Management Involvement on the Board of Directors and Hospital Financial Performance

Abstract

Agency theory is used to investigate the relationship between top management team involvement on not-for-profit hospitals' boards of directors (BODs) and hospital financial performance. Governance data collected in 2011 by The Governance Institute was merged with hospital financial performance data from the 2011 Medicare Cost Reports. Then, an ordinary least squares regression model, using propensity score adjustments, was used to evaluate the relationship between management involvement on the BOD and three financial performance profitability ratios: total margin, operating margin, and return on assets. The sample included 637 not-for-profit hospitals, most of which (74.1%) were not government owned. As hypothesized, we found that having a larger number of managers with voting rights on the BOD was associated with lower total margin (β = -0.011, p < .065). Similarly, we found that having a greater percentage of voting BOD members who were managers was associated with lower total margin (β = -0.296, p < .002) and return on assets (β = -0.337, p < .072). We did not find support for the notion that CEO involvement onthe BOD is associated with poorer hospital financial performance (β = -0.008, p < .437). Consistent with agency theory, our findings suggest that management involvement on the BOD is associated with poorer hospital financial performance. This finding suggests that management involvement on the BOD may impair the BOD's ability to effectively monitor the actions of management, which may lead managers to make decisions that are more consistent with their own interests than those of the organization.