Control Without Ownership: Governance of Nonprofit Hospitals

Authors:

Katharina Lewellen

Tuck School at Dartmouth


Gordon Phillips

Tuck School at Dartmouth


Giorgo Sertsios

University of Wisconsin Milwaukee


The paper provides a comprehensive analysis of the governance structures of nonprofit hospitals and hospital systems. We adapt the framework used to analyze for-profit governance by incorporating nonprofit objectives and legal constraints. Combining various data sources, we study both the internal governance tools (boards of directors, incentive contracts) and external tools (market for corporate control). Nonprofit boards are unusually large, include more independent and non-independent directors, and face weak external oversight. The disciplinary market for corporate control is less active: nonprofits with poor financial performance are half as likely to be acquired or closed than for-profits, and weak performance on non-financial goals has no effect on either event. CEO pay and turnover are sensitive to financial performance but are unresponsive (or less responsive) to nonfinancial goals, including the quality of medical treatment, patient satisfaction, and charity provision. We conclude that nonprofit governance structures lack the attributes that the literature has traditionally associated with ‘good governance.’