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Leadership, Governance, Values, and Culture

Learning Objectives

After reading this chapter, you should be able to:

• Describe what strategic leadership entails.

• Compare the differences and similarities between leaders and managers.

• Discuss why strategic success depends on finding, developing, and evaluating capable leaders.

• Compare and contrast governance in for-profit and nonprofit HSOs.

• Examine the relationship between an HSO’s organization and the strategy it is pursuing.

• Analyze the importance of organizational values and culture and the extent to which they can enable or hinder strategy implementation.

• Explain how and why organizational change is inevitable and desirable if an HSO wants to improve its competitiveness and performance.

Chapter 2 Noel Hendrickson/Photodisc/Thinkstock

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CHAPTER 2Section 2.1 Strategic Leadership and Developing a Vision

This chapter focuses on the roles of power, leadership, organizational culture, values, and attitudes toward innovation as they relate to strategic planning and management (refer back to Figure 1.1 in order to see the components of the strategic management model for Chapter 2). The importance of leadership, the roles of top management and the board of directors, values and culture, and organizational change all affect the quality of strategic planning and are in turn affected by it.

2.1 Strategic Leadership and Developing a Vision In articles in the business press and the literature, the words manager, leader, executive, and administrator are often used interchangeably. Consider, however, the implied judgments in the descriptions of a person as “a real leader” versus “just a manager,” and it becomes evident that the terms are different.

One might assume the only person who creates a vision is the individ- ual at the apex of an organization, such as the HSO administrator or the president of a health system. This is certainly not the case. Leaders can be found at any level in an organization. A leader is anyone who can visualize a better state of affairs and persuade others that such a vision makes sense. A leader is anyone who is dissatisfied with the status quo, has suggestions for improvement, and is able to con- vince others of the merits and bene- fits of such changes. By contrast, managers are responsible for implementing changes and achieving performance objectives. Managers do not need to be leaders, although what they do is nonetheless critical to an organization’s success.

What makes leadership “strategic”? Strategic leadership involves creating a vision and strategy that helps the organization succeed at its mission in both the short and the long term. Whereas leadership may be required for bringing about changes or improvements to parts of the organization, strategic leadership determines the long-run survival and success of the entire organization.

Power in an Organization

All types of executives have the authority to force others to do what they want done. Executives with leadership capabilities more often use communication and a range of pro- social influence tactics (e.g., reward, rationality, and friendliness) to gain others’ coopera- tion (Lamude, Scudder, Simmons, & Torres, 2004). Leaders have the power to influence

Blend Images/SuperStock

True leaders use influence rather than authority to get people to do what they want them to do.

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CHAPTER 2Section 2.1 Strategic Leadership and Developing a Vision

or affect the people around or under them. This is true regardless of whether they hold leadership posi- tions. There are five types of power in an organization.

Legitimate power is the authority derived by virtue of occupying a position in the organization. The higher the position a person occu- pies, the greater the authority or legitimate power that person holds. Expert power is derived from a per- son’s unique competencies, skills, and experience. For example, a group surviving a crash on a mountainside is likely to willingly follow the mem- ber with survival knowledge and skills. Referent power is derived from subordinates’ or followers’ respect, admiration, and loyalty to the leader;

it is often referred to as leadership charisma. Leaders who have the ability to give or with- hold meaningful incentives hold reward power. Incentives can be tangible rewards such as pay raises, bonuses, or preferred job assignments or intangible rewards such as verbal praise or respect. A leader or manager in a position to punish a subordinate is said to have coercive power, which could take the form of firing someone, denying a raise or bonus, or reassigning the person to an undesirable location (Jones & George, 2007).

Transactional leadership has been the dominant style in many healthcare organizations (Schwartz & Tumblin, 2002). Transactional leadership relies on interactions between the leader and follower, with followers rewarded for meeting specific goals set by leaders. For instance, hospital governing boards often set performance expectations (financial and quality criteria) by which the CEO is evaluated and rewarded. The CEO, in turn, sets performance expectations for top management, top management sets performance expec- tations for middle managers, and so on. Leaders in the hierarchical healthcare environ- ment are followed primarily because the followers benefit. For example, the relationship between hospital leadership and the hospital’s organized medical staff is transactional in that leadership relies on the independent physicians caring for hospitalized patients to assist the organization in meeting financial and quality performance goals. The physicians benefit from providing this assistance—they have a hospital in which to care for their patients that is financially strong and has a good reputation.

Mission and Vision Statements

Healthcare organizations—indeed, any kind of organization—need mission and vision statements. Like many terms in the business lexicon, these are misunderstood and often misused.

Thomas Northcut/Digital Vision/Thinkstock

A physician who has received many years of medical training and achieved a position of authority in a healthcare organization can be said to have both legitimate and expert power. Whether she has referent power will depend to a large extent on her own charisma.

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CHAPTER 2Section 2.1 Strategic Leadership and Developing a Vision

Mission Statements A mission statement is a concise statement of an HSO’s reason for being—its purpose, what it actually does, and for whom. It describes what services are provided for which tar- get market, as well as how the organization considers itself different or unique. A mission statement should not contain descriptions of values, strategies, or objectives (although many organizations make this error). It could also contain a description of what the HSO’s consumer will experience when using its services (known as the customer value proposition).

A mission statement answers the questions “What do you do?” and “What is your raison d’être (reason for being)?” For many HSOs, the answers have not changed for many years. With today’s fast-moving transitions in the healthcare industry, many organizations are revisiting their mission statements to determine if they are still valid. The ideal time to do this is at the end of the annual strategic planning process.

When crafting a mission statement, care should be taken in how broadly or narrowly the HSO is characterized. For example, an organization could conceive of itself as a primary care clinic or as a public health clinic, the latter precluding any work or involvement in the private sector. It could be a home health agency or a hospice agency, the former being broader and the latter more restrictive in the kind of services provided and the target consumers.

Suppose that in the course of conducting its strategic analysis, an organization partnered with a national health system. If its existing mission statement characterized it as being local in scope, then clearly the mission statement would need to be modified and aligned with the new reality. This is why both the mission and vision statements are reconsidered at the end of the strategic planning process.

Consider the following example of a poorly written mission statement:

Care. Trust. Heal.

You might never identify this as the mission statement of a hospital. While the statement is short, as recommended by some management consultants, it is probably more of a marketing slogan than a mission. Missing is what the organization actually does and for whom, and so on. Contrast this with the well-written mission statement of Mayo Clinic in Rochester, Minnesota:

To inspire hope and contribute to health and well-being by providing the best care to every patient through integrated clinical practice, education and research. (2013, para. 1)

It is obvious from this mission statement that patients are the primary reason Mayo Clinic exists. How it strives to provide patient care is clearly articulated. The customer value proposition at Mayo Clinic is hope and best patient care.

Mission statements are a communication device—they inform internal stakeholders (physicians, managers, staff members) as well as external stakeholders (consumers, com- munity of interest, investors) about the HSO’s unifying themes and goals that guide deci- sion making, resource allocation, and planning. Although some management consultants

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CHAPTER 2Section 2.1 Strategic Leadership and Developing a Vision

Examples of Vision Statements

Read the following vision statements, and, using the criteria discussed, evaluate each.

Accurate HomeCare (2013, para. 2): “Build the largest and most trusted home care company in the Midwest.”

The Dental Service at the Salt Lake City Veterans Administration Medical Center “will accomplish the following”:

1. Provide an integral part of the patient’s total health care 2. Provide appropriate and quality care 3. Provide a caring atmosphere 4. Provide timely and efficient care 5. Function as a team to maximize use of resources 6. Advocate for eligibility reform/equitable access to dental care 7. Provide holistic care 8. Provide quality education for dentists, auxiliaries, trainees, and the community 9. Make health promotion for patients a priority. (2013, para. 2)

discourage organizations from including value statements in their missions, HSOs affili- ated with religious groups are an exception. Hospitals in the Adventist Health System, for example, always espouse a mission that includes references to Christ’s healing ministry and Christian values.

Vision Statements Does a strategic leader simply conjure up in isolation a vision for the organization? Do effective leaders rely on others in the organization to support the development of a realis- tic vision? Let us examine the nature of organization vision statements and the approaches used to create them. A vision statement is a concise expression of where the organization would like to see itself in the next 5 or 10 years. What makes an effective vision statement rather than one that just sounds good? At some point, the organization will want to know if the vision has been achieved.

The vision of Centura Health, based in Denver, Colorado, is “Fulfill a covenant of caring for our communities with excellence and integrity to become their partner for life” (2013, para. 5). While this vision sounds very good, how will Centura Health determine if this vision has been achieved?

Vision statements should include some type of quantitative measure. For example, the vision for University of California, Irvine, Medical Center and School of Medicine is “to be among the best (top 20) academic health centers in the nation in research, medical educa- tion, and excellence in patient care” (2012, para. 3). This is a measurable vision. Ideally, the vision statement should be concise, inspiring, memorable, and achievable—a tall order, but not impossible. (For a few samples of real-world vision statements, see Examples of Vision Statements.)

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CHAPTER 2Section 2.1 Strategic Leadership and Developing a Vision

It is imperative that a healthcare organization’s strategy and vision be completely aligned. This is why an organization should review and, if necessary, revise its vision statement after deciding on the strategy and strategic direction, in case the latter has changed.

Visionary leaders should collaborate with other top managers and their board of directors to craft a good vision statement that embodies their vision and makes sense to all of the organization’s stakeholders. Getting everyone’s agreement takes time; however, such col- laboration is necessary if the vision is to be truly shared and owned by everyone. A great vision becomes realized only when every person in the organization makes a contribution toward its achievement and does not merely rely on those at the top. Table 2.1 summarizes the differences between mission and vision statements.

Table 2.1: Characteristics of mission and vision statements

The mission statement focuses on current activities—“who we are” and “what we do”

The vision statement concerns the future path—“where we are going”

Current service offerings Markets to be pursued

Consumer needs being served Future service–customer focus

Operational and business capabilities Kind of organization that management is trying to create

Discussion Questions

1. Are most CEOs and presidents of healthcare organizations today “strategic” leaders? Why or why not?

2. Consider the following leaders. For each one, state the source or sources of their power— legitimate, expert, referent, reward, coercive—and explain the reasons for your choice:

• Martin Luther King, Jr. • Your mother • U.S. surgeon general • Michael Ellis DeBakey, world-renowned heart surgeon • The professor of your strategic management course

3. If you wrote the mission statement for your local hospital, what would it say? How does it compare to the hospital’s official mission statement?

4. Why do healthcare organizations find it difficult to develop a good vision statement? 5. If an organization has a good vision statement, why is a mission statement necessary? 6. Vision statements typically look 5 or 10 years into the future. Name an organization (or

an industry) where a vision statement might be developed for 20 or more years, and one where less than a year might make sense.

7. Many organizations have vision statements that “sound nice” purely for public relations (PR) purposes. How can you tell the difference between the “PR” vision statement and the genuine thing?

8. Should every employee in the organization be able to recite the mission statement? The vision statement? Both? Why or why not?

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CHAPTER 2Section 2.2 Leaders and Transformational Change

2.2 Leaders and Transformational Change Warren Bennis, a pioneer in the contemporary study of leadership, once said, “Managers do things right; leaders do the right thing” (Bennis & Nanus, 2012, p. i). Bennis’s words echo a common saying in business that “leaders create change while managers implement change.” The way that healthcare leaders create change is by creating a vision for the orga- nization and then “selling” the benefits of that vision to the rest of the organization. To the extent that they succeed, they create followers and motivate or influence them to put forward their best efforts for making the vision a reality. The leader’s vision then becomes their vision. One test of leadership is whether the leader actually has any followers. Who, indeed, has the leader succeeded in influencing?

“Fundamentally, management is about coping with complexity (control), whereas leadership is about transfor- mational change” (Schwartz & Tum- blin, 2002, p. 1421). Robert Allio also has written on the differences between leaders and managers. The key differ- ences he describes are summarized in Table 2.2. He further provides five pre- scriptions for improving the quality of leadership. Allio contends that good leaders must have good character and integrity, a personal style that balances managing with leading, a commitment to collaboration, and adaptability. Lastly, leaders are self-made, and good leadership requires constant practice (Allio, 2009).

Table 2.2: Leaders vs. managers

Leaders Managers

Take the long view Take the short view

Formulate visions Make plans and budgets

Take risks Avoid risks

Explore new territory Maintain existing patterns

Initiate change Transact

Transform Control

Empower Enforce uniformity

Encourage diversity Invoke rationality

Invoke passion Act amorally

Source: Allio, R. J. (2009). Leadership—the five big ideas. Strategy & Leadership, 37(2), 4–12. Used with permission.

Creatas/Thinkstock

Effective leaders know how to make others feel comfortable, using nonverbal behaviors that create a sense of personal connection.

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CHAPTER 2Section 2.2 Leaders and Transformational Change

Is it difficult to be a leader? The list of attributes in Table 2.2 might appear daunting to a junior person in a healthcare organization. To someone who seeks out challenges, learns from experience, works well with others, takes the initiative, and in other ways “prac- tices” leadership, it is a natural progression to leadership positions with ever-increasing responsibility and visibility.

Communication and Effective Leadership

Although personality, business acumen, legitimate power and authority, and expertise are factors in leadership ability, communication competence is central to the practice of influence and leadership in organizations. Without the ability to relate to others at work through interactions, influence and leadership are virtually impossible. A foundation of strong relational and communication skills is critical to the ability to inspire motivation within others and to encourage the pursuit of organizational vision.

Impression Management Leadership effectiveness and communication satisfaction within organizations rely heav- ily on perceptions of individuals in formal or informal leadership positions. Thus, strong leaders are able to manage others’ perceptions and have a heightened degree of self- awareness. They must be aware of what is appropriate and expected in a given situa- tion, possess the skills to deliver it, and demonstrate the motivation for accomplishing excellence.

Effective Message Content Good leaders pay a great deal of attention to the content of their messages. They approach their leadership communication as a goal-directed activity, rather than mindlessly. They craft their messages strategically so as to provide others with a clear, concrete sense of their vision. The content of their formal and informal messages should be motivational and inspirational and succeed in convincing others that behaving consistently with the leader’s (or organization’s) vision is truly in their own best interests. Needless to say, lead- ers must also have unquestionable ethics and engage in this type of influence carefully and thoughtfully.

Strong Message Delivery Effective message delivery, often referred to as charisma, is central to leadership effec- tiveness. Numerous research studies point to the importance of message exchanges that foster a sense of connectedness among communicators. Although connection can be dif- ficult to define, studies have isolated factors such as smiling, using others’ first names in conversation, appropriate touch and diminished physical distance, making eye contact, removal of physical barriers (for example, sitting on the same side of a table or desk with the other communicator and avoiding the use of lecterns during public presentations or meetings), engaging in some degree of self-disclosure, and using animated facial expres- sions as important to reducing the psychological distance between people.

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CHAPTER 2Section 2.2 Leaders and Transformational Change

Leader Communicator Styles

An animated leader relies primarily on nonverbal behaviors such as gestures, eye contact, and facial expressions to motivate others. An individual who fits this profile but is not able to draw on behaviors associated with the other styles will lack influence in contexts other than face-to-face communication.

An attentive leader relies primarily on listening skills in relationships with others to exert influence. Through both verbal (asking questions, paraphras- ing, and validating others’ positions) and nonverbal (eye contact, head nodding, and leaning forward) means, attentive communicators illustrate that they value individuals and their ideas. Attentive leaders

must be careful to listen to others and actually incorporate their perspectives into organizational strategies and plans to maximize their credibility and impact.

A contentious leader is argumentative and challenging in communication with others. These lead- ers may enjoy playing the devil’s advocate and will often challenge others to prove or support their positions. Although the contentious communicator can be challenging to work with, this style can enable transformation by encouraging others to think outside the box. This leader’s communica- tion style and interactions with others focuses on asking questions, raising the bar, and being intel- lectually stimulating.

A dominant leader is similar to a contentious leader, but instead of questioning and challenging others, dominant leaders take charge of conversations and speak in a strong manner. They tend to communicate more frequently than others in meetings and conversations. This style suits the authoritative leader but can be precarious for leaders operating in more democratic environments.

A dramatic leader communicates both verbally and nonverbally in flowery and exaggerated ways. These leaders use narratives and expressive language to convey their positions. They may even rely on poetry, literature, or dramatic quotations from others to drive home their point.

A friendly leader influences others through frequent delivery of positive feedback and praise.

(continued)

Communicator Style Communication researcher Robert Norton (1983) identified nine primary communicator styles that nearly 30 years of research have consistently supported (see feature box Leader Communicator Styles). When applied to leadership, they give some insight into the reper- toire of communication behaviors available to foster leadership and encourage influence. As you read about each, consider the situations in which they would be most appropriate. Remember, although an individual may have a primary communicator style, people can “borrow” habits from each of the styles. The most competent communicators are flexible and adaptive in their approaches to different situations.

A leadership style that is facilitative, rather than authoritative, is preferable for a home model of healthcare delivery.

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CHAPTER 2Section 2.2 Leaders and Transformational Change

Leader Communicator Styles (continued)

An open communicator leader expresses emotion and self-discloses personal experiences (both positive and negative) as a way of inspiring and influencing others.

An impression-leaving leader finds ways to deliver memorable messages that others think about after the conversation is over.

A relaxed leader is calm and understated in his or her approach. These leaders rarely reveal anxiety or nervousness and react unflappably under pressure. They exude confidence and composure.

Effective leaders understand that impression management, strong message content, and effective delivery are central to their ability to influence others. Further, they recognize that there is not one perfect communicator style for a leader. Strong leaders are adept at analyzing people and situations and selecting a message, delivery approach, and personal style that best fits the circumstances.

Beckhard and Pritchard (1992) note that high-performing organizations have a strong sense of purpose with a team-driven model of management that involves shared, knowledge-based decision making. Continuous learning and improvement are encour- aged, and employees are considered valued partners in these efforts. Paul O’Neill, former chairman and chief executive officer of Alcoa, suggests people working in a healthcare organization should be able to answer “yes” to these three questions every day:

• Am I treated with dignity and respect by everyone, every day, in each encounter, without regard to race, ethnicity, nationality, gen- der, religious belief, sexual orientation, title, pay grade, or number of degrees?

• Do I have what I need—education, training, tools, financial support, encouragement—so I can make a contribution to this organization that gives meaning to my life?

• Am I recognized and thanked for what I do? (Lucian Leape Institute, 2013, p. ES2)

Discussion Questions

1. What are some strategies leaders can use for managing how other people perceive them? What are some specific ways in which you already practice these perception-management strategies in your personal and professional life?

2. Consider each of Norton’s communicator styles as they relate to leaders and leadership. Identify at least two situations in which each style would be appropriate, and two situations in which each style would probably be ineffective. Explain.

3. What is the difference between a goal-directed message and a mindless message? Explain your perspective. Why is goal-directed communication more desirable for leaders than mindless communication?

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CHAPTER 2Section 2.2 Leaders and Transformational Change

Leadership Traits

It is well known that experience is the best teacher of leadership. An Accenture study of leaders in all fields found they agreed that real work and life experiences had taught them more about leadership than any classes they had taken (Thomas & Cheese, 2005). When interviewed about the making of healthcare leaders, one hospital vice president recounted that he had not learned leadership skills in his graduate program: “We received technical education on finance, operations, accounting, policy and policy development. Even with my degrees, I still needed a lot of mentoring in terms of executive expectations” (Witt/ Kieffer, 2007, p. 3).

While experience is certainly valuable to leadership development, some key personal- ity traits can typically be found in people with leadership positions at various levels. The first of these is vision—the ability to see the big picture, imagine likely futures, and infuse that vision with passion. Integrity is a requisite trait because it is impossible to influence others without gaining their trust. Communication skills, compassion, and charisma are needed to articulate the vision and persuade others to embrace it. Leaders demonstrate strong moral and ethical principles. Attention is given to all stakeholders, not some at the expense of others. A commitment to collaboration encourages everyone to work together to achieve a vision. A less obvious trait of leaders is humility. Effective leaders typically give others credit for an organization’s success but will accept responsi- bility for poor results. These traits can be summed up in the phrase emotional intelligence, which Goleman (2004) asserts is the indispensable ingredient of effective leadership. Five domains constitute Goleman’s definition of emotional intelligence: self-awareness, self-regulation, motivation, empathy, and social skills.

Robert K. Greenleaf introduced the servant leadership philosophy in 1970 and defined servant leaders as those who achieve results for their organizations by attending to the needs of those they serve (Greenleaf, 1970). Max de Pree, the longtime chairman and CEO of the Herman Miller office furniture company, personified the concept of servant leadership in business. He characterized the art of leadership as “liberating people to do what is required of them in the most effective and humane way possible” (O’Toole, 1989, pp. xviii–xvix). This puts the leader as the “servant” of his followers by removing obstacles that prevent them from doing their jobs, thus enabling them to realize their full potential.

The importance of humility also figures prominently in the concept of Level 5 leadership, developed by Jim Collins. Collins’s research examined how companies were able to tran- sition from being merely “good” to “great.” He concluded that a leader builds “endur- ing greatness through a paradoxical blend of personal humility and professional will” (Collins, 2001, p. 20). Table 2.3 further elaborates on humility and will as these traits per- tain to leadership. So where might you find a Level 5 leader? According to Collins, “Look for situations where extraordinary results exist but where no individual steps forth to claim excess credit. You will likely find a potential Level 5 leader at work” (2001, p. 37). Level 5 leadership is transformational. Leaders in high-performing HSOs inspire and motivate followers to achieve greatness. Studies have shown that healthcare leaders who promote innovation and change are critical to the success of implementing “best practice” patient care (Aarons, 2006).

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CHAPTER 2Section 2.3 Developing and Evaluating Leaders

Table 2.3: Summary of the two sides of Level 5 leadership

Professional will Personal humility

Creates superb results, a clear catalyst in the transition from good to great

Demonstrates a compelling modesty, shunning public adulation; never boastful

Demonstrates an unwavering resolve to do whatever must be done to produce the best long-term results, no matter how difficult

Acts with quiet, calm determination; relies principally on inspired standards, not inspiring charisma, to motivate

Sets the standard for building an enduring great company; will settle for nothing less

Channels ambition into the company, not the self; sets up successors for even greater success in the next generation

Looks in the mirror, not out the window, to apportion responsibility for poor results, never blaming other people, external factors, or luck

Looks out the window, not in the mirror, to apportion credit for the success of the company—to other people, external factors, and good luck

Source: Based on Collins, J. (2001). Good to great: Why some companies make the leap . . . and others don’t. New York, NY: HarperCollins Publishers.

Many primary care providers, particularly those practicing in rural settings, are poorly trained in leadership skills (Markuns, Culpepper, & Halpin, 2009). With primary care pro- viders being asked to transform to patient-centered, medical home models of healthcare delivery, leadership skills that are facilitative in nature, as opposed to the more common authoritative approaches, will be needed.

Discussion Questions

1. What leadership traits, if any, have you learned in your work experiences? What traits may be more difficult to learn on the job?

2. When managers are promoted to more senior positions with substantial leadership respon- sibilities, what problems might they encounter in their first year in the new position?

3. What is more important to a leader’s success: high intelligence and solid technical skills, or high emotional intelligence? Or are these traits equally important?

4. Do you have what it takes to be a Level 5 leader? Why or why not? 5. Recount an experience you have had that shows you have leadership potential.

2.3 Developing and Evaluating Leaders Leadership development in HSOs involves identifying future leaders, giving them opportunities to function in leadership roles, and providing feedback and mentoring. Many healthcare organizations fail to develop and groom talent. In a survey of 200 healthcare provider CEOs, almost half indicated that no potential successor to their orga- nization’s top management spot had been identified, and only 17% felt that someone in the organization was prepared to step into the top spot (Witt/Kieffer, 2012). As the health- care environment becomes more complex, the development of leadership talent is becom- ing more critical.

There are considerable advantages to developing leaders internally rather than hiring from outside.

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CHAPTER 2Section 2.3 Developing and Evaluating Leaders

Studies have shown there are con- siderable advantages to developing leaders internally instead of hiring from outside (Brant, Dooley, & Iman, 2008). While the talent pool of exter- nal applicants can be impressive, leaders hired from the outside are less successful. By contrast, the lead- ers of 10 out of 11 “good-to-great” companies studied by Collins in his book of the same name came from inside the company. Companies that failed to achieve great results hired outsiders six times more often.

In addition to having a higher risk of failure, recruiting external candi- dates for leadership positions is more costly. Direct costs include search fees, interview costs, signing bonuses, relocation, and severance packages, among others. There are also indirect costs and post-hiring costs. One study suggests that replacing a chief nursing executive could cost a hospital upwards of $1.5 million (Sredl & Peng, 2010). By contrast, developing people in the organization to assume leadership positions is much less costly. Internal development costs are associated with training, education, mentoring, and job rotation.

Finally, an organization that practices internal promotion is more likely to retain high- potential talent. Executive retention is positively correlated with formalized succession programs. In companies having an executive turnover rate of 1–5% annually, 84% had formal development programs. At companies reporting turnover rates of 6–10%, 24% had succession programs. Of businesses experiencing turnover rates of 11–20%, only 11% had succession programs.

Developing the next generation of leaders is a difficult challenge for an HSO. Organi- zations committed to promoting from within can take certain measures to increase the prospects of success (Allio, 2009). First, they must have a good talent pool, which means hiring people with leadership potential in the first place. The organization must have a leadership development program that intentionally puts these people in challenging situ- ations and as members of cross-functional teams. A good development program obtains feedback about them and their performance from those who see them in action (Fulmer, Stumpf, & Bleak, 2009).

A 2007 survey of 104 health systems found that 52% had executive leadership develop- ment programs, and programs were under development at another 12% (McAlearney, 2008). Healthcare leaders suggest that some organizations getting into leadership develop- ment are “just going through the motions” and not implementing a substantive program (McAlearney, 2006). However, several healthcare organizations, including the follow- ing, were recently recognized as having outstanding leadership development programs and practices:

There are considerable advantages to developing leaders internally rather than hiring from outside.

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CHAPTER 2Section 2.3 Developing and Evaluating Leaders

• HCA Healthcare, Nashville, TN • Parkland Health, Dallas, TX • Northwestern Memorial Hospital, Chicago, IL • Nebraska Medical Center, Omaha, NE • Baylor Health Care System, Dallas, TX • William Osler Health System, Ontario • Mayo Clinic, Rochester, MN • St. Peter’s Health Care Services, Albany, NY • Griffin Hospital, Denver, CO • St. Jude Children’s Hospital, Memphis, TN • Children’s Healthcare of Atlanta, Atlanta, GA • Christiana Care Health System, Wilmington, DE • Alexian Brothers Med Center, Elk Grove Village, IL (Leadership Excellence, 2012)

Physicians are a critical source of new leadership talent for healthcare organizations. One would think that physicians seek executive leadership positions because they are not happy with taking care of patients. That is not necessarily true, says Richard Afable, M.D., M.P.H., president and chief executive officer of Hoag Memorial Hospital Presbyte- rian in Newport Beach, California. Dr. Afable believes that “the best physician executives are doctors who care so deeply about patients that they have chosen to take that need to care for people to a higher calling and lead organizations in caring for communities” (Witt/Kieffer, 2011, p. 4). Some healthcare organizations are actively training physicians to assume leadership roles. For example, Stanford Hospital & Clinics has a strong leadership development program for faculty physicians. Each year, 25 to 30 participants are selected to participate in training and projects that prepare them to lead small divisions, sections, or teams within the academic medical center (Stanford School of Medicine, 2012).

While there are clear advantages to promoting from within and signaling to current man- agers that the career path in the company goes right to the top, there are circumstances in which hiring a CEO from outside makes more sense. For instance, there are occasions when an HSO requires a transformational leader to shake up a hierarchical health system or to revitalize an organization that needs to expand into a completely new service area.

Hiring People With Leadership Potential

Hiring future leaders is not as easy as it sounds. Imagine you are interviewing someone for a middle management job, such as project manager for your clinic’s new electronic billing system. The person could be very well qualified for the position, but how do you assess his or her leadership potential? There are a few things that almost every employer looks for in an applicant when recruiting potential leaders.

Obvious indicators are experiences in the applicant’s resume where he or she made a dif- ference. Having achieved something tangible is important, but just as important is the way it was accomplished. Did the applicant lead the initiative, manage a group, or otherwise demonstrate leadership qualities? References can provide information about what the per- son was assigned to do and whether delivered results met or surpassed expectations. They can also reveal whether teammates would work with that person again. In other words,

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CHAPTER 2Section 2.3 Developing and Evaluating Leaders

a reference is a source who can help ascertain if the candidate has a record of successfully completing assignments and being unafraid to take on more challenging ones.

During the formal interview, some employers put applicants into various calculated situ- ations to see how they would respond. For leadership positions, an applicant may be asked questions such as: How do you motivate your staff? Deal with poor performers? Handle patient complaints? “Mock situations” used to elicit answers to these questions can provide insight into the applicants’ leadership potential. These types of behavior- based interviews are common in healthcare organizations. Candidates for a position are asked to recount specific situations where they have used behaviors or skills necessary to the position. For example, a person applying for a management position may be asked to describe an incident that involved a lot of pressure to meet a deadline and how this situ- ation was handled (time management behavior). An applicant may be asked to tell about a situation that involved talking with consumers or colleagues during a difficult circum- stance (communication skills).

Finally, following the old adage “It takes one to know one,” several people currently in leadership roles can interview the applicant to provide a balanced and complete picture before actually hiring the person. Allio advises that candidates for future leaders pos- sess three attributes: (1) motivation and a need to achieve, (2) attitude and the ability to inspire even when facing adversity, and (3) morality—the possession of positive values and benevolent motives (Allio, 2009).

By no means should all hiring decisions take into account leadership potential. Some peo- ple are more interested in playing a supporting role in the organization. Not everyone has the motivation or interest to lead. In healthcare organizations, there are many positions that do not require leadership competencies. One important purpose of recruiting, how- ever, is to keep the potential leadership pipeline—the cadre of highly developed leaders capable of filling slots in the organizational hierarchy—full.

Effective Leadership Development

Health systems with leadership development programs often start the programs because of “dissatisfaction with their executives’ preparation for advancement to leadership posi- tions” (McAlearney, 2008, p. 24). Such programs enhance the organization’s strategic goals and succession planning. The leadership training program that began in 1996 at Central DuPage Health (a health system in Illinois) initially consisted of classroom programs and educational retreats. Courses ranged from 2-day training sessions to 15-day seminars offered over a period of 10 to 12 months. Participants in the learning programs came from all corners of the health system—senior executives, frontline staff, new employees, physicians, employees in physician offices, and governing board members. By the end of the second year, the target of having 2,000 individuals enrolled in the full curriculum of leadership and staff development programs was met (Boynton & Sibery, 2002).

In health systems offering leadership development opportunities, the most heavily emphasized managerial competencies are communication and relationship management, leadership skills such as negotiation and motivation, general management principles, quality improvement theories and frameworks, managerial ethics, financial management, and human resource systems (McAlearney, 2008).

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CHAPTER 2Section 2.3 Developing and Evaluating Leaders

Although small HSOs may lack sufficient internal resources to design and support ongo- ing leadership training programs, there are some solutions. Training consultants and vendors offer several on-site and online learning products. For instance, the more than 400 leaders in the Lancaster General Health system are given access to Harvard Man- ageMentor, an online provider of leadership development services and products (Chief Learning Officer, 2013).

To complement more formal development programs, current leaders should be careful to model behaviors they expect potential leaders to emulate. Potential leaders should seek a mentor, either in the same organization or outside it, to help their development. Some healthcare professional associations offer mentoring programs. For example, The Ameri- can Society for Healthcare Human Resources Administration (ASHHRA) has a mentoring program for healthcare HR professionals to help them enhance and grow knowledge, skills, and abilities to excel in their careers (ASHHRA, 2013). Modeling desired behaviors and mentoring opportunities are often overlooked aids to leadership development.

Leadership Development Pitfalls

Not all leadership development programs produce desired results. According to Douglas Ready, a researcher on leadership development efforts, organizations that experience dif- ficulties implementing a successful development program or fail entirely manifest com- mon “pathologies” (Ready & Conger, 2003).

Some organizational leaders have a “control, ownership, and power mentality.” This is characterized by a reluctance of those in positions of authority to give up control, to relin- quish ownership of resources, or to share information. This leads to unenthusiastic or even zero cooperation with leadership development programs. Another pitfall is the “pro- ductization” of leadership development. This means creating a new program based on the latest management fad or the magical new offering promoted by a leadership training firm, without regard to whether it has anything to do with the organization’s strategy or future needs. To make matters worse, in tough economic times the program is viewed as an unnecessary cost and often curtailed.

The National Center for Healthcare Leadership (NCHL), a group dedicated to improv- ing leadership development practices in healthcare organizations, has identified five evidence-based “best practices” for leadership development systems:

• Leadership development and organizational business strategy are aligned

• Board is accountable for leadership succession

• Learning is competency-based, interprofessional, and action oriented

• Key talent management and strategic human resource processes are integrated and aligned

• Leadership development dashboard tracks key measureable out- comes (NCHL, 2013, para. 1)

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CHAPTER 2Section 2.3 Developing and Evaluating Leaders

Discussion Questions

1. How could you discover whether an applicant for a job in your organization had leadership potential before hiring that person?

2. If you were asked to develop a score sheet for interviewing managerial candidates to assess leadership potential, what would it look like?

3. Why do HSOs persist in hiring senior and executive positions from outside despite research findings that people promoted from within do better and are less costly?

4. Are formal leadership development programs a cost or an investment? If the latter, how might you calculate a return on that investment?

5. How can smaller HSOs implement the NCHL evidence-based “best practices” for leadership development systems?

6. What do you think an HSO should do to develop potential leaders when it has no budget for leadership development?

A 2010 NCHL survey of 504 hospitals and 31 healthcare systems found that greater adop- tion of these best practices occurred in hospitals affiliated with healthcare systems and in large free-standing and teaching hospitals. Smaller hospitals, nonaffiliated hospitals, and other specific hospital types were less likely to implement many of the best practices. For- profit and nonprofit hospitals were more likely to implement best practices than public hospitals (NCHL, 2011).

Evaluating Success

How can the success of leadership development programs be evaluated? Some organiza- tions make the mistake of applying the wrong metrics. It sounds great when the human resources department delivers leadership training programs at lower-than-expected costs. Yet, the cost of the program is not the metric that counts. The value of leadership develop- ment programs should be measured by answers to questions such as, “Are we better able to fill key management jobs when they arise?” or “To what extent are potential leaders knowledgeable about and committed to our strategic direction?”

How investments in leadership development are integrated with the organization’s stra- tegic goals differs among HSOs. Experience has shown that more substantial returns are achieved when the program is explicitly aligned to support organizational goals. The primary expense associated with particularly sophisticated leadership development programs is not the cost of external speakers or coursework, “but rather the personal investment of senior leaders’ time, effort and patience in identifying and developing their high-potential future leaders” (Garman & Lemak, 2011, p. 2).

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CHAPTER 2Section 2.3 Developing and Evaluating Leaders

Leader Succession Planning

The complexity of healthcare today and the changes needed to reform and improve our healthcare system require skillful people in leadership positions. When there is turnover of senior leaders, their successors must be adequately prepared for the challenges ahead.

Succession planning is a process by which organizations continuously identify inter- nal, qualified candidates who are available to assume vacant leadership positions. Suc- cession planning, especially at the top of an organization, is vital. It is too late to think about succession when a CEO or other key senior leader announces his or her resigna- tion, even when the transition date is a few months away. The time to think about suc- cession planning is years before the actual event. In other words, it should be done on an ongoing basis.

Good succession planning requires that a leadership pipeline be full at all times. This can be quite challenging, especially for large hospitals and health systems. There are four principal reasons why it is difficult to maintain a leadership pipeline (Brant, Dooley, & Iman, 2008):

• Inadequate criteria. When asked to recommend individuals in their unit who had leadership potential, managers’ recommendations may be based on criteria that reflect local values but do not match standards used in other functions or parts of the organization.

• Assessing potential vs. performance. Sometimes leaders find it difficult to distin- guish between current performance and evidence of perceived ability to handle a more responsible role.

• Inadequate data to make an informed decision. Decisions about leadership potential may rely too heavily on performance appraisal scores that are high and fail to distinguish between candidates. The assessments suffer from “leniency” and have less to do with raters’ ability to make accurate judgments than with their willingness to be candid.

• Over-reliance on traditional training. Leaders feel that traditional leadership train- ing methods, such as membership in cross-functional teams, are sufficient.

To ensure that potential leaders and successors are being developed, leaders should estab- lish criteria for identifying talent throughout the healthcare organization. Standard termi- nology is important so that everyone knows what is meant and what one is looking for and why. Identifying promising candidates for leadership development should be organization-wide and begin with recruiting.

In addition, there must be a formal system to provide feedback about particular indi- viduals after assignments are completed. These multiple evaluations are used to help identify employees best suited to a particular position from among all the potential candi- dates. Finally, an aggressive schedule of development opportunities should be devised to provide these talented people with maximum leadership growth. The multifaceted suc- cession planning process at one healthcare system is described in Case Study: Healthcare System Succession Planning.

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CHAPTER 2Section 2.3 Developing and Evaluating Leaders

Discussion Questions

1. When obtaining feedback on an individual already in a leadership development program, whose feedback is more important—the person’s supervisor, peers, those directly reporting to the individual, or consumers who interact with the individual?

2. Design a feedback form to capture information you would find useful in assessing and devel- oping someone’s leadership potential.

3. What principal elements of a potential leader’s performance in a leadership development assignment should the organization really look for?

4. Are formal succession programs a cost or an investment? If the latter, how might you calcu- late a return on that investment?

Case Study: Healthcare System Succession Planning

After recently hiring a new CEO, the board of trustees at a small healthcare system in the south- west became concerned about the organization’s lack of a structured succession plan for key lead- ership positions. The first step toward creating an effective organization-wide succession planning process was to implement the program in one functional area—nursing—which included five levels of leadership.

A project team of nursing representatives started by identifying 10 competencies and defining behaviors for each leadership level. Next, all nursing leaders in the system were surveyed about their short- and long-term career goals and leadership development needs. Armed with the results, the project team had a better idea of the system’s leadership pipeline potential and who might benefit from further training.

Next, the team conducted capability review meetings with high-potential leadership develop- ment candidates. Past performance was evaluated using standardized key organizational metrics and future potential considered. Out of the more than 120 individuals invited to capability review meetings, 23 potential candidates were identified and 21 accepted invitations to participate in the formal nursing leadership succession group.

People in the succession group are involved in action learning activities, project assignments, and individual and team coaching. Participants have an individualized leadership development plan that outlines their goals and action steps. This plan helps prepare them to be ready for promotion when a leadership position becomes available.

Lessons learned from implementing the succession program in nursing are now being applied to the creation of succession programs in other functional areas in the health system.

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CHAPTER 2Section 2.4 Governance and the Role of the Board of Directors

2.4 Governance and the Role of the Board of Directors The American Hospital Association (AHA) recognizes a number of different types of HSOs, including for-profit, religious nonprofit, other nonprofit, hospital district, and other gov- ernment. A mix of for-profit and nonprofit activities has long been found in the health ser- vices sector. Pharmaceutical and medical device companies have always been organized on a for-profit basis. Both for-profit and nonprofit health insurance companies are com- mon. Because hospitals originated and evolved as charitable institutions, organizations that provide healthcare services to patients have traditionally been considered nonprofit. Since the enactment of Medicare in the 1960s, there has been growth in for-profit corpora- tions as direct providers of health services. Thousands of for-profit HSOs, owned by local investors who are often physicians, now provide healthcare services. These organizations range from large investor-owned hospital and nursing home chains to smaller indepen- dent medical facilities, such as ambulatory surgery centers, weight control clinics, urgent care centers, cardiopulmonary rehabilitation, and alcohol and drug abuse programs.

Yet, despite these differences, the formal governance structures among HSOs are quite similar and have not changed much in the last few decades. Most HSOs are organized as corporations with governing boards that set strategies and oversee achievement of strate- gic objectives. However, “a few HSOs may be set up as general or limited partnerships (mostly those owned by a few physicians), and a few nonprofit hospitals may be orga- nized as unincorporated associations” (Horty & Mulholland, 1983, p. 17). State and fed- eral regulations governing for-profit and nonprofit HSOs influence board membership, oversight responsibilities, and board activities.

Governance of Nonprofits

A body of individuals known as the board of directors (or trustees or governing board) is responsible for the conduct of an HSO. Understanding the mission, helping the organization

to fulfill it, and adapting it to a chang- ing world is at the very core of non- profit governance (McFarlan & Epstein, 2011). The board employs senior lead- ers to manage the HSO’s day-to-day operations. For hospitals, the board of directors may include influential peo- ple in the local community, representa- tives of the hospital-affiliated religious organization, physician leaders of the medical staff, and possibly represen- tatives from other healthcare corpora- tions and larger local employers. Some district hospitals are established as quasi-public agencies with the board of directors publicly elected.

The Joint Commission, an organization that accredits and certifies more than 20,000 U.S. healthcare organizations

Exactostock/SuperStock

In a hospital, the board of directors may include physicians on the medical staff, individuals from the larger community, and representatives of religious organizations affiliated with the organization.

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CHAPTER 2Section 2.4 Governance and the Role of the Board of Directors

and programs, requires that organizations have a governing body with overall responsi- bility for the conduct of the facility. The conditions of participation for the federal Medi- care program require that each hospital have

an effective governing body legally responsible for the conduct of the hos- pital as an institution. If a hospital does not have an organized govern- ing body, the persons legally responsible for the conduct of the hospital must carry out the functions . . . the governing body (or the persons legally responsible) must include a member, or members, of the hospital’s medical staff. (CMS, 2012, p. 29074)

For some HSOs, federal or state regulations may have fairly strict board composition requirements. For example, nonprofit or public entities designated as federally qualified health centers serving designated medically underserved populations/areas or special medically underserved populations must be governed by a community-based board of directors: “The board must have between 9 and 25 members” that reasonably represent the patient “population served in terms of demographic factors such as race, ethnicity and gender.” At least “a majority (51%) of board members must be consumers of the health center services” and must live in the service area (HRSA, 2012, para. 17–18).

Governance of public health departments is subject to state regulations. For instance, in Missouri the county health departments operate under a board of trustees appointed by county commissioners. North Dakota has 28 different public health units, each with governing bodies. The Public Health Accreditation Board (PHAB) does not mandate a particular board structure or membership but does encourage the governing entity to “(1) be an official part of the Tribal, state, regional, or local government; (2) be responsible for policy-making and/or governing; and (3) advise, advocate, or consult with the health department on matters related to resources, policy making, legal authority, collaboration, and/or improvement activities” (PHAB, 2011, p. 242).

Governance of For-Profits

For-profit HSOs also have a board of directors with responsibilities similar to boards in nonprofit HSOs and subject to the same state, Joint Commission, and CMS requirements. In for-profit HSOs, the owners of the corporation (private investors or shareholders) elect the board of director’s members. In many cases, some of the board members are also offi- cers of the corporation. State corporate laws govern corporate board elections and report- ing requirements.

For-profit HSOs that are subsidiaries of investor-owned healthcare systems or holding companies have another layer of governance at the system level, where there is another board of directors that oversees organization and operation of the entire business. If the healthcare system is a public company—meaning that its shares are publicly traded on a U.S. stock exchange—there is additional oversight by the United States Securities and Exchange Commission (SEC) to ensure accurate and responsible financial reporting. The SEC requires public companies to disclose various information to the public, with the intent to “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation” (U.S. Securities and Exchange Commission, n.d., para. 1).

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CHAPTER 2Section 2.4 Governance and the Role of the Board of Directors

The SEC requires public healthcare organizations to have a board of directors elected by the shareholders at their annual meeting. The role of the board is to represent shareholder interests and oversee the strategic decisions that the CEO and management team take and, when necessary, to reclaim decision-making power and make the crucial decisions itself.

Boards of directors of public HSOs are required by the SEC to have three standing com- mittees, outlined in Table 2.4, to help them fulfill their obligations.

Table 2.4: Standing committees required by the SEC

Committee Responsibilities

Audit Hires and reviews the performance of the independent public accountants who audit the organization’s financial systems and reports; ensures the integrity of the accounting practices and controls and reviews significant changes in accounting policies.

Compensation and Benefits Determines compensation packages for the CEO, president, key top managers, and board members; oversees pension and other welfare policies for all employees.

Nominating and Corporate Governance

Reviews possible candidates for board membership and recommends nominees for election; oversees the process for performance evaluations of the board and its committees; reviews the organization’s executive-succession plans.

Sarbanes-Oxley Act of 2002

Reacting to the Enron Corporation financial scandals in 2002, the U.S. Congress passed Public Law 107-204, also known as the Sarbanes-Oxley Act of 2002. Often shortened to “SOX,” the Sarbanes-Oxley Act made internal control the direct responsibility of direc- tors. For accounting crimes, SOX imposes large fines and prison sentences. After the Sarbanes-Oxley Act was passed, the New York Stock Exchange and the American Exchange required independent directors to head the major standing committees (Petra, 2005). Today, boards of directors of companies trading on those exchanges are required to have a majority of the board be independent and the audit committee be composed entirely of independent directors (Hitt, Ireland, & Hoskisson, 2007). Even so, in some cases, the CEO is powerful enough to offset the independence of the board. Some companies have coun- tered this with efforts to prevent the same person being chairman of the board and CEO concurrently (Lorsch & Zelleke, 2005).

When first enacted, SOX seemed not to affect HSOs, especially those designated as chari- table organizations. Yet it is now apparent that several sections are relevant. For instance, Title III, section 302 requires that the principal officers and financial officers sign the finan- cial report, certify that the report contains no false statements, and certify that the report is materially correct or face stiff penalties (Levine & Short, 2004). Today, most boards in nonprofit hospitals and healthcare systems have an audit committee with one member having financial expertise. This committee meets each year with the HSO’s external audi- tor without senior management present. Boards in high-performing hospitals are better able to effectively oversee the organization when they receive timely financial reports and education in financial management principles (Kane, Clark, & Rivenson, 2009).

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CHAPTER 2Section 2.4 Governance and the Role of the Board of Directors

Discussion Questions

1. What stakeholders are represented at the nonprofit hospital located nearest to you? Why might it be challenging to find people willing to serve on a hospital governing board?

2. Discuss some ways in which a board of directors might maintain its independence from management.

3. What is the role of the governing board in keeping organizations “honest” and ethical? 4. What is the benefit of having a member of the hospital medical staff serve on the hospital’s

governing board? 5. Do you think SOX has been successful at increasing the financial transparency and account-

ability of publicly traded healthcare organizations? 6. In July 2011, a former top executive of nonprofit Children’s Hospital of Philadelphia pleaded

guilty in federal court to embezzling $1.7 million from the hospital. He had devised a scheme to embezzle money from the hospital by creating fraudulent invoices, fake compa- nies, and phony bank accounts. The assistant U.S. attorney in charge of the case said the scheme went on for such a long time because the hospital executive had a position of trust and authority. What could the hospital board of directors have done to protect the organiza- tion’s financial assets?

Healthcare organizations are not immune from board liability concerns. An example is the federal guilty plea agreement signed in January 2003 by the nonprofit United Memorial Hospital in Michigan in which the hospital admitted to fraudulent billing of inappropri- ate pain management surgical procedures. As Levine and Short describe it,

Careful reading of the allegations contained in United Memorial’s plea agreement reads like a primer on what not to do from the governing board on down. The hospital’s systems for information reporting, internal audit and investigation, conflict of interest disclosure, and responding to com- plaints all were questioned. (2004, p. 4)

Suspicion of accounting crimes led to a federal criminal investigation of Birmingham- based HealthSouth, a large healthcare system with approximately 1,700 hospital, outpa- tient surgery, diagnostic imaging, and rehabilitative facilities nationwide. HealthSouth management was alleged to have “conspired to inflate assets and overstate earnings by between $1.4 and $2.7 billion through false and delayed accounting entries and bogus transactions” (Levine & Short, 2004, p. 5).

While governing publicly traded and investor-owned healthcare organizations is com- plicated, new regulations are making governance in all HSOs more challenging. In later chapters, the strategic management process will be described in more detail in a manner that works equally well in all types of HSOs. The emphasis will be placed on what the management team must do to make and act on its strategic decisions. At the same time, the board plays a critical role in overseeing and sometimes controlling what manage- ment does.

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CHAPTER 2Section 2.5 Organizational Designs and the Role of Top Management

2.5 Organizational Designs and the Role of Top Management Organizational design is a major determinant of whether an HSO can effectively implement its strate- gic objective through deployment of organizational resources. It entails dividing the workforce into specific departments and jobs, identifying formal lines of authority, and creat- ing mechanisms for coordinating diverse organizational tasks. Strat- egy execution depends on compe- tent people who have the resources and the knowledge, and who know what to do and how their jobs relate to everyone else’s. Additionally, they require information where and when they need it. How the HSO is staffed and organized becomes critical. Over time, as the HSO grows, the difficul- ties of implementing the strategy increase. Organizational design in an HSO must evolve as it grows to become a multi-state health system, or expands its services, or acquires other HSOs, and so on. Details about executing strategies come later in the book. This section introduces the different kinds of organizational design, the reasons each one is effective, and the drawbacks.

Functional Organizational Design

The functional organizational design is a common design used in HSOs. Employees are grouped together according to discrete functional activities in the belief that work will be done more efficiently. Top management and workers have a direct relationship. An example is a primary care clinic. Registration employees are grouped with health record and billing employees. Clinical staff members, such as medical technicians and nurses, are grouped together with physicians and other practitioners, or the latter two may form a third grouping. By grouping individuals, there is better communication and task exe- cution. However, barriers that inhibit organization-wide teamwork can form between groups. Figure 2.1 illustrates the functional structure in a physician hospital organization (PHO), an entity composed of physicians and one or more hospitals. A PHO is formed for the purpose of contracting with payers and controlling costs.

In a functional organizational design, individuals are grouped together by function or task; this improves efficiency but may create barriers between groups.

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CHAPTER 2Section 2.5 Organizational Designs and the Role of Top Management

Figure 2.1: Functional organizational design in a physician hospital organization

The functional organization design in a physician hospital organization is formed for the purpose of con- tracting with payers and controlling costs.

Functional organization designs are variants of the following structure: At the top of the hierarchy sits the CEO or president. In for-profit organizations, this includes the chairper- son of the board of directors and office of legal counsel. Below the CEO may be several vice presidents responsible for one or more functional areas. Some HSOs have a chief operating officer (COO) or executive VP, who has the authority to act as CEO in the lat- ter’s absence. That executive sometimes oversees the functional vice presidents. Report- ing to most vice presidents are C-level officers, with responsibilities for their functional areas. Examples include the CFO (chief financial officer), CNO (chief nursing officer), CMO (chief medical officer), and newer ones like CIO (chief information officer) and CCO (chief compliance officer).

The primary disadvantage of this form of organizational design is that it discourages hori- zontal communication across functions. For example, a situation might arise in which the hospital nursing department identifies ways to improve patient safety with the purchase of a new technology, but the finance department is not informed of this recommendation and funds are not available for this purchase. To get around this problem, HSOs often form interdisciplinary committees composed of members from each affected functional area. Special project teams might also be established to tackle one-time issues such as new federal regulations dictating changes in information security practices. Interdisciplinary committees and project teams are rarely full-time activities but rather must be done in addition to regular jobs and responsibilities.

Business Development

Marketing Finance Contracting Provider Relations

Medical Management

Information Systems

Board of Directors

Physician Medical Director

Chief Operating Officer

Chief Executive Officer

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CHAPTER 2Section 2.5 Organizational Designs and the Role of Top Management

It can be more difficult for HSOs with vertically organized functional units to create inte- grated patient care programs at the service level to best meet patients’ needs. Nationwide healthcare reform efforts are requiring HSOs to adopt a more global view of healthcare processes. To meet these challenges, the organizational structure may need to change. HSOs with very divided functional units in which there is little collaboration among pro- fessionals and more attention to completing specific tasks will find it difficult to adapt to provisions in the 2010 Affordable Care Act. Cowen et al. (2008, p. 417) suggest that con- temporary healthcare organizations face many challenges in determining how “to deploy and manage patient-focused interdisciplinary care teams, how to provide them with rel- evant and timely information, and how to connect them to the resources and priorities of the parent organization.” It will be important to know how each task is to be accom- plished and also who will accomplish the tasks.

Divisional Organizational Design

Much like functional organizational designs, the divisional organizational design works better for some HSOs than others. A divisional or market design is most effective when

an organization has a broad line of services that serve different markets. Northwestern Memorial HealthCare (NMHC), based in Chicago, is an example of an HSO with a divisional design (see Figure 2.2). Northwestern Memorial HealthCare is the parent corporation of Northwestern Memo- rial Hospital, Northwestern Lake Forest Hospital, and the Northwest- ern Memorial Foundation, which provides fundraising and grant- making support for the hospital’s mission and strategic goals. North- western Memorial Hospital has three subdivisions representing its physi- cian groups, its healthcare services area, and its professional and general liability insurance arm (Northwest- ern Memorial Hospital, 2013).

When a large healthcare system engages in different lines of service, such as grant-making or fundraising efforts for a hospital’s strategic goals, a divisional organizational design is ideal.

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CHAPTER 2Section 2.5 Organizational Designs and the Role of Top Management

Figure 2.2: Divisional organizational structure at Northwestern Memorial HealthCare

Source: Northwestern Memorial HealthCare. (NMHC) (2013). About us. Retrieved from http://www.nmh.org/nm/about-us-northwestern -memorial-healthcare. Used by permission of Northwestern Memorial Healthcare.

Northwestern Memorial HealthCare, based in Chicago, Illinois, has a divisional organizational structure.

The divisions or subsidiaries are considered “line departments,” as they continue the chain of command up to the CEO and overall board of directors. Staff departments, such as human resources, labor relations, finance, and legal counsel, exist at the corporate office and serve all divisions and subsidiaries. If the HSO does business outside the United States, an international department coordinates the operations of divisions in different countries. Divisional organizations, while simple in concept, can become quite complex as they grow and expand.

The test to determine if a divisional organizational structure is the best choice for an HSO is whether each of the divisions has somewhat different customers, competitors, or strate- gies and therefore needs to be run by a separate director. The divisional structure provides an opportunity for better attention to consumers’ needs with increased flexibility and quicker reactions to changes in the market. This structure allows for enhanced coordina- tion between functional areas with opportunities for multidisciplinary input. The divi- sional structure, nonetheless, has some weak points. Resources that are duplicated in each division can be costly for the organization. There may be divisional rivalry for scarce resources, and a reluctance to share can be problematic.

Northwestern Memorial

HealthCare

Northwestern HealthCare Corporation

Northwestern Memorial Insurance Company

Northwestern Memorial

Physicians Group

Northwestern Memorial Hospital

Northwestern Memorial

Foundation

Northwestern Lake Forest

Hospital

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http://www.nmh.org/nm/about-us-northwestern-memorial-healthcare

CHAPTER 2Section 2.5 Organizational Designs and the Role of Top Management

Matrix Organizational Design

A matrix organizational design is preferred when an organization’s “needs for coordi- nation are so large that a traditional functional organization is not effective or when the interdependencies between services are so strong that a divisional configuration is inef- ficient” (Creteur & Pochet, 2002, p. 19). The matrix structure is said to improve depart- ment coordination and organizational flexibility and allow a quicker reaction to customer requirements and “ensure an efficient use of resources and economies of scale” (Creteur & Pochet, 2002, p. 19). Figure 2.3 illustrates a matrix organizational design for a skilled nurs- ing and long-term care facility. The managers from the program and service areas and the functional managers report directly to the CEO of the facility.

Figure 2.3: Matrix organizational design

In the matrix organizational design for a skilled nursing and long-term care facility, the managers from the program and from the service areas and the functional managers report directly to the CEO of the facility.

Functional Managers

P ro

g ra

m o

f S

er vi

ce L

in e

M an

ag er

Traumatic Brain Injury

Nursing Rehabilitative

Services Nutritional Services

Pharmacy Activity

Services Health

Records

Behavioral Health

Acute Respiratory

Disease

Orthopedic

Parkinson’s Disease

Alzheimer’s Disease

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CHAPTER 2Section 2.5 Organizational Designs and the Role of Top Management

Discussion Questions

1. What is the organizational design at your place of employment (or your college)? What are the advantages and drawbacks of its organizational design?

2. Describe how a small nonprofit HSO might change from a functional organizational design to one that might better support a new for-profit health service product.

3. What organizational design would be best for public health departments?

Healthcare managers often find the matrix structure attractive because it combines two main objectives: avoid duplication of resources and view the patient’s care from a global, rather than segmented, perspective. But coordination costs may be high and authority sharing can be difficult. There is a functional manager for each department and different managers for each program or service line. Employees are assigned to both functional and program or service line areas—meaning they report to more than one manager.

Large multi-state or national health systems may be organized in a matrix structure. The organizational matrix could be two-dimensional; think of a spreadsheet in which service line managers are column headings and state or country managers are row headings, or even three-dimensional with the third dimension being disciplines like physicians, nurses, technicians, support staff, administrative staff, and so forth.

Choosing an Organizational Design

The best way to structure an organization is to adopt a design that is sufficiently flexible to respond to strategic requirements while ensuring excellent internal coordination and communication. For simplicity, only three organizational designs are described above, while there are in fact several variations on these basic designs. Also keep in mind that the right structure for today may be the wrong structure for tomorrow. During the inter- nal assessment step of strategic planning, leaders should examine the current organiza- tional design to determine if changes are needed. Regardless of what type of design is adopted by an HSO, certain minimal requirements should be considered:

• Have we created the fewest possible management levels and the shortest pos- sible chain of command?

• Does the design enhance, not impede, communication? • Does the design expedite decision making to ensure achievement of strategic

objectives? • Are roles and responsibilities clear at all levels? • Are resource duplication and loss of efficiency minimized? • Do employees know where they belong in the organization and where their

tasks fit into the work of the organization? • Are employees organized in a manner that encourages a sense of community

and belonging? • Does the organizational design facilitate the development of future leaders?

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CHAPTER 2Section 2.5 Organizational Designs and the Role of Top Management

Role of Top Management

It is top management as a group that runs an organization under the guidance of the CEO. Depending on the management style of the CEO, the relationship can be highly participa- tive and democratic with strategic decisions made jointly. If the CEO is more dogmatic or autocratic, top managers may be asked for input but are not directly involved in making strategic decisions.

Composition and Authority The composition and authority of top management varies according to organizational design. In a functional design HSO, the top management team typically comprises all vice presidents and C-level executives. In a divisional design HSO, the top management team comprises key staff directors and all divisional and subsidiary presidents. In a matrix design HSO, the top management team often includes the department heads, key staff directors, and sometimes managers of large and critically important programs.

The degree of decision-making authority also varies with the organizational design adopted by the HSO. For example, in a functional HSO, vice presidents or C-level execu- tives have authority only in their functional area. A vice president of nursing services can decide tactical questions only in patient care areas involving nurses. On the other hand, a divisional president acts like a CEO within the division in question, overseeing all activi- ties of the division.

Building Capability Implementing a strategy involves more than just doing tasks that have always been done in the same way as before. Strategy implementation over time becomes more demanding as external challenges intensify. For that reason, top management must do more than sim- ply keep the organization running.

To build the necessary capabilities required for effective strategy implementation, the orga- nization must continually recruit the kinds of people it needs and train others in newer systems, processes, and technologies. It must develop and keep full a pipeline of poten- tial management and leadership talent that can fill higher-level positions as they become available. It must strive to develop a core competence if it doesn’t have one already or strengthen the one it has. If it does not, the business will erode over time. Part of building capability is to push decision-making authority down to lower-level managers so they can prove themselves worthy of taking on more responsibility (Thompson, Strickland, & Gamble, 2007).

Top management must also be effective at evaluating and developing managers and supervisors at lower levels. It becomes a top-management issue in larger HSOs where internal demand for good managers and leaders is high and the positions varied. In such an organization, potential leaders need to be cross-trained in different functional areas or different service lines as they develop their problem-finding and -solving capabilities.

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CHAPTER 2Section 2.5 Organizational Designs and the Role of Top Management

Discussion Questions

1. Under what circumstances might an organization need an autocratic leader? 2. What steps might be taken if one or more members of the top-management team were

suspected of withholding information or pursuing a hidden personal agenda? 3. Members of the top-management team were appointed to their positions because of their

leadership and take-charge abilities yet must behave more like team players when helping to make strategic decisions. How might such a seeming disparity be handled?

4. As CEO of an HSO, how would you handle high turnover in your top-management team? How could you or should you influence such change?

5. Would a top-management team at an HSO be better if its members had experiences at other HSOs before having been promoted internally? Why or why not?

6. Is it possible for a top-management team to do a good job of assessing the state of its own management and leadership? Why or why not?

7. Aside from its value as part of an internal assessment of the HSO, what other benefits might accrue from a detailed assessment of the state of management and leadership in the organization?

8. Do you believe management and leadership evaluations should be done annually? Biannually? Once every three years? Give reasons for your answers.

Evaluating Management and Leadership The organization’s management and leadership capabilities affect its ability to achieve strategic goals. Thus, it is important that HSOs have a process for periodically evaluating those in charge. C-level and vice-president executives, middle managers, and supervisors are evaluated individually by their immediate superiors, direct reports, and any groups they have worked with. The CEO and president are evaluated by the board of directors, usually with input from their direct reports. The following are some key areas that should be included in any evaluation of an HSO’s leadership:

• In what regard do their peers and direct reports hold them accountable? Do they command respect? Are they easy to approach and communicate with?

• How open are they to new ideas and new ways of doing things? Do they learn from past mistakes or tend to repeat them (Pfeffer, 2008)?

• What ethical standards and values do they espouse? Are they good role models, leading by example?

• Do they put a high priority on developing the people they supervise? Are they good motivators? Do the people they develop often get promoted?

• Are they critical and demanding—that is, do they have high standards and espouse ambitious goals? Do they put the organization’s goals ahead of their own?

• Are they empathetic and compassionate?

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CHAPTER 2Section 2.6 Organizational Values and Culture

2.6 Organizational Values and Culture According to authors Thompson, Strickland, and Gamble (2007, p. 27), an organization’s values are “the beliefs, traits, and behavioral norms that company personnel are expected to display in conducting the company’s business and pursuing its strategic vision and strat- egy.” In some organizations, such norms are democratically derived and clearly stated, if not rigorously followed. In some organizations, no explicit values statement exists. Does it matter? In today’s business world, whether a formal statement of organizational values exists, it is unfortunate that individuals may feel at liberty to behave any way they want.

The Value of Core Values

More than half of the 1,700 hospital workers surveyed in 2004 reported having

occasionally witnessed broken rules, mistakes, lack of support, incompe- tence, poor teamwork, disrespect, and micromanagement. Many had seen some of their colleagues cutting corners, making mistakes, and demon- strating serious incompetence. However, fewer than one in ten fully dis- cussed their concerns with their coworkers or their boss. (Maxfield, Grenny, McMillan, Patterson, & Switzler, 2005, p. 3)

According to a 2011 survey conducted by the Ethics Resource Center (2011), 45% of U.S. employees observed wrongdoing within their organizations. We can assume that pub- lic exposure of any these incidents would erode consumer perceptions of credibility and trust, which would be disastrous for the organization’s reputation.

While the HSO’s reputation must be protected, most important is protection of patients from the harm that can result from mistakes or incompetent acts. To deliver safe health- care services, everyone involved must adhere to the highest standards of patient care and professional values.

What should a statement of values contain? Ideally, it should summarize the culture and state how the company wants everyone to behave. For instance, Northwestern Memorial Hospital pursues four values:

• Patients First: We put the patient first in all we do. No matter where in the hospital we work, we remember always that caring for the individual patient and his or her family is at the heart of our mission and our philosophy.

• Integrity: We adhere to an uncompromising code of ethics that emphasizes complete honesty, transparency and sincerity. Through our words and actions, we earn the complete trust of our patients and their families, our community and our coworkers. We seek to do the right thing, always and everywhere, in our day-to-day work and lives.

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CHAPTER 2Section 2.6 Organizational Values and Culture

• Excellence: We continuously strive for excellence. We never stop learning and working to improve our skills, programs and services.

• Teamwork: We can only achieve our mission and goals by working together. Through the collective and coordinated efforts of our staff, we apply our diverse talents, backgrounds, ideas and experiences to create solutions and benefit patients. We value team success over individual success. (2013, para. 9–12)

Many hospitals also create a statement of expectations for professional behavior, some- times called a code of conduct. This became more common after the Joint Commission issued new leadership standards in 2009 requiring management of disruptive behaviors. Disruptive behavior encompasses any action that might reasonably be construed by oth- ers as destructive or abusive to individuals, to health professional relationships in the organization, or to operations. In addition to a statement that disruptive behavior is not tolerated, the code of conduct often includes definitions and examples of unacceptable behavior, potential con- sequences, a method of reporting, and a statement that the organization will not retaliate against employees who make good faith reports regarding potential violations of laws, regula- tions, or policies.

The statement of values and code of conduct should be as explicit as pos- sible. What it means to observe them should be in concise and clear lan- guage. Typically, the key values are fewer than 10 in number. The code of conduct may be longer. Most impor- tantly, everyone from the CEO on down should model the beliefs and expected conduct set forth by the orga- nization. People should be account- able not only to the organization but also to themselves. The box Commonly Held Expectations for Professional Behav- ior details some of the more prevalent expectations.

Written in the 5th century bce, the Hippocratic Oath is one of the first known documents that provides a code of conduct for physicians to follow, serving as a basis for ethical medical practice.

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CHAPTER 2Section 2.6 Organizational Values and Culture

Commonly Held Expectations for Professional Behavior

• Treat all members of the healthcare team and patients with courtesy and respect. • Do not care for patients while impaired by alcohol, drugs, or illness. • When managing disagreements with other healthcare team members, use conflict

management and direct verbal communication skills. • Do not criticize members of the healthcare team in front of others while in the work-

place or in front of patients. • Do not physically or verbally threaten other members of the healthcare team. • Do not use foul or abusive language. • Be truthful at all times. • Respond promptly and professionally when another member of the healthcare team

requests your assistance. • Respond to patient requests promptly and appropriately. • Respect patient confidentiality and privacy at all times. • Disclose potential conflicts of interest and resolve the conflicts in the best interest of

the organization and the patient. • Abide by all rules, regulations, and policies of the organization. • Assist in identifying healthcare team members who may be impaired or act in a disrup-

tive manner. • Refrain from fraudulent practices. • Protect the organization’s property from loss or theft. • Wear apparel that is appropriate to your professional role and respectful of your patients.

Which expectations should be in your organization’s professional code of conduct? Which ones match its vision and values and should therefore be adopted? Which ones are paramount? Which ones does everyone agree on?

Organizational Culture

The values statement and code of conduct sets forth what is expected of employees, and in turn, what they can expect from the organization. The shared values contribute to the organizational culture of a workplace. Much has been written about what organizational culture is. Kilmann, Saxton, and Serpa state that organizational culture “is defined as the set of key values, beliefs, understandings, and norms shared by members of an organi- zation” (1986, p. 87). Because of this last characteristic—norms—it is important that top managers have a thorough understanding of the organization’s culture to judge whether it is a strategic enabler or hindrance (Prahalad, 2010).

Culture has the ability to enhance or impede the implementation of a particular strategy. Just as form follows function, so also does structure follow strategy. Changing the struc- ture involves changing the culture (Schein, 2010). Some organizational failures can be traced to a new strategy being imposed on a culture that has not changed. In a nonhealthcare-related example, for years before General Motors actually went

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CHAPTER 2Section 2.6 Organizational Values and Culture

bankrupt, it resisted manufacturing and selling smaller, more fuel-efficient cars primar- ily because executives’ bonuses were still based on selling the large gas-guzzlers that commanded high profit margins.

Often, strategic changes that HSOs undergo require the culture also to change. For instance, cardiac care providers at the Virginia Health system adopted a shared-medical- appointment concept in which a cardiologist sees patients in a group setting. As many as 12 patients gather in a meeting room where each one is given a brief physical exam by the cardiologist as well as individual counseling and treatment planning. The clinic’s patients are given a choice between a one-on- one appointment lasting 30 minutes or a 90-minute shared appoint- ment. While it might be thought that patients would prefer more personal attention, the interactive nature of the shared appointments contrib- utes to patients’ high satisfaction

with their care during group meetings (Ramdas, Teisberg, & Tucker, 2012). This strategic change also required a change in the clinic’s culture to a more collaborative, team-based, patient-centered experience. In the one-on-one model, physicians took notes during the appointment. In the shared appointment model, a nurse attends the sessions and does the note taking directly into a computer.

Unless done carefully, people in organizations, and especially cultures that have evolved over time, resist change. The way to succeed is to get those who must change involved in the change process from the very beginning. They should be told what the problem is or why the change is necessary and be given an opportunity to come up with solutions. Any change forced on them will produce resistance, either overt or tacit. The change process should be planned carefully with participation by all affected. Implementation should take place in stages and be accompanied by any necessary education or training and sup- port. The process may be smoothed with the assistance of a skilled consultant.

The extent to which a strategic alternative fits with the existing corporate culture and the extent to which a company’s culture might be required to change are key criteria in choos- ing the best strategy. Changing the culture is very difficult to do, and this should be taken into account when making strategic choices. This is discussed in Chapter 6 when we con- sider how to decide which of several strategic alternative choices to adopt.

A strategic change might require a change in culture. For example, a collaborative approach to patient treatment requires a high level of teamwork among caregivers.

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CHAPTER 2Section 2.7 Managing Organizational Change

Discussion Questions

1. Can an HSO be successful without a formal values statement? Discuss. 2. Describe a process you would use to develop a statement of values to which everyone in the

organization subscribes. 3. What would you do—indeed, what can you do—if you notice someone in the organization

violating a professional code of conduct? 4. How can you ensure that all employees really understand and accept the organization’s val-

ues statement and code of conduct? 5. Can an organization with a bureaucratic culture ever change? Why or why not? 6. How might an HSO realize that its culture is the reason its strategies are not working? If you

worked in this HSO and noticed this issue, what would you do? 7. If an HSO needs to change its culture, which is better: replacing people who adhere to the

old way of doing things or initiating an organization-wide culture change process? Explain your selection.

2.7 Managing Organizational Change Change management is “a systematic approach to dealing with change, both from the perspective of an organization and on the individual level . . . proactively addressing adapting to change, controlling change, and effecting change” (Change-Management -Coach.Com, n.d.a, para. 15). It is “the coordination of a structured period of transition from situation A to situation B in order to achieve lasting change within an organization” (Change-Management-Coach.Com, n.d.b, para. 9). These are two of many definitions; together, they effectively and concisely define a complex process.

To succeed in an environment of almost constant change, HSOs must embrace change. Managing such continual change is difficult but necessary. Section 1.3 discussed the accel- erating pace of change to which all HSOs are subject. Merely reacting to changes as they occur is not enough. Organizations must be proactive to flourish and survive long term.

Staying Ahead of Change

Steering an organization to be successful over time—the purpose of strategic management—necessarily requires some organizational changes. Any change, no matter how small, poses a threat to the status quo and creates immediate resistance. The changes required for achieving strategic objectives can affect every aspect of organizational life— structure, culture, accountability systems, work groups, professional hierarchy, and so on. Vital processes such as communication, motivation, and leadership are often affected.

The more urgent motivation for change stems from a strategic consideration. An HSO might need to install a new electronic health record (EHR) system, start a new service line, enter into a joint venture with another HSO, partner with other providers to create an accountable care organization, or take other vital actions necessary to maintain mar- ket share and a consistent revenue stream. In such cases, the status quo is not an option; change is inevitable. Unless handled properly, resistance—both passive and active—will derail important strategic initiatives. That is why organizations must learn how to effec- tively manage change.

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Change-Management-Coach.Com

CHAPTER 2Section 2.7 Managing Organizational Change

Organizations that are considered high performers are undergoing constant change and have thus become experts at managing change (Jones & George, 2007). High- performing organizations have learned through experience how to identify and achieve goals through participative discussions that lead to enthusiastic pursuit of changes by everyone involved. Forcing something on people without their input and involvement will be met with resistance, thereby jeopardizing the change process or even preventing it.

Implementing Change

Managers introduce and implement change from either the top down or the bottom up. At times, change can be cocreated. Top-down change is autocratic—the need for change and how it is to be implemented is decided at the top of the organization and relayed to those lower in the hierarchy to implement. Top-down change is valuable when the organization must act quickly and decisively. It is typically initiated by the CEO. This approach works because managers at each level of the hierarchy have the authority to tell their staffs what to do and what results are expected. For example, prior to the mid-1990s, the Veterans Health Administration (VA) system was widely recognized as an autocratic, top-down style HSO with little decision-making involve- ment by staff members and physi- cians. Although the VA system has undergone some structural changes with a more regional approach, the militaristic, top-down style of leader- ship still persists in some areas.

Bottom-up change is more gradual, complex, and evolutionary, but no less effective. More than top-down change, it gets everyone involved, confirming to employees that the “higher-ups” are listening to their ideas and sometimes acting on them. This sense of being a participant in the process minimizes resistance to change. Who else is in a better position to see the need for change or how something can be done better or more efficiently than frontline staff members? Bottom-up change can originate anywhere in the organization. For example, hospitals that have adopted a model of nursing shared governance have a formal structure that provides staff nurses with a way to communicate concerns and work toward mutually beneficial solutions. All nurses have an equal voice.

Cocreated change involves distributive leadership. Instead of top leaders being in charge and pushing change onto people at the lower levels, cocreated change involves people at all levels of the organization. Rather than leaders looking for ways to get people to “buy in” to strategic goals, multilevel leadership involving managers and staffs generates the goal of change. Neither the top nor the bottom of the organization is pushing for changing independently of one another (Golden-Biddle & Dutton, 2012). People at the mid-levels and lower resolve local barriers, and top leaders clear away strategic barriers. Cocreated

Unless change needs to be immediate, it is often best to use a bottom-up or cocreated approach to implement change.

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CHAPTER 2Section 2.7 Managing Organizational Change

Case Study: Hospital Nursing Department Change Effort Gone Awry

The nursing education director in a mid-size hospital came up with a great idea. Bedside nurses spend a lot of their time in face-to-face group meetings, which take them away from patient care duties. The director proposed using electronic message boards, blogs, and wikis to reduce the need for group meetings. Using these media would allow nurses to complete some group work during their downtime rather than leaving units to attend formal meetings. This change would potentially help nurses be more productive at the bedside and improve the way they get their work done. The electronic message boards could also be used to update all nurses on the work of various commit- tees and share evidence-based practice recommendations.

The idea was presented to the nursing shared leadership committee, where it was received with a lot of enthusiasm. Once the IT department set up servers to run the message boards securely, the change effort was off and running. Electronic message boards were set up for each unit, and nurses were instructed in how to use the media and its purpose. Blogging capabilities were to be implemented once staff members got used to using the message boards.

What seemed like a great idea did not catch on with the bedside nurses. Making this new com- munication tool available was not enough to get people to magically start accessing the board to interact with one another. The value of using the message boards for communication was unclear to people at the grassroots level, and face-to-face meetings had been their usual way of interacting for years. The committee chairs, charge nurses, and clinical leaders were not made responsible for regularly posting content on the message boards. The staff nurses quickly stopped logging into the message boards when they found very little to read.

This change effort failed for several reasons. First, and most important, it was initiated with a top-down approach. The idea hadn’t originated with the bedside nurses. While it may have been a great idea, the people being asked to change the way they had always done things were not involved in the initial strategic decision. Bedside nurses were not asked to help design the message boards or identify content that would be relevant for posting on the boards. There was no effort to obtain buy-in from staff nurses—the idea was pushed down from the upper levels of the nursing department. The goal of leadership was to improve nurse productivity at the bedside and enhance departmental communication. Whether the frontline staff considered these to be important goals was never fully explored before implementation of the change.

When people are being asked to change the way they have always done things, unless the change is urgently needed, a bottom-up or cocreated approach is more likely to be successful.

change was used to improve efficiency and consumer friendliness in the Medicaid offices in New York City. Top leaders as well as those most affected by the changes jointly agreed on what needed to be done, and people at all levels were engaged in making changes. Not only did client processing times go down so more clients could be served, but staff attitudes and office climate also improved (Isett, Glied, Sparer, & Brown, 2013).

Change efforts must be carefully managed; otherwise, the hoped-for results will not be achieved. Case Study: Hospital Nursing Department Change Effort Gone Awry illustrates a failed change effort and describes what contributed to this disappointment.

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CHAPTER 2Summary & Resources

Whatever change tactic is employed, a high degree of communication and coordination among all organizational units is always needed. For instance, primary care clinics imple- menting an EHR system often require significant revisions in patient care workflow, bill- ing systems, and other functional areas (AMA, 2011). All activities related to the adoption of the EHR must be coordinated, as must all the other strategic changes that are occurring at the same time.

Discussion Questions

1. You are in charge of a small home health agency and want to institute many changes. Com- pare the top-down, bottom-up, and cocreated change approaches and describe situations in which each approach might be better than the others.

2. A hospital is considering whether to install expensive robotic surgery equipment. Top man- agement and senior medical staff leadership want to do this because of the potential for increased market share, but the plant engineering department says the difficulties of doing this are huge and it should not be done. Suggest a way out of this impasse.

3. Your organization has decided to change to a shared leadership model with more grassroots involvement in strategic decisions. How can leaders convince employees their input is valued?

Summary & Resources

Chapter Summary

• An understanding of the human side of corporations is essential to managing strategically. Strategic planning and strategic management are the principal driv- ers of change.

• Leaders create change; managers implement change. Both are responsible for get- ting things done, but leaders see where changes are needed and the direction in which the company should go. Organizations sponsor leadership development programs to identify, cultivate, and evaluate potential leaders and ensure that people will be available to fill vacant leadership roles.

• A leader’s power derives from legitimate authority by virtue of his or her posi- tion in the organization; specialized knowledge, respect, and charisma; the ability to give or withhold rewards; and the ability to punish or fire. Strategic leaders are most concerned with the long-term survival and success of the whole organiza- tion. A concise and inspiring vision statement articulates where the HSO should be 5 to 10 years in the future, and leaders are responsible for motivating everyone to achieve this vision.

• Organizations are governed by CEOs and their top management teams. Most healthcare organizations, both for-profit and nonprofit, are organized as corpora- tions with a board of directors. Boards are composed of inside members (the CEO and key executives and physicians), related outsiders, and independent mem- bers. The board members and senior management in all healthcare organizations have more stringent oversight responsibilities as a result of the Sarbanes-Oxley Act of 2002.

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CHAPTER 2Summary & Resources

• As an HSO evolves and expands, structure follows strategy. Unless the HSO is organized appropriately, it will not be able to execute its strategies effectively. There are three basic forms of organizational design. Functional organization is the most common for HSOs, although divisional organization is becoming more common because of the growth in mergers and joint ventures. A matrix organiza- tion may be suitable when an HSO has several unique programs or services or conducts business in several locations.

• Besides the CEO and president, top-management teams in a functional organi- zational design typically consist of all vice presidents and C-level officers. In a divisional organization, key staff directors and all divisional and subsidiary pres- idents are members of the management team. In a matrix organization, top man- agement includes department heads and key staff directors. Top-management teams are involved in strategic planning and making strategic decisions for the whole organization.

• How people behave in an HSO and how they interact with one another and con- sumers is of the utmost importance. The organization has to treat people fairly and motivate them to be good and to do good. Thus, promoting explicit values and a code of conduct and modeling them are critical. A culture based on good values and professional behavior will endure, because it attracts employees and physicians who share these values.

• Organizational cultures are engrained values or “how we do things around here.” Once established, cultures are self-perpetuating and therefore hard to change. When a new strategy is chosen or changing times demand different goals, imple- mentation is hindered if the culture does not also transform.

• Strategic transitions within an HSO can necessitate many organizational and functional changes, and these need to be managed well. The single biggest mis- take is not giving those most affected by the change an opportunity to participate in making the change. Excluding frontline staff members and physicians from the process leads to both passive and overt resistance. This resistance makes the change process more challenging and costly and even impossible.

• Sometimes change is dictated from the top down. This is particularly true if the issue is urgent because top-down change can be implemented rapidly. Bottom- up changes take longer but involve those most affected by the change, thus minimizing resistance and increasing the chances of successful implementation. Cocreated change is ideal because it reinforces the importance of active involve- ment of both leadership and frontline workers.

Web Resources http://www.ache.org/newclub/career/MentorArticles/Mentoring.cfm A compilation of articles on mentoring for both mentors and protégés hosted by the American College of Healthcare Executives.

http://www.ahrq.gov/professionals/quality-patient-safety/quality-resources/tools /collabguide/ The Regional Coalition Collaboration Guide published by the Agency for Healthcare Research and Quality details the work of six healthcare communities that built and man- aged coalitions for value-driven healthcare.

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http://www.ache.org/newclub/career/MentorArticles/Mentoring.cfm

http://www.ahrq.gov/professionals/quality-patient-safety/quality-resources/tools/collabguide/

CHAPTER 2Summary & Resources

http://bphc.hrsa.gov/about/requirements/index.html The Health Resources and Service Administration (HRSA) provides information on key health center program requirements for centers receiving Medicare and Medicaid funding.

http://erc.msh.org/toolkit/ The Health Manager’s Toolkit on this website is a compendium of tools designed to assist health professionals at all levels of an organization to provide high-quality health ser- vices. Included in the toolkit are human resources management and leadership develop- ment tools.

http://www.governanceinstitute.com The Governance Institute provides a number of resources for healthcare leaders, includ- ing its 2009 publication with The Joint Commission, Leadership in Healthcare Organizations: A Guide to Joint Commission Leadership Standards.

http://www.greatboards.org The Center for Healthcare Governance, sponsored by the American Hospital Association, provides a variety of governance resources for leaders and managers.

http://nchl.org The website of the National Center for Healthcare Leadership has several resources on effective healthcare management leaders, including presentations, publications, white papers, and videos.

http://www.phaboard.org The voluntary accreditation standards for public health entities and related resources are available on the website of the Public Health Accreditation Board.

Key Terms board of directors An appointed or elected group of people that has the legal responsibility for overall management of an organization.

bottom-up change A change process that can begin with anyone in the organization (and need not travel upward more than one or two levels), gets results gradually over time, and involves employees, thus minimizing their resistance to change.

change management A structured approach to shifting or transitioning individuals, teams, and organizations from a current state to a desired future state. It is an organizational process aimed at empowering employees to accept and embrace changes in their current work environment.

C-level officers Executives who are on par with or report to vice presidents in the organizational hierarchy. “C-level” is shorthand for CFO (chief financial officer), CNO (chief nursing officer), CMO (chief medical officer), CIO (chief information officer), CCO (chief compliance officer), and so on.

cocreated change A change process that involves distributed leadership at all levels of the organization.

customer value proposition Description of the value a customer will experience when purchasing and using a product or service.

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http://bphc.hrsa.gov/about/requirements/index.html

http://erc.msh.org/toolkit/

http://www.governanceinstitute.com

http://www.greatboards.org

http://nchl.org

http://www.phaboard.org

CHAPTER 2Summary & Resources

divisional organizational design A design that is most common in diversi- fied organizations, where each division or subsidiary has its own president and functional organization but reports up the chain of command to the CEO.

functional organizational design A design that groups employees together according to discrete functional activities in the belief that by so doing the work will be done more effectively.

leader Anyone who can visualize a better state of affairs and can induce and guide others to achieve change.

leadership pipeline A cadre of highly developed potential leaders capable of fill- ing slots in the organizational hierarchy as and when they become vacant; ideally, this pipeline should be “full” at all times.

manager Someone who gets work done through others.

matrix organizational design A design with both vertical (skills or disciplines) and horizontal chains of command (such as projects, distinct brands or product lines, or countries).

mission statement A concise statement of an organization’s reason for being: its purpose and what it actually does, and for whom.

organizational culture The set of key values, beliefs, understandings, and norms shared by members of an organization.

public company A company whose shares can be publicly traded on a U.S. stock exchange and that is regulated by the SEC to ensure accurate and responsible finan- cial reporting.

Sarbanes-Oxley Act (SOX) An act passed by the U.S. Congress in 2002 that strength- ened the role of corporate boards and governance in protecting investors from fraudulent accounting practices. The act improved the transparency and integrity of financial statements.

Securities and Exchange Commission (SEC) A federal agency that holds pri- mary responsibility for enforcing the federal securities laws and regulating the securities industry, the nation’s stock and options exchanges, and other electronic securities markets in the United States.

strategic leadership Involves creating a vision and strategy that, in both the short term and the long run, help the organiza- tion succeed.

succession planning An essential pro- cess by which organizations continuously identify internal, qualified candidates who are available to assume vacant leadership positions.

top management The group responsible for running an organization; typically com- prises all the vice presidents and C-level executives in a functional organization, the department heads and key staff direc- tors in a matrix organization, and key staff directors and all divisional and subsidiary presidents in a divisional organization.

top-down change Change initiated by the CEO when the organization needs to act quickly and decisively.

transactional leadership A relationship of mutual dependences in which the con- tributions of each party are recognized and, often, goals are met and rewards are delivered.

vision statement A concise statement of where the organization would like to see itself 5 or 10 years (sometimes longer) in the future.

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