements, and the improved governance of trusts. Based on the experience of our members, we wish to emphasize that one-size-fits-all solutions may not account for the wide variety of organizational size, resources, and cultures across the not-for-profit landscape. The legislation under consideration for the most part reflects the recognition that principles may not be compromised, but specific operational requirements need not be prescribed. In some instances, however, we believe that certain provisions may present serious compliance obstacles simply because of practical realities or because some provisions may be strengthened to respond to current environmental circumstances. In the spirit of offering constructive recommendations that would not compromise essential legislative principles, HTNYS and HANYS offer the following comments on specific provisions of the Senate and Attorney General bills. Definition of Independent Director With regard to the definition of an independent director, an employee of an entity paying funds to or receiving funds from the non-profit corporation would not be considered independent and therefore would be ineligible to participate in audit and executive compensation oversight activities. We believe that this provision is far too overreaching in its treatment of directors. The audit and compensation committee functions are specific and, while significant, are circumscribed. We believe that a director with a direct interest in the transaction or function being undertaken may not be independent. A director employed by an entity that has some 4

5 financial interaction with the corporation should not, however, be categorically classified as not independent. In contrast to the definition contained in the legislation, the Internal Revenue Code bars a director with a conflict of interest from participating in a decision. This is not meant to be a general conflict, but a specific and direct interest in the transaction. The legislation, we believe, would impose a generic standard on directors when the more specific and honed standard of a conflict of interest is more appropriate. To illustrate, most membership organizations, including the vast majority of trade associations, receive dues revenue from members. In some instances, grant funds to support research to improve the quality of care provided in hospitals may involve the pass-through of grant dollars to participants that are also members of the organization. Yet, membership organizations are necessarily governed by representatives of the member entities. Further, there are thousands of small provider entities that include on their boards employees of their sole corporate members. In addition, these smaller providers find board recruitment to be one of their major challenges. The legislation would require these entities to seek out independent directors that are nevertheless deeply committed to the organization. Accordingly, we recommend that the legislation be modified to track the Internal Revenue Code to restrict directors with a specific conflict of interest from participating in decisions that would have a direct impact on them. Conflict of Interest Policy The Senate bill, but not the Attorney General s bill, would require every non-profit entity to file its conflict of interest policy with the Attorney General s office. We believe this requirement simply adds a new reporting obligation without a tangible benefit and would unnecessarily burden the Attorney General s office with thousands of policies without improving compliance with or enforcement of the requirements of the statute. 5

6 Incorporation Prior to Regulatory Approval The Senate bill would also allow entities that may not operate without the approval of a regulatory agency, such as hospitals, nursing homes, and clinics, to incorporate prior to receiving regulatory approval. We believe this would alleviate considerable time, expense, and unnecessary corporate process that today is commonplace. One exception to the provision, however, excludes proposed Article 28 entities from the reform. We are not clear as to the reasoning for the exception and urge that it be eliminated so that Article 28 incorporation, but not operation of a licensed entity, may precede DOH approval. Whistleblower Protection With regard to whistleblower protection, we note that our members are subject to at least three state whistleblower statutes Labor Law 740 and 741 and Social Services Law 363-d (corporate compliance programs) and uncounted federal laws. We strongly believe that whistleblower protection is essential. However, we must question the appropriateness of imposing yet another law, worded differently and to be enforced by another agency, on entities that are already subject to several other laws. We recommend that the language be amended to state that the whistleblower provision in the legislation is applicable to entities not otherwise subject to any whistleblower law. Committees The Senate and Attorney General s legislation differ in their treatment of committees. The Attorney General s bill would eliminate the category of standing committees and proposes that all committees be considered corporate committees, none of which may bind the board. The Senate bill more clearly identifies standing and other committees and would allow standing board committees, but not the other corporation committees, to bind the board. Many hospitals are structured as outlined in the Senate bill and we do not believe that the elimination of standing committees serves a meaningful purpose. HANYS believes that the legislation should include a provision stating that unless otherwise provided in the certificate of incorporation or bylaws, no standing or other committee shall have the authority to bind the board. 6

7 Similarly regarding committees, many of our members assign audit oversight to a board committee named something other than the Audit Committee. The important point of the legislation is that there is a committee of the board that carries out the audit oversight function, regardless of its name. We propose that legislation not specify what the name of any committee must be. Other Proposed Changes to NFPCL Two areas in New York s current Not-for-Profit Corporation Law (NFPCL) are not addressed by either the Senate or Attorney General s bill. The first provision is 603 regarding the annual member meeting, which states that at the annual meeting, the directors are chosen by the members. While 603 states that the members appoint the board, 703 provides that directors shall be elected or appointed as provided in the certificate of incorporation or the bylaws. We believe that it is appropriate to clarify the seeming contradiction between these two sections. The second area is with regard to the indemnification of corporate directors and officers. Currently, NFPCL has six provisions, , addressing an aspect of indemnification in one way or another. Since the legislation under consideration is proposing comprehensive amendments to NFPCL, we believe that it should include clearer and more streamlined provisions, as long as the protections in current law are not diminished. Conclusion The above discussion of specific sections of the legislation is not intended to be an all-inclusive list of potentially beneficial amendments that we would suggest. We will provide such a list to the Committee. To conclude, HANYS and HTNYS support significant provisions of the Senate and Attorney General legislation. The approach taken by the legislation is consistent with prior guidance issued by our organizations and embraces many corporate best practices. We look forward to working with the sponsors and the Attorney General s office to further strengthen and update governance provisions in NFPCL. 7