Working Paper
Governance of Nonprofit Organizations: Lessons from Mayo Clinic
Paul Clyde Stephen M. Ross School of Business
The University of Michigan E-mail: [email protected]
Aneel Karnani
Stephen M. Ross School of Business The University of Michigan
E-mail: [email protected]
February 2017
Keywords:Nonprofitgovernance;MayoClinic;governanceproblems.
UNIVERSITY OF MICHIGAN
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Inanarticleonthegovernanceofnonprofitorganizations(NPOs),Dentconcludedthat“a
remarkableconsensusofexperts...agreesthattheirgovernanceisgenerallyabysmal”
(Dent,2014p93).Anotherstudyconcludedthat“substantialpercentagesofboardsare
simplynotactivelyengagedinvariousbasicgovernanceactivities–andifanything,this
studybasedonself-reports,likelyunderstatestheproblem”(Ostrower,2007)Perhapsthis
shouldnotbesurprising.Inanyorganizationthereisanagencyproblem.Agencytheory
arisesfromthepremisethatthegoalsofthetopexecutives–theagents–arenot
necessarilythesameasthegoalsoftheorganizationasdefinedbytheprincipals(Fama
andJensen,1983).Theagentshaveoperationalcontroloftheorganizationandwilltendto
makedecisionsthatmostfavorthemselves,evenabovetheinterestsoftheprincipals.Ina
for-profitorganization,theowners(theshareholdersinapubliclytradedcompany)have
theauthoritytomonitortheperformanceoftheexecutivesandholdthemaccountable.Ina
for-profitcompany,theowners(theshareholders)arethecontrollingstakeholders.Ina
democraticsociety,thecitizensarethecontrollingstakeholders.Theyhavetheauthority
toholdthegovernmentofficialsaccountableandcanvotethemout.Thefundamental
probleminNPOsisthe(frequent)lackofacontrollingstakeholder,andtheagency
problemisparticularlysevere.
However,therearenonprofitorganizationsthathavebeenspectacularlysuccessful.One
suchorganizationistheMayoClinic.MayoClinichassuccessfullynavigatednumerous
leadershipandboardtransitionsinitsnearly100yearexistenceasanonprofitenterprise
andremains,accordingtheUSNews,thebesthospitalintheUnitedStatesandoneofthe
leadinghealthcareprovidersintheworld.AndrewMellon,theearly20thcenturybanker
andindustrialist,wouldnothavebeensurprised.AsU.S.TreasurySecretaryheobserved
3
theearlyyearsofMayoClinicandreportedlytoldWillMayothat“theProperties
Associationsetupwasthemostpracticablearrangementhehadcomeacrossfor
safeguardingthepurposesofapublictrust”(Clapesattle1941,p593)Mellonmodeledhis
MellonInstituteafterit.
Inthispaper,wefirstdiscussthegovernanceproblemsinNPOsfrombothatheoreticaland
practicalperspective.WethendescribethegovernancestructureatMayoClinicand
exploretheprinciplesthatdeterminedtheclinic’sgovernanceandthelessonsthatcan
guideotherNPOs.Wearguethattheclinic’shistoryrevealsunusuallycarefulthinking
aboutthegovernanceprinciplesatitsinception,andcontinueddevotiontotheseprinciples
evenwhileadaptingasneededovertheyears.
GovernanceProblem:Theory
Corporategovernanceinafor-profitcompanyhasmechanismsthattieauthorityto
responsibility(seeFigure1).Thisistrueforsmallercompaniesaswellaslarger
companies.Inthesmallestofcompanies,thesingle-personentrepreneurhascomplete
authorityandisheldresponsibleintheformoftheprofitsorlossesthataccruetothe
entrepreneurandaretheresultofhowthatauthorityisexercised.Inalargercompany,
shareholdershavetheauthoritytochooseaboardandareheldresponsibleinthatthey
receivetheresidualthatresultsfromtheactionstakenbytheboard.Thatboardthenhas
theauthoritytochoosetheCEOandprovidefinancialoversightand(atleastinputon)
strategicdirection.Theboardisheldresponsiblebyshareholders.Iftheshareholdersare
contentwiththeresidual(profits)andexpectationsonfutureperformancebasedontheir
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analysisofthedecisionsmade,theymaychoosetokeepthesameboard.Iftheyarenot,
theyhavetheauthoritytoreplaceit.Theycanreplaceitdirectlybyelectingdifferentboard
membersortheycanreplaceitbysellingsharestootherswhowillchangetheleadership,
ashappensinatakeover(DemsetzandLehn,1985;Clyde1997,ShleiferandVishny1997).
Thereisconsiderableevidencethatshareholderscananddoexercisetheirauthority
throughdirectvotingofdirectors,investingininstitutionalshareholderswhotakeona
monitoringroleonbehalfofdiffuseshareholders,andapprovingacquisitionswhich
effectivelyreplacedirectors.1CEO’sthenhavetheauthoritytomakestrategicandhiring
decisionsthatwilldeterminethecompany’sperformanceandprofits.TheCEOisheld
accountablebytheboardwhichhastheauthoritytohire,fireandcompensateCEOs.
InNPOs,theboardstillhasthesameauthoritytomonitor,superviseandcontrolthe
executives.But,therearesignificantdifferenceswhencomparedtoafor-profit
organization(seeFigure2).First,theboardisnotaccountabletoanycontrolling
stakeholders.Instead,theboardisaccountabletothefoundingprinciples.Anexception
occurswhentheNPOisfundedbyasingle(orfew)donor,whomaybeanindividualoran
institution.Forexample,TheGatesFoundationisactivelymanagedbyBillandMelinda
Gates,andthereisasignificantlyreducedagencyproblem.Thisisanalogoustoafor-profit
organizationthatisactivelymanagedbytheowner(s)andagainthereislessofanagency
problem.However,inthemajorityofNPOsthereisnodominantdonor,andthereisno
effectivemechanismtoholdtheboardaccountableforachievingtheorganization’sgoals.
1Demsetz,HaroldandKennethLehn,“TheStructureofCorporateOwnership:CausesandConsequences”JournalofPoliticalEconomy,93,1985,1155-77;Clyde,Paul“DoInstitutionalShareholdersPoliceManagement?”ManagerialandDecisionEconomics,18(1),1997,1-10;seeShleifer,AndreiandRobertVishny,“ASurveyofCorporateGovernance,”JournalofFinance,52(2),1997,737-783forasurvey.
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Second,inafor-profitorganization,thereisaclearmetrictomeasurethecompany’s
performance;inNPOsthereisnosuchclearmetric.EveryNPOhasitsowngoalsthatmay
notbeeasilymeasured;or,itmayhavemultiplegoalsandtheweightingacrossthesegoals
isilldefined.Thus,evenanextremelyconscientiousboardwouldfinditdifficultto
measuretheperformanceoftheexecutivesoftheNPO.
Third,bylaw,theboard’sfundamentalpurposeistoholdtheNPOaccountabletothe
broadersociety.Butthelawofferslittleguidancebeyondreferringtobroadlyconceived
‘dutiesofloyaltyandcare.’Itisuncleartowhomthesedutiesareowed.NPOsoftenhave
multiplestakeholdersallofwhomseektospeakfortheorganizationanditspurposes.
Lawsonlysetminimumstandards,butdonotcreateanimpetusforaspirational
achievement.TherealissueisnotwhetherNPOboardshelpavoidmalfeasance,but
whethertheyactivelyensurethattheorganizationaccomplishesitsmission.
GovernanceProblem:Practice
Researchonnonprofitgovernanceidentifiesgovernancepracticesthatarecommonlyused
ingeneral,andpracticesusedbyeffective2nonprofitorganizations.Intermsof
mechanismsforchoosingboardmembers,factorsconsideredincludewhetherornotthe
nominatingcommitteewascomprisedofoutsidemembers(thatwasrarelyadoptedin
practice)3andhowactivelytheChiefExecutiveparticipatedinboardselection(apractice
2RobertHermanandDavidRenz,“BoardPracticesofEspeciallyEffectiveandLessEffectiveLocalNonprofitOrganizations,”AmericanReviewofPublicAdministration30(2)June2000,146-160.3WalterRobbinsandGaryTaylor,“CorporateGovernancePractices:anExploratoryStudyoftheU.S.NonprofitHealthcareSector,”AmericanInternationalJournalofSocialScience3(3)May2014
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adoptedofteninthe“mosteffective”organizationsstudied).4However,thereisverylittle
researchthatexplorestheprecisemechanismthatisusedtochooseboardmembers.This
isunderstandablesincesurveysarelookingforresponsesthatcanbegeneralized–
questionslike“Theboardhasanominatingcommittee”willworkwhilethespecificsof
howthosecommitteesworkwillnot.However,thespecificsarewhatweareinterestedin.
Thelackofaccountabilitytoanystakeholdershowsupinthewayboardsarechosen.In
70%ofthenonprofitsintheUnitedStates,theboardmembersarechosenbytheboard
itself.5Freefromanexternalcheck,suchboardmembersmayhavelittleincentivetoincur
thecostsofmonitoringthemanagersandcouldevenleadtheorganizationawayfromits
originalmission.
ThenumberofNPOsintheUShasexplodedfrom12,000in1940to1.7millionin2005
(whichdoesnotincludemostchurches),accordingtotheIRS.Thishascreatedan
enormousdemandforcompetenttrusteesthatprobablyfarexceedsthesupplyofpeople
withexperienceorunderstandingofgovernanceissues.6
GovernanceinNPOHealthcareinstitutions
Allorganizations–business,government,andcivilsociety–shouldcreatevalue,definedas
thevalueofoutputsminusthevalueofinputs.Mostorganizations,infact,docreatevalue.
Inabusinessorganization,thisvalueiscapturedpartlybyshareholdersandother4RobertHermanandDavidRenz,“BoardPracticesofEspeciallyEffectiveandLessEffectiveLocalNonprofitOrganizations,”AmericanReviewofPublicAdministration30(2)June2000,146-160.5BoardSource“LeadingwithIntent:ANationalIndexofNonprofitBoardPractices”2015.6Brody,Evelyn.‘Theboardofnonprofitorganizations:Puzzlingthroughthegapsbetweenlawandpractice.’FordhamLawReview,Vol.76(2),2007.
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producersintheformofproducersurplusandpartlybycustomersintheformof
consumersurplus.AnNPObyitsmissionshouldservesometargetstakeholdersandthese
stakeholdersshouldcapturethevaluecreated.But,becauseoftheweakgovernance,the
executivesandotheremployeescananddocapturesomeofthisvalue.Thisistheprice
societypaysforweakgovernanceofNPOs.
ConsidertheexampleofhospitalsintheUnitedStates.Nonprofithospitalsareactuallythe
mostprofitablehospitals.“The29,000nonprofithospitalsacrossthecountry,whichare
exemptfromincometaxes,actuallyendupaveraginghigheroperatingprofitmarginsthen
the1,000for-profithospitals.”7SevenoftoptenmostprofitableUShospitalsarenonprofit
hospitals.Nonprofitdoesnotmeanthattheorganizationdoesn’tmakeanyprofits;instead
itmeansthatprofitsarereinvestedinthehospitalintheformofnewfacilitiesand
equipment,highsalariesandbonuses,expandingstaff,offeringmoreservices,andbuying
outcompetinghospitals.
OnestraightforwardwayexecutivesinanNPOcapturevalueisthroughhigh
compensation.Therehasbeenincreasingpublicconcernabouthighcompensationlevels
fortopexecutivesinnonprofithospitals.Thetotalcompensation(salaryandbonus)forthe
20top-paidCEOsofnonprofithospitalssoaredby29.6%in2013comparedtotheprevious
year.8Perksatsomenonprofithospitalsincludedfirst-classplanetickets,chauffeursand
countryclubmemberships.9Thisdoesnotstopwithtopexecutives.AstudybytheBureau
7Brill,Steven.‘BitterPill:WhyMedicalBillsareKillingUs?’Time,April4,2013.8Sandler,Michael.‘CEOpaysoarsattopnot-for-profits.’ModernHealthcare.August8,2015.Availableat:http://www.modernhealthcare.com/article/20150808/magazine/308089988[AccessedDecember9,2016]9Robinson,David.‘Investigation:tophospitalexecs,docsgetmillions.’Lohud,June5,2016.Availableat:http://www.lohud.com/story/news/investigations/2016/06/02/new-york-hospital-payouts/85027532/[AccessedDecember9,2016]
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ofLaborStatisticsfoundthat,onaverage,hourlyworkersgethigherwagesinnonprofit
hospitalsthaninfor-profitones.10“Itisoftenthecasethatthehospitals,hospitalgroups,
andaffiliatedmedicalentitiesthatpaythemostexcessivecompensationalsoprovideless
charitablecarethancomparableinstitutionsthatpayreasonablecompensationtotheir
executives,managers,andadministrators,”concludeda2014studytheofficeofthe
AttorneyGeneralofCalifornia.11
AnotherwayexecutivesinanNPOextractvalueisthroughwhatmightbecalled‘plush
carpets.’Somespendlavishlyonfacilitiessuchasluxuriousbuildingsandfurnishing,and
expensivebutunnecessaryequipment.
MayoClinic
AllofthismakestheperformanceoftheMayoClinicoverthepast100yearsthatmuch
moreimpressive.TheClinicitselftracesitsrootsto1864whenWilliamWorrallMayo
establishedhispractice.12However,thenonprofitMayoClinicwasn’testablisheduntil
1919whenWWMayo’stwosons,WillandCharlie,madeadonationthateffectivelycreated
theMayoClinic.Theprocessfordoingso,however,wasnotasstraightforwardasthat
sentencesuggestsandreflectsacarefulthoughtprocessthatbeganyearsearlierandtook
onasuddenurgencyin1918whenDr.Willbecameillwithwhathebelievedmightbe
10BureauofLaborStatistics,U.S.DepartmentofLabor,TheEconomicsDaily,Wagesinfor-profitandnonprofitprivatehospitalsontheInternetathttp://www.bls.gov/opub/ted/2005/jun/wk4/art05.htm(visitedDecember08,2016).11Availableat:https://oag.ca.gov/system/files/initiatives/pdfs/13-0042%20(13-0042%20(Hospital%20Executive%20Compensation)).pdf[AccessedDecember8,2016]12Lanier,William“CelebratingtheSesquicentennialofMayoClinic:150YearsofAdvancesinMedicalPractice,Education,Research,andProfessionalism”MayoClinicProceedings,89(1),January,2014,1-4.
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cancer.Duringhisillness,hewouldgoonlongdriveswithHarryHarwick,thebusiness
mindthathehadcometotrust,todiscussthefutureofMayoandhowtoensureit
continuedtopursueitsmission.Theprocessalsocontinuedafter1919withimportant
changestakingplaceoverthenext5years,andcontinuedthroughtodayalbeitwithless
significantchanges.Dr.Will,asitturnedout,didnothavecancerandliveduntil1939,the
sameyearDr.Charliedied.Bythattimethegovernancestructurehadbeentestedbya
successfultransitionthatwouldberepeatedintheyearstocome.
Thecreationofthenonprofitoperationin1919wasoriginallycalledtheMayoProperties
Association.AlloftheequipmentandbuildingsthathadbeenusedbytheMayobrothers
andtheirpartnerswasdonatedtothePropertiesAssociation.TheMayoProperties
Associationwastobedirectedbya“self-perpetuatingboardof(trustees),servingwithout
compensation.”13Thetrusteesweretoincludealawyerand“onecompetent
businessman”.14Harwick,thebusinessmanchosenbytheMayobrotherstohelpestablish
theinitialstructures,laterexpandedtheboardfromninetotwelvewiththree“public”
members,therebyretainingthenon-clinicalexpertiseontheboard.15
ThestatedpurposeofthegiftthatcreatedtheMayoPropertiesAssociationwas“Toaidand
advancethestudyandinvestigationofhumanailmentsandinjuries,andthecauses,
prevention,reliefandcurethereof,andthestudyandinvestigationofproblemsofhygiene,
healthandpublicwelfare,andthepromotionofmedical,surgicalandscientificlearning,
skill,educationandinvestigation,toengageinandconductandtoaidandassistinmedical
13P.15,Harwick,Harry,“Forty-FourYearsWiththeMayoClinic:1908-1952”1957.14P592,Clapesattle,Helen,DoctorsMayoTheUniversityofMinnesotaPress,Minneapolis,1941.15Harwick,op.cit.
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surgicalandscientificresearchinthebroadestsense.”16Whilethispassageemphasizes
researchandtraining,earlierlanguageintheDeedofGiftandotherdocumentsindicates
thatthepracticeofmedicineisincluded,andmightevenbetheprimarypurposeofthe
organization.
TheMayoClinic,whichthenreferredtothegroupofdoctorsthatrentedthefacilityand
equipment,paidrenttotheMayoPropertiesAssociationintheformoftheresidualfrom
operations.TheMayobrothersmadeitclearthattheydidnotwantthedoctorsoperating
theclinictobenefitbeyondthe“reasonablecompensation”theyreceived.17InDecemberof
1922,theMayoClinicphysiciansagreedtoafixedcompensation.Thecompensationrates
couldbealteredperiodicallybutonlywiththeapprovalofthePropertiesAssociation.
TheClinicitselfwasgovernedbyaBoardofGovernors.Thefirstboardwascomprisedof
theoriginalfiveMayopartnersplustwootherstaffclinicians.Originally,therewassome
skepticismabouttheauthorityoftheBoardofGovernorssincetherewaslittledoubtthat
thedecisionswouldstillbedeterminedbytheMayobrothers.However,overtime,the
Mayobrothersthroughtheiractions,madeitclearthatitwastheBoardofGovernorsasa
groupthathadthefinalauthority.18
ThefinalcomponentofthegovernancedevelopedbytheMayobrotherswasthecommittee
system.Thecommitteesystemhadtwofunctions:itpreparedfutureleadersbyexposing
themtoavarietyofissuesandgivingthemtheopportunitytoplayleadershiprolesin
committees,anditdistributeddecisionmakingauthorityandresponsibilitytoalarger
16P.7,DeedofGiftfromWilliamJMayoandCharlesHMayotoMayoPropertiesAssociation,October8,1919.17DeedofGiftop.cit.18Harwick,op.cit.
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groupthroughacontrolledprocess.By1922,therewasanExecutiveCommitteecharged
withthesupervisionofallprofessionalactivities,theFacultyOrganization,theCouncil
(comprisedoftheBoardofGovernors,theExecutiveCommitteeandChairmanofthe
Faculty)andtwostandingcommittees:CommitteeonMedicalEducation,Researchand
ScientificProgress,andCommitteeonUniversityRelations.Todaythereareabout300
committees.Employeestellstoriesofdreadingbeingonacommitteebutlearningan
enormousamountfromtheexperience.
OvertheyearstherehavebeensomeimportantmodificationstoMayo’sgovernancebut
mostoftheunderlyingthinkingremains.Forinstance,in1969theMayoClinicandthe
MayoPropertyAssociationmergedtoformtheMayoFoundation.In2010,thenamewas
changedbacktotheMayoClinic,whichunlikethepreviousMayoClinic,ownsthebuilding
andequipmentthatituses.However,therulingbodyoftoday’sMayoClinic,theBoardof
Trustees,continuestohavethemixofinternalandexternalmembers–17externaland14
internal–thatcouldbefoundintheMayoPropertyAssociation.Italsoretainsaprominent
rolefordoctors–atleastone-thirdofthetrusteesmustbeMayoclinicians–foundinthe
BoardofGovernors.19TheBoardofGovernorsstillexiststodayandallBOGmembersare
alsomembersoftheBoardofTrustees(therecanalsobeInternalMembersoftheBoardof
TrusteeswhoarenotmembersoftheBOGsubjecttotheconstraintsmentionedabove),but
theBoardofGovernorsalonehastheauthoritytorecommendallofficersforMayoClinic
andoverseeoperationsoftheclinic.TheBoardofTrusteeshasfinalapprovalauthority
andoversightresponsibilityforallClinicleadership,strategy,operations,budgetsand
19AmendedandRestatedBylawsofMayoClinic,August14,2015.
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long-termfinancialplans.TheBoardofTrusteesisalsoresponsibleforconductingan
annualaudit.20
Thedoctors’compensationhasalsobeenmodifiedbutretainstheimportantincentive
features.Todaythedoctorsstillreceiveafixedcompensation,butitisnowinformedby
nationalcompensationsurveysforthevariousspecialtiesandistargetedtobecompetitive
withotherpremiermedicalorganizationsbutnotexcessive.Noneofthe‘profit’orsurplus
generatedbytheclinicaccruestothedoctors;nobodyreceivesanybonuspayments.
Leadershippostsarecompensatedwithanadditionalstipendthatisremovedwhenthe
personmovesoutoftheposition.
LessonsfromMayoClinic
ClearlyArticulatedObjectives
For-profitshavetheluxuryofmaximizingoneobjective,profits,whicharealsoeasyto
measure.Forpropergovernanceinanon-profititisnecessarythattheboardandthe
executiveshaveagoodunderstandingoftheNPO’sobjectivesandawaytoascertain
progresstowardstheseobjectives.
TheMayobrothersspentmuchoftheinitialdeedforthefoundationdescribingthehistory
oftheClinicincludingaclearstatementthatthe“Clinichasnotbeenoperatedwiththesole
viewofprofit,”andexpressedtheirintentionthattheClinic“maybeconducted,maintained
20MayoClinic:GovernanceandManagementStructure,August14,2015.
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anddeveloped”forthesamepurposes(thatithadbeenhistorically).”21Thosepurposes
werenotterriblyconcreteatfirst–“theprimaryobjectoftheClinicshouldbeserviceto
humanityinitsbroadestsense”22–butnumerousdocumentscombinetoformabasicidea
and,in1957,theywereturnedintoaStatementofPurposethatincludedthreemain
components:“Tooffer,toboththesickandthewell,comprehensivemedicalcareofthe
higheststandard...Toofferoutstandingyoungmenandwomenopportunitiesfor
educationinclinicalmedicine...Toadvanceandenlargeknowledgeandskillinmedicine
andthesciencesrelatedtomedicine,throughresearch...”23ThethreeshieldsoftheMayo
Cliniclogoareaconstantreminderofthisthree-prongedfocus.
Intermsofclinicalservice,theMayoClinictodayisratednumberoneintheUnitedStates
overall.Italsoholdsthetoprankinginanumberofspecialtiesandisinthetopthreein
mostoftherankedspecialties.24ItisalsohighlyrankedasaResearchMedicalSchooland
PrimaryCareMedicalSchool.25
Constraintsfordecision-makingpositions
Constraintsonchoicesregardingthecompositionoftheboardandthespecific
responsibilitiesoftheboardrelativetotheexecutivescanmitigatesomeoftheproblems
relatedtothelackofaboard’saccountability.Mayohasthreesuchconstraints.First,
electionforboardmembershiprequirestheapprovalofmultiplegroupsofindividuals.
21P3,DeedofGift,op.cit.22Dr.W.J.Mayoasquotedonpage8inRoesler,Robert,“PrinciplesandPeople:KeyElementsofMayo”1984.23P29,Roeslerop.cit.24“2016-17BestHospitalsHonorRollandOverview”USNews,August11,2016.25“2017BestMedicalSchools”USNews,2016.
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TheInternalMembersoftheBoardofTrusteesandalloftheBoardofGovernorsare
nominatedbytheBoardofGovernors.However,thefullBoardofTrusteesmustapprove
them.Further,andasmentionedabove,nominationsbytheBoardofGovernorsforat-
largepositionsontheBoardofGovernorsarevotedonbymembersoftheVotingStaffwho
alsonominatecandidatestobeconsideredfortheBoardofGovernors.Anymemberofthe
VotingStaffcannominateafellowmembertobeconsideredforpositionsontheBoardof
Governors.TheBoardthendiscussesthedifferentcandidatesandhasaseriesofvotesto
determinewhowillbeputforwardtobevotedonbytheentireVotingStaff.TheBoardof
Governorsiscomprisedofamaximumof14individuals,nineofwhomareat-large
positions(7physicianscientists,1administratorand1thatcanbeanadministrator,a
physicianorascientist).Thus,animportantpartoftheBoardofTrusteesandallofthe
BoardofGovernorsisnominatedbyandvotedonbytheVotingStaff,mostofwhomarenot
boardmembers,andmustbeapprovedtheBoardofTrustees,mostofwhomarenotstaff
members.
Second,thechoicesarelimited–theBoarddoesnothavecompleteflexibility.Asdescribed
earlier,thebylawsstatethat17ofthe31membersoftheBoardofTrusteesaretobePublic
Trustees(notMayoemployees),atleastonethirdoftheBoardofTrusteesmustbe
membersoftheVotingStaffwhoarealsophysiciansofMayoClinic.Thus,thepoolfrom
whichanimportantpartoftherulingboardischosenhasbeenthrougharigoroushiring
processandhasbeenvettedoveramulti-yearprobationaryperiodbytherestoftheMayo
staff.TheBoardofGovernorshassimilarlimitations:atleasttwo-thirdsofthemembersof
theBoardofGovernorsmustbephysiciansandmembersoftheVotingStaff.Positionsare
alsolimitedbytimeserved:PublicTrusteescanservenomorethanthreefull4-yearterms.
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NothingelseisspecifiedabouttheselectionofthePublicTrustees.Inpractice,theMayo
leadershiptracksvariouscharacteristicsofitsPublicTrusteessuchasgeography,vocation
andgendertoensuretheyrepresentawidevarietyofpublicinterests.And,aswiththe
firstboardbackin1918,theyarecarefultoincludelegalandbusiness,especially
accounting,backgrounds.However,thereisnothingbeyondtheinitialrequirement.
Theleadershipchoicesavailabletotheboardarealsosomewhatlimited.TheChair,elected
bytheBoardofTrustees,canservenomorethantwo4-yearterms.ThePresident/CEOof
Mayo,mustbeaphysicianandamemberoftheVotingStaffofMayoClinicforthe
preceding5years.Thus,thePresidentwillhaveatleast8yearsofMayoexperience.
Finally,therearealsoconstraintsontheactionstakenbyleadership.Forexample,the
compositionoftheAuditandComplianceCommittee,theInvestmentCommitteeandthe
GovernanceandNominatingCommitteeis,ineachcase,completelyExternalTrustees.26So
theoperation,strategy,etc.istakenonbytheBoardofGovernorsactingastheexecutive
committee,butnoneofthemembersoftheBoardofGovernorsareonanyofthese
financialoversightcommittees.
Decentralizepowerthroughtheuseofcommittees
Thegovernancerulesandproceduressetatthehighestleveloftheorganizationneedgono
furtherthanestablishingtheauthorityandresponsibilityoftherulingboardandthe
executives.Governancedecisionsbeyondthatcouldbelefttothechiefexecutive.
However,somesuccessfulorganizationshavegonebeyondthat.Oneparticularly
26WalterRobbinsandGaryTaylor,“CorporateGovernancePractices:AnExploratoryStudyoftheU.S.NonprofitHealthcareSector,”AmericanInternationalJournalofSocialScience,3(3),May2014.
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noteworthyexamplewasacontemporaryoftheMayoBrothers.AlfredSloan,arguablythe
fatherofthemoderncorporation,wasdevelopinghisowngovernancestructuresat
GeneralMotorsinthesame1915-1925timeframethattheMayoBrotherswereworkingon
theirs;andhiswouldhaveatleastasmuchimpactastheMayobrothers.Itistherefore
notablethatbothSloanandtheMayobrothersbothreliedheavilyonacommittee
structure.
Sloan’sorganizationalandgovernancestructurekeptauthorityforoperationswiththe
divisionsand,inparticular,withtheindividualinchargeofeachdivision.Hebelievedthat
committeesshoulddealwithpolicyissuesbutexecutionhadtobetheresponsibilityofan
individual.Thecommitteestructureenabledhimtomaintaintheautonomyofthe
divisionswhilecombiningtheknowledgeofallofthedivisionsandtherelevantcorporate
officestherebyinformingthedecisionstobemadeatthedivisionlevel.
TheMayobrothersalsoviewedcommitteesasanintegralpartofthegovernanceofthe
organizationdespiteinitialskepticismamongstaffmembers.ThecommitteesatMayo
beganwithanexecutivecommitteeandquicklyspread.In1922,thereweretwostanding
committees:theCommitteeonMedicalEducation,ResearchandScientificProgressandthe
CommitteeonUniversityRelations.Thatgrewintotheapproximately300thatexisttoday.
Fromthebeginning,oneoftheprimarypurposesofthecommitteeswasthedevelopment
offutureleadership,butthatwasneverthesolereason.Committeesplayedanimportant
practicalroleofdisseminatingmanyoftheduties.AsHarryHarwickputit,“Tothe
individual,committeeworkprovidesanopportunitytolearnmoreoftheoperationofthe
Clinicasawhole,allowshimtoaddhisvoicetothisoperationand,perhapsmostimportant
17
ofall,servesasaprovinggroundforpositionsofevengreaterresponsibility.”The
committeeshave“arealandsignificantauthority”and“(p)erhapsthegreatestsingle
contributionofanycommitteeisfindingthemostgenerallysatisfactoryanswerto
problems.”27Insum,theMayobrothersusedcommitteesinmuchthewaySloandid:they
wereformedtotapintoabroadrangeofexperiencesandtheyhadrealauthorityinthe
governanceoftheorganization.
Removedecisionmakers’incentivetoprofitfromdecisions
Allorganizationshaverevenuesandcostsandthetworarelyequate.Thus,whetherafor-
profitoranonprofit,aresidualistobeexpectedandsomeonehastheauthorityto
determinewhathappenstothatresidual.Inafor-profit,theincentiveofadecisionmaker
(theshareholderwhodecidesboardmembership)isalignedwiththeobjectiveofthe
organization(maximizeresiduals).Inanonprofit,theresidualdoesn’tgoawayandthe
decisionsmadebythosewithauthorityaffecthowlargeitisandwhathappenstoit.If
thoseinauthoritystandtobenefitfromtheresidualdirectly,theyhaveanincentiveto
makedecisionsintheirowninterest–nottheorganization’sinterest.Ifthatincentiveis
eliminated,thedecisionmakersaremorelikelytopursuetheorganization’sgoals.
Mayoaccomplishesthisinanunusualbutapparentlyeffectiveway.Sincemostkey
decisionmakersatMayoaredrawnfromtheVotingStaff,wecanfocusontheincentivesof
theVotingStaff.Mayodoesn’thavemerit-basedcompensation;therearenobonusesor
merit-basedsalarychanges.Thishasbeentruesince1922andfromthattime,the
governancestructurewasexplicitlydesignedtotakeawaythepossibilitythatphysicians
27Harwick,op.cit.p23.
18
wouldprofitfromtheclinic:“TopreventtheClinicatsomefuturedatefromraisingthe
salariesofitsstafftoeatupthegrossincomeandreducetherental,thusdefeatingthe
purposeofthearrangement,thecontractstipulatedthatallClinicsalariesmustbe
approvedbythePropertiesAssociation.”28Asaresult,thereisnodirectincentiveto
increasetheprofitsbecausethestaffdoesn’tbenefitfinanciallyfromchangesinthe
financialperformanceofMayoClinicbeyondensuringitssolvency(andthus,theClinic’s
abilitytopaystaff’sfixedsalary).WhentheMayoPropertiesAssociationwasfirstformed,
thesalarycouldbechanged,butonlybytheapprovaloftheBoardofTrustees.Inpractice
today,nooneaffiliatedwiththeorganizationhasanyimpactonit–itisafunctionof
nationalaveragesforthatclinicalgroup.TheMayoClinic:GovernanceandManagement
StructuregivestheBoardofGovernorsauthorityoversalarystructure,subjecttothe
approvaloftheBoardofTrustees.However,inpractice,theyadoptthepracticeofsettinga
physiciangroup’ssalaryatthe75thpercentileofthenationalaverageforthatgroupof
doctors.
PuttheResidualtoOrganizationalGoals
Thefixedsalarymayeliminatedecisionmakers’abilitytousetheresidualtoprofitthem
personally,butitdoesn’teliminatetheirabilitytobenefitfromtheprofit.On-the-job
consumptionintheformof‘plushcarpets’orcorporatejetscanalsobenefitdecision
makersattheexpenseofthegoalsoftheorganization.Sothegovernancemustalsocreate
theincentivetousetheresidualtopursuetheorganizationalgoals.Therearetwowaysto
increasethealignmentbetweentheincentivesoftheindividualdecisionmakersandthe
28Pp593-4,Clapesattleop.cit.
19
organizationalgoals:onecanstructurecontractsthatgivedecisionmakerstheappropriate
incentivesoronecanensureanyoneinadecision-makingpositionhasincentivesthatare
alreadyalignedwiththoseoftheorganization.Mayousesthelatterapproach.
Mayo’sorganizationalgoalsarethreefold:bestinstituteforclinicalcare,bestmedical
researchinstituteandbestmedicaltraininginstitute.MayoClinicthereforewantsdecision
makerswhosepersonalincentivesalignwiththoseoftheinstitution:bestatcare,research
andtraining;thustheemphasisonphysiciansinthegovernanceasdescribedabove.
However,justbecausethedecisionmakerisadoctor,itdoesn’tmeanthatthatparticular
doctorisgoingtohavepersonalgoalsthatcoincidewiththeorganization’sgoals.The
hiringprocessthatdeterminesthepoolofdoctorsfromwhichtheleadershipisdrawnis
thusimportanthereaswell.Theresultofthishiringprocessisthatthedecisionmakers
arechosenfromagroupofindividualsthathasbeencarefullyvettedtoalignwithMayo’s
values.That,inturn,meansthatdecisionsabouttheresidualaremorelikelytobe
consistentwiththegoalsoftheClinic.DoctorswhovaluetheopportunitytoworkinMayo
teamsonclinicalmatters,andalsovalueeitherresearchortraininghavebeendeliberately
selected.Pursuingtheirowninterest,theywillmakedecisionsthatareconsistentwiththe
organization’sgoals.
Thisapproachhasitscosts.MayoClinicwillnotalwaysgetthebestdoctor,themost
creativeresearcherorthebestteacher.Theyaresacrificingthatinreturnforastaff,and
thusfutureleaders,thatwillmakedecisionsconsistentwiththegoalsoftheClinic.
20
Conclusions
Thegrowthofnon-profitsintheUSis,asmentionedearlier,significant.However,that
arguablyunderstatestheimportancetheyareplayingintheworld.Astheamountof
moneyandnumberoforganizationsinlowandmiddleincomecountrieshasgrown,the
importanceofnon-profitsintheseeconomiescanbedisproportionatelylarge.Indeed,that
isthemotivationforourinterestinthetopic.Unfortunately,therearenowidelyaccepted
andappliedprinciplestoestablishingeffectivegovernancepracticesinnon-profits.Inthis
context,itishardtothinkofabetterexampletofollowthanMayoClinic.
ThebasicideasthatcomeoutofacarefulanalysisofMayoarestraightforward:clearly
establishedobjectives;constraintsonthechoiceofboardmembersandontheroleof
specificboardmembersandexecutives;constraintsondecisionmakers’useofthe
residual;andeffectiveuseofcommittees.However,fewoftheselessonsareregularly
incorporatedinthedevelopmentofgovernancestructuresasthenon-profitisestablished.
Theselessonshavealreadyguidedsomeofourworkinhealthcareinlow-income
countries.PerhapsthemostimportantlessonfromMayoisthatdecisionsabout
governancedeservecarefulattention,asignificantamountoftimeandanexpectationthat
youwon’tgetitrightthefirsttime.Conversationsoveralongdrivecanbeveryproductive.
21
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Figure1
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Figure2
