Ray Spadoni (5:58)

Got it. Okay. So you've been around a lot of these organizations that are in trouble and the Attorney General became accustomed to dialing your phone number in these situations. It sounds like. So recognizing that this is a big question, I'll just ask it which is what are some of the reasons that these organizations get into trouble in the first place?

Bob Griffin (6:28)

There's, there's a variety of reasons, Ray. There's no one single reason. I mean the first and probably obvious to listeners is, you know, public charities that engage in fraud or have massive regulatory non compliance that jeopardizes consumer or patients care. I mean that's for the most part. So the exception I have found, but nevertheless it does exist and has to be dealt with appropriately. A second area, and probably a more common area, one that falls short of out fraud, is self dealing. And there's really a couple two categories in that. One is a category that I can't claim ownership of. The term founder, right is actually David Spackman. He was in charge of public charities. Developed that term when I worked with him dealing with several organizations that had what we called Founderitis. And just for you, Ray and the listeners, the way we viewed Founderitis is it's a non profit public charity that was organized by an individual and the individual many times put his or her own assets on the line to start the company, which I always advise against doing. But back in the days in the 70s and 80s, a lot of folks did that and as such they sort of felt like this was their nonprofit. They had a sense of ownership, entitlement to it as time went on. And the other kind of founder, right is is headed by someone who's a charismatic leader, who may not necessarily been a founder, but Carrie, but ended up with many of the attributes associated with the founder. Itis know, became long standing. CEO had a, you know, board that was disengaged, not overseeing the charity properly. So the end result of founder riot is what you call someone who founded the organization or charismatic leader is is that unfortunately these individuals looked at the organization somewhat as their piggy bank. You know, they could draw upon some of the financial reserves for their own use. For certain items they overcompensated themselves. They potentially got involved with, you know, giving certain perks to family members. So in the whole, it was basically just like a failure for there to be any kind of governance control by the board. And just the charisma of a founder just dictated where the organization was going. Another area is just mismanagement or insolvency. And this is where the board is just really sort of asleep at the switch, really not dealing with financial matters or even with compliance issues, just sort of going along for the ride, so to speak, and the organization falls into disarray. You also have another area, what I would call market and demographic shifts. This is a little more complicated in that you're going to have boards that are fully engaged and being involved with governance and supervising the CEO and everything. But there could be regulatory changes that changes to delivery of services. The charity is really not attuned with those changes. You could have, you know, predatory competitors. You see that clearly in the hospital area where large hospital systems are able to act in a predatory manner and it leaves some of the less strong hospital systems or hospitals in jeopardy. There's also the failed confidence of consumers. This is where it goes to the publicity issue. You have a bad outcome and you can't manage it properly. You know, there's. This is where obviously public relations is important. You lose consumer confidence and therefore the charities suffers in terms of volume or participation by the community. And lastly there's also this. I See emerging area of loss of workforce with demographic changes and the gentrification. You have certain pockets in cities that used to be where the workforce came from all of a sudden now has been so called yepified. But there's no longer that pool of employees. So you're unable to really staff up appropriately to meet the needs of the community. So you end up have to either relocate or shut down your operation. And lastly, there's an area, a change in corporate focus. And again, this is where a public charity has a certain mission statement, you know, 50 plus years ago, and all of a sudden they do contracting or whatever, they, they're shifting their mission and what they have to do is they don't properly redirect themselves. They could end up, you know, chasing themselves, trying to fulfill the old mission and trying to deal with the new mission. And in that instance, I found nonprofits or public charities are able to separate out sort of the changed mission and give it to someone else or just to close it down. So that's sort of a overview. What I see is like five areas of problems.

Ray Spadoni (12:41)

Okay, that's great. That is a very helpful framework by which we can have the conversation. Bob, I'm drawn to think about the founderitis as you described it. You know, sometimes refer to it as Founders syndrome. Same exact thing in my own work. And oftentimes find that sometimes someone who may be suffering from this, from this syndrome, when the environment changes, when things happen, when there are shifts in the environment, for example, or in the broader market, sometimes they may struggle to adapt because they're so vested in whatever it is that they built in the first place. And also when the time comes for there to become the conversation of transition to the next leader for whatever reason, sometimes it's just because the person who was in that original spot is nearing a retirement age or something, that can become very difficult because sometimes that person is struggling with issues of identity and legacy and even mortality. And it can get very personal very fast. And that can get quite awkward for.

Bob Griffin (13:51)

Boards you spot out of that. I mean, the legacy issue is very important. Letting go is difficult. I also find in founderitis cases it tends to be overcompensation because there's not independent compensation analysis as sort of like, you know, I'm worth what I'm worth, which is a lot more than what the market may necessarily bear. And it was also, I would say a concern about Ponderitis and board members is, is that you'll find that they could be subject to key Tom or whistleblowing, because sometimes employees get Frustrated by looking at someone who they feel is not necessarily acting in their best interest organization. They may be acting in that person's best interest and they may be cutting corners in certain areas. And I have been involved with resolving founderitis cases with the Attorney General's office and other enforcement agencies, including U.S. attorney's Office be as a result of whistleblowing and key time. So that's clearly a warning for boards. You know, if you're not staying on top of the situation and trying to curtail, you know, certain founder rightist tendencies, you could be going down a real bad path.

Ray Spadoni (15:15)

Well, you know, this issue of overcompensation also can just sometimes be from the board's perspective that the identity of that individual and the identity of the organization are so intertwined that they can't imagine what would happen without that person and they may be quite fearful that that person will leave. And so overcompensation can be the result of just wanting to try to lock that person in as much as possible so that they don't have to go through a transition that they may be quite concerned could at some point happen. You know, you mentioned governance. You described the notion of governance being asleep at the switch. And you talked about times when the Attorney General asked you to step in into a receiver role and you had to, I think you use the term cleanup. So let's talk a little bit about the board of directors, the nonprofit governance. Can you talk about the characteristics of good governance? What's best practices here?

Bob Griffin (16:18)

Okay, I, I think what I like to do when I discuss this is to point people to guides to provide information on how to practice good governance. And the guy that I usually refer to is the one that the Attorney General's office puts out and the most recent version is in 2022. And it's, it's really just to guide to public charities, to boards. And also included at the end of that guide is a list of other resources, including the irs, which is important. And let me just sort of summarize the way that the Attorney General General office spells out good governance principles. And we can sort of see how maybe in certain instances we've talked about how those principles were not adhered to. I mean first the AG suggests know your responsibilities, okay? Your duty of care, your duty of loyalty, your fiduciary responsibilities. Your duty of care is sort of the prudent man rule. What would a reasonable person do in a given situation? Duty of loyalty. You're loyal to your, your public charity. You're not self dealing. We talked about that earlier the problems of self dealing and also participate in meetings and keep informed. That's so, you know, sort of the asleep with the switch. Just don't go along for the ride. Be involved. Now the other attribute of the governments is educate, educate yourself. As board members know your governing documents, you know, understand your role. You know, we just did, you know, discuss that in terms of, of, you know, participation, duty of care, duty, loyalty. Third, you have a right to information as a board member and that includes just on information that is, you know, given to you, you know, by the organization. For example, if you feel, excuse me, if you feel the need as a board member to get outside information, the board should be able and willing to hire consultants to advise them in the field. You know, if they just, you know, the market's changing, demographics are changing, we don't know what to do. Well, we need to bring consultant because maybe an organization isn't adept at be able to answering those questions. Pay close attention to financials. I can't underscore this enough. Yeah, I've been asked to come in because of a financial free fall a lot of times caused by founder writers, caused by boards that were not fully engaged. And, and it's just you got to understand the financials. Now I'm not suggesting that you sit there at a board meeting and try to sort through a balance sheet. It's not easy and there's a lot of numbers. And I have found in my own role, which I probably, I failed to mention the beginning. You know, I've been on many, many boards over the years and I Once calculated over 170 board years I sat through financial statement reviews to actually become chair of finance. And I just find that a lot of the presentations just can overwhelm directors and they sort of get lost. But I strongly recommend that you understand certain financial ratios, particularly your current ratio and your day's cash on hand, because you're going to, you got to know those because you're going to find out whether you're going to exist or not. It's nice to know debt to service, debt to equity ratios on all this stuff, but that gets confusing. You know, I think you got to know where you stand on a given day and you also have to make sure you have enough money to dispose of your obligations and in particular your wages to employees because it is a crime in Massachusetts not to pay your employees. So you don't want to be left short and not have your employees paid. The other piece that I strongly recommend in the financial area, it can Be awkward is when the finance committee hires independent auditor and has the review with management. And the auditor, they ask management to leave the room. So the finance committee, only board members, no staff get to engage with the auditor in a totally transparent and honest assessment of what their view of management slash financial responsibility and actions have been. And that's where they'll, you'll find out if they'll, they can be more transparent. For example, they can tell you that, yeah, your controller is weak, your CFO is good in a lot of areas, but weak in this area. They don't want to say that in front of them.

Ray Spadoni (21:32)

Right.

Bob Griffin (21:32)

But they will tell the board that. And that's how you as a board board can give you a handle in your financial situation is, is through, you know, independent discussions with the cpa. If you're a board member and, and the CEO or CFO pushes back on that, that's obviously a warning sign.

Ray Spadoni (21:53)

Yeah, it's a red flag for sure.

Bob Griffin (21:54)

So really stay on top of your, your, your financial situation. Make sure there's, you know, you know, internal controls, so forth. You need to have a diverse, diverse board. Now you go back to really early AG case involving a hospital system back in the 90s. They got involved and, and enter into agreement with AG because there was a closed club. You know, it was your community and people on the board was basically the country club clique. It was not representing the community and there were some bad deals that happened. So the AG got involved and said, open up, open up the board. Now obviously you need to have demographic representation with respect to various groups that you either serve or the community you serve. An area that I'm very involved with and I'm on a board of a community health center raise because you help us. We have a requirement for a diverse board. Under federal guidelines, you have to at least have 51% consumers. And then you need to have a diverse board. Now that's the extreme. This is federally required, but for public charities, they don't have a requirement. I can't underscore the importance of having a diverse board to get the viewpoints that are necessary so that the charity can properly represent the community, serve the consumers. You know, the board members become the voice of the community to make sure that management understands fully what is going on in the community. Another area is with respect to the CEO, the board members have to be all involved with hiring the CEO. Don't delegate to a committee. You all have to be invested in who that CEO is. You don't want a situation where you Have a small clique, hire the CEO and the other members of the board feel disenfranchised. And of course they're going to be questioning that CEO throughout his or her tenure, being involved and following up in the CEO. Make sure you're involved with the compensation of the CEO. Everyone should be involved with that. Should not be the finance committee, executive committee, and you should get comparables. And this would also help in the situation of, you know, founderitis is that just because someone founded the organization doesn't mean it's bad. But you want to make sure that you have the proper protection with respect to compensation. Get yourself comp studies. It also will inoculate you from challenges from the IRS under the excess benefit transaction rules, which briefly says that if you as a board over compensate or make, you know, overpay someone, you can be held liable for certain amount of penalties. I don't think there's necessarily prison time involved, but the point is you can be fine. You don't want that. Or the AG will come in and oversee you and also force you to realign yourself. And then last and very important area is make sure you either you avoid conflict of interest or you document transactions with related parties. Related party is a board member. There's a family member of a key individual. I'm not saying that those transactions per se are bad and sometimes you get better deals, but document them to document. And I found over time, you know, insurance is a key area. You have a. Someone gets on the board who's somehow involved with insurance and immediately want the, the, the charity to hire his insurance company or hire him as the agent, whatever, whatever the case may be. Do comps. Cover yourself. You'll find you'll probably get a better deal. But if you don't do it, it's gonna, you know, people are gonna raise issues with you, you know, similarly on any, any other kind of services. And also when it comes to CEO compensation, do not. I strongly recommend that anyone that does have a related party transaction with the organization, whether it be, you know, a cleaning company or whatever you want to call it, the person who the transaction is with, the board member should not be involved with establishing compensation for the CEO.

Ray Spadoni (26:48)

Right.

Bob Griffin (26:48)

You want to, you want to avoid that quid pro quo. You scratch my back, I scratch your back. To stay away from that. Isolate them. These are awkward conversations. I've had to do them in my, in my practice and, and sometimes it works and sometimes I leave used. I used to leave the engagement or I would, they would go venue shopping. But conflict of interest, avoid them at all costs. If you are going to do related party, make sure there's not a conflict of interest by getting comp studies.

Ray Spadoni (27:27)

Great, great list. Very, very comprehensive, Bob. Thank you for that. You know, I will say I work with a number of nonprofit boards and as you ticked through that list, I was just struck by the fact that there's still a fair bit of variability in this regard. And I and I work with of boards you mentioned, you know, the, the one that I would put as you know, the benchmark in this regard and following these, these guidelines quite well. But I do work with other organizations that are, I, I guess adhering much less rigorously to them. The document that you mentioned at the Massachusetts Attorney General, I'm familiar with that and I think it, it provides a lot of good general information. I can put a link to that in the show notes. But I just want to ask you as an attorney, is it so Massachusetts specific as to not be helpful to folks outside of Massachusetts or are there some elements to it that are specific to Mass law?

Bob Griffin (28:34)

That's pretty much that would cover most jurisdictions. I do have to qualify that. I'm a Ray. I'm a retired attorney now, so I gotcha. Not rendering any legal advice just based giving advice based on my experience. But that list should cover any kind of a public charity in any other jurisdiction because these are issues that the IRS would obviously be interested in the extent if they think there's over compensation. But with the Attorney General guide, there is a link to the IRS which obviously covers all the jurisdictions. So I, I think it's a useful guide even if you're not in Massachusetts.

Ray Spadoni (29:15)

Okay, great. You know, folks who listen to this podcast are leaders, board members, supporters of organizations that are, that are much like the one you just described in terms of their mission, in terms of their focus and so forth. And I just said there's a lot of variability. So if you are someone listening to this and as you ticked through that list, someone hears this and thinks, oh this, that part sounds familiar. This maybe is something of concern. Maybe they're part of an organization where they sense there could be some trouble, could be some decline. What do they then do? What advice do you have for them? Not legal advice, but sort of general advice in terms of what they might be able to do in order to turn the tide of their organization.

Bob Griffin (30:08)

Let me just run down the list in terms of severity to less severe. Obviously the most severe case is if the Attorney General's office or the U.S. attorney's office gets Involved and I've been involved with a number of those cases and my recommendation in that case is instances if you get the U.S. attorney's office involved mainly due to a complaint. Key, Tom, is where a lot of it comes from. You must hire yourself a former U.S. attorney to represent. I have found that they open doors that we don't even know exist. They know the whole process. So unfortunately you have to lawyer up in that kind of a situation. And similarly with the Attorney General's office, someone that understands laws and public charities. If it's public charities that comes after you, it's generally public charities. I have not found ag criminal that much involved with public charities. It's usually public charities oversight, which is a civil, which they can refer over to criminal if they feel necessary. So you really do have to lawyer up in that instance. And just because you just want to protect the reputation of the organization, the reputation of the board members and, and many times these, these issues get resolved without much fanfare. But you, you just have to be on top of the situation. You really can't, you can't mess around. I can't underscore that enough. Now the area and the largest area is where I would call just sloppy practices, conflict of interest. You know, we've talked about, you know, shifts in corporate mission, founderitis, that whole bucket. There is a large bucket. And I think the way you navigate that is that you need to bring outside resources and clearly you have to bring an attorney in that understands public charities so they can help in the extent you need to you to buttress or redesign your corporate documents, tighten your procedures. But you also need to bring in a consultant that is well versed in nonprofit public charities. They can help deal with the organizational structure as well as the deal with market changes, demographic changes. You want someone well versed. You know, put my plug in for you, Ray, because I know you've been helpful to non profits, including some that I have been associated with. So you need someone that knows what they're doing in that area. And it's, and it's more than just, I think organizational flow. I think someone needs to understand the whole market dynamic as well. It's, it's a, it's a well versed type of consultant. And then you know, if you know, if you're just. Things are going along hummingly and you feel like, you know, we're, we're doing well, I still recommend that organizations should do what I call, you know, a corporate, corporate or organizational refreshment. And that's really more work for A consultant such as someone like you, Ray, that would help guide the board into like, call it the new frontier. What opportunities are there? You know, what opportunities maybe should we have not go to engage the board in some strategic planning. And I think if you do the corporate refresh, you might not deal with some of the above two issues of clearly, you know, the fraud piece, non compliance piece, or even the sloppy procedures. Because a corporate refresh would just help guide the organization into the future and protects the charity from, you know, going down the wrong path. So that's how I would recommend board members if you're either in a bad situation, sense you may be in a bad situation or even a good situation. Be proactive, don't wait for the bad situation before you bring in advisors.

Ray Spadoni (34:50)

I like that term corporate refresh. I've done some work with a number of organizations going through a strategic planning process that want to incorporate that in. It's the proverbial look in the mirror, get some external feedback, talk to folks internally and be willing to listen and you can uncover a lot. You can understand yourself and your situation pretty well when you do that. Not every organization does that. I certainly recommend it. So I like that term though. Refresh. We've been talking, Bob, about nonprofits. I know that's been a, an important part of your career, certainly a part of my focus. But let's just touch base a bit on the for profit side of this. You know, before we get into the for profit versus nonprofit and you know, what's happening in the broader state of healthcare, maybe you could just talk a bit about the kinds of trouble because, you know, much of what you've described, charitable organizations, nonprofits and so forth. But the for profits, what are the sorts of things that can go sideways for them?

Bob Griffin (35:59)

Well, clearly for profits is a hot button issue, always has been within healthcare. And I should, you know, underscore that I have represented for profit healthcare. I've acted as receiver of many nursing homes on behalf of the attorney general's office, all for profit. So I've seen what can get, you know, for profits into trouble. And in many respects it's really no different than nonprofits, except it's can be. How's the white. It can be more readily occur in the for profit world. And the way, the way I, I look at it with, with for profits is that there's really the, the tension of for profits is, you know, between, you know, accountability and independence, where it's clear in public charities, public charities are for the public good and for profits are Driven by profits. And it depends upon how aggressive a for profit is in pursuing profits and at the expense of whom. Now let me just talk about categories before profits and problems that may ensue from them because not all for profits are bad. For example, you have, let's call it the lower entry level for profit private practitioners, whether it be physicians, your physical therapists, you know, home care agencies, they, they, many of them are for profit, right. And I, I view them as, you know, being people that tend to be more sensitive to the community in which they live in because they tend to be more localized and they're going to feel some of the community pressures if they act inappropriately. They're also smaller scale, not searching for, you know, the big profits. That also includes mom and pop nursing homes, which sort of disappeared, but that used to be a phenomenon we had here. The other extreme is private equity, where, let's face it, I mean, at the end of the day, their primary concern is return on investment. So their corporate mission is far different than even a small nonprofit provider. How do you get in trouble? Obviously excessive profiteering. So it's, it's just, it's, it's really, you know, it's been well documented time and time again. You just pick up the newspapers. You have to look at Massachusetts, you look at Rhode Island. Some of the damage that private equity can do because, you know, the way the money gets pulled out in the middle. You have publicly traded companies now, they're, they're a little different in that they do have some more accountability than private equity and that they have shareholders, you know, the sec, they're not, they're not going to go, you know, and rip large sums of money out of organizations because they have to, you know, appease the shareholders and they have to appease their mission. The, the problem that I see sometimes that can happen within a, even a large for profit and even a smaller nonprofit is that particularly, you know, a large for profit is publicly traded is sometimes the pressure for shareholder return can be such that people may cut corners and you run into compliance issues. You know, you see some major, major paybacks to government because of aggressive, you know, upcoding, whatever the case may be. It doesn't say that non profits don't have the same issue. But at the end of the day, when they do not profit their money, it's ultimately, you know, for public charity and for public good for profit world either goes to shareholders or if it's private equity, goes to investors. So that's how I sort of look at the for profit scene is obey those, those three different categories. And I have not found, you know, when I've been receiver, I have been receiver of nursing homes that were smaller, family owned, that ran amok. Eventually it's just greed, you know, didn't pay the irs, they took the money, did bad things with it and in those cases there was. There's no independent accountability. And that's to me the problem with many for profit health care is what is the extent to which there's accountability by an independent group in a non profit public charity. If a board is acting properly, that is because we talked about some of the problems. But if a board is doing its job, there is independence, there's accountability and it's for the public good. In the for profit, if there is independent accountability, you're going to have good services and, and so forth. But when you're closely held, there's not much independence. So really the accountability is your relationship with the community and your consumers. But if your ultimate goal is to pocket as much money as you can, then the, your interest in community sort of wanes. And that's, that's sort of the horns of dilemma in the for profit world is when does the profit motive overtake what's best for the community?

Ray Spadoni (41:44)

Right. Well, you described that this has always been a hot button in healthcare and the geographic area where we live. This has been particularly hot more recently because of the high profile collapse of a major for profit hospital chain which has been on the minds of lots of folks as we've witnessed what that looks like and what that does to the healthcare industry, to patients, employees, that sort of thing. But there has been an increase in the presence of for profit organizations in the healthcare industry. Some segments like hospice and home care and others more so than in other parts of the system. Care to share your thoughts from a policy perspective, from a bigger picture panoramic view perspective, what you think this is doing to our industry.

Bob Griffin (42:40)

Well, for profit health care is sometimes is the last resort for providers, in particular hospitals. A hospital that is whatever reason. We can go back to the list of the five problem areas. Whether it's lack of financial oversight, changing demographics, there's a whole host of reasons why a public charity that has a hospital is failing and no other public charity hospital wants to be involved. It's the for profits that come in to save the hospital. And from my point of view, I guess you know that that's, that's a good. But then you have to then monitor what happens to that for profit hospital. Now there's certain you know, hospital chains for like a better name that have been highly successful, you know, in taking over hospitals like that and have been around for 20, 30 years, you know, publicly traded. I think from that perspective, the, that they're good because hospitals would not otherwise exist. I think the problem is, is that when, you know, there's hospitals that are not taken over by publicly traded, you know, they're into this private equity piece. And, and everyone acknowledges, whether it's reports in Massachusetts, Rhode Island's going through the same thing. The attorney general in Rhode island put a report out that simply said, you know, private equity is there to pull money out. You know, it's, it's, no, it's not a surprise. Right. And I think so you track what happens, you know, 10 years later and then it raises the policy question is the amount of money that government has to put in to bail out organizations? Should they have just done that 10 years ago? That's easy to say, you know, in terms of, you know, armchair quarterbacking, but that's, you know, that's, that's an issue in terms of when for profit does take over hospital. I think, I think it was what is the structure of the for profit? What is really their commitment? So I'm not saying all, all for profit is bad in some cases. Now in terms of the other areas, you know, hospice, home care, competing with nonprofits, I mean, I mean home care probably provides, they probably provide certain efficiencies, providing that they meet all the regulatory requirements. I, I don't see a problem with that. Same with, you know, physicians, they're for profits. You know, I just think it really turns on what is the, you know, again, it comes down to balancing the profit profit incentive with meeting regulatory requirements and also basically self dealing, you know, how much money is someone pulling out?

Ray Spadoni (45:33)

Okay, good. It's a good balanced view and it is worth remembering that sometimes these, these organizations don't have other choices and the for profits will come in and will continue the mission, the original mission of that organization off into the future when there were no other possibilities. So, yeah, good balanced view. Bob, this has been most helpful. This has been a very, very good, I think, overview and you know, I would dare say probably be a good training resource for leaders and members of nonprofit boards.

Bob Griffin (46:11)

If people have questions on anything that we discussed, including my hobbies, feel free to send me an email.

Ray Spadoni (46:20)

Thanks for listening. I hope you'll consider leaving a five star review on Apple podcasts or your platform of choice that will help others find us here. My mission is to help empower organizations that matter by supporting those who lead them. Feel free to learn more about me and my work@redsailadvisors.com.