A ! HEALTH LAW REPORTER BNA ’ s

BY MICHAEL W. PEREGRINE AND JAMES R. SCHWARTZ T he year 2009 witnessed an extraordinary series of developments in nonprofit corporate and charitable trust law as they affect the governance and operation of hospitals and health care systems. This is consistent with a decade-long trend that has made corporate law and governance key legal feasibility considerations for nonprofit organizations. These developments reflect the following general trends: (a) increased oversight from state and federal charity regulators; (b) greater focus on corporate governance practices; (c) closer scrutiny of the exercise of business judgment by boards; (d) the evolution of system structures and business combinations; and notably, (e) the governance implications of a recessionary economy. Based on these trends, our ‘‘top ten’’ list of major nonprofit developments for health care providers in 2009 is as follows: 1. Governance Under Stress. The ‘‘Great Recession’’ of 2008-2009 had a dramatic effect on the governing board oversight of nonprofit financial affairs. During this period, nonprofit hospitals and health systems suffered through a ‘‘parade of (financial) horribles’’: significant negative outcomes in financial performance, a marked downturn in charitable giving, widespread reductions in workforce, an uncertain recovery timetable, and increased financial-related challenges. Particular financial challenges included organizational solvency, debt covenant compliance, the security of the investment portfolio, proper revenue/ expense management, the potential need to consider reorganization/bankruptcy options, and the concern of third parties such as creditors, donors and charity regulators. These unique financial concerns prompted a series of related governance challenges at both the full board and the finance committee levels. Included were issues with respect to the intensity of board oversight of financial affairs, the adequacy of board and committee ‘‘skill sets,’’ the level of finance-related information flow to the board and relevant committees, the accessibility of the chief financial officer and financial administration staff to the board and to key committees, and the effectiveness of audit committee practices. The importance of the board’s financial oversight role was addressed in a series of reports issued throughout 2009 by Moody’s Investor Services, a prominent health industry rating agency which incorporates Peregrine is a partner with McDermott Will & Emery LLP, Chicago. He can be reached at (312) 984-6933, or [email protected]. Schwartz is a partner with Manatt, Phelps & Phillips LLP, Los Angeles. He can be reached at (310) 312-4182, or [email protected].