Corporate social responsiveness regardless of tax status
- Senior healthcare leaders should ask: What percentage of operating expenses would be invested in community benefit if investments were not tied to our tax-exempt status?
- For-profit healthcare organizations can serve more than one bottom line. This requires greater executive agility and ability to embrace complexity.
- Corporate social responsiveness can take on many different forms, including impact investments, donating space, land or buildings; partnering with not-for-profit social service organizations; and volunteering talent and expertise.
In a 1970 New York Times Magazine article, the economist Milton Friedman wrote and promulgated that the social responsibility of business is to increase its profits. Sister Irene Kraus, who belonged to the Daughters of Charity order that led a number of hospitals, put a twist on Milton Friedman’s belief by saying, “No margin, no mission.” Earlier, around the First World War, one of the leaders of scientific management, Henry Gantt, wrote, “The business system must accept its social responsibility and devote itself primarily to service, or the community will ultimately make the attempt to take it over in order to operate it in its own interest (Gantt, H., Organizing for Work, Harcourt, Brace and Howe, 1919, p. 15).
The community has not sought to take over business, but there have been calls for greater accountability beyond making a profit or a positive operating margin in the case of not-for-profits. For example, reflect back on Occupy Wall Street. Another example is Sen. Charles Grassley challenging not-for-profit hospitals to contribute more to the benefit of society.
Milton Friedman and Henry Gannt are both now gone and nuns leading hospitals are quite rare in healthcare today. Now, it is up to senior leaders in healthcare, including financial leaders, to address this tension of doing what is best for organizations and stakeholders, including shareholders where applicable.
The aim here is to make the case for corporate social responsiveness regardless of the organization’s tax status. Spending on charity is flat among hospitals (Bannow, T., “Charity care spending flat among hospitals,” Modern Healthcare, Jan. 6, 2018). Charity care is part of community benefits. Overall, community benefit spending increased slightly as a percentage of operating expenses from 7.6% in 2010 to 8.1% in 2014 (Young, G.J., Flaherty, S., Zapeda, E.D., et al., “Hospitals changed little after ACA,” Health Affairs, 2018).
There appears to be an overall upward trend regarding executive compensation even while healthcare organizations are containing costs (Kacik, A., “Steady executive pay hikes eclipse cost-containment concerns,” Modern Healthcare, Aug. 4, 2018). Does this paradox add any validity to which stakeholders matter more than others?
Beyond corporate social responsibility
It is argued here that an emphasis on corporate social responsibility is often driven by compliance with laws, regulations and even norms. In contrast, corporate social responsiveness is driven by organizational vision, mission and values and often framed as the “right thing to do.” Of course, a single organization can engage in both, but the focus here is on corporate social responsiveness.
Therefore, a question for senior healthcare leaders to ask is the following: What percentage of operating expenses would be invested in community benefit including population health if these expenses were not part of our demonstration of community benefit and associated with our tax-exempt status? For example, for-profit healthcare organizations, even those that are publicly traded, may decide to allocate a percentage of their operating expenses to community benefit and population health but do not receive a tax benefit for doing so.
Model of corporate social responsiveness
Corporate social responsiveness revolves around the 3P model. Another name for the model is the Triple Bottom Line (TBL).
The purpose of an organization is complex. This is not news to healthcare leaders but is often a source of distress for healthcare board members who often come from the world of for-profit companies and believe that the solution to more effective healthcare is to mimic the organizational practices of for-profit and even publicly traded companies. This view approaches Milton Friedman’s line of thinking described earlier, but it is misplaced. Even if healthcare organizations are for-profit, they can still serve more than one bottom line. Indeed, this requires a far greater degree of executive agility and ability to embrace complexity, but this should not be the reason to singularly focus on profit, EBIDA (Earnings Before Interest, Depreciation and Amortization), or operating margin.
It is beyond the scope of this article to exhaustively describe the meaning of planet, people and profit but a brief description is warranted. The descriptions that follow are from the lens of a single healthcare organization that serves one or more communities.
Planet. The focus is on the natural and built environment. Ideally, both types of environments promote healthy living.
People. The focus is on factors that contribute to healthy living required by individuals and families such as a living wage, health literacy, social support, and freedom from oppression, bias and violence of all types. Beyond these absolute requirements for healthy living is a focus on optimal well-being, meaning and joy.
Profit. The focus is on generating, allocating and investing financial resources in a way that creates and sustains organizations that have a symbiotic relationship with the community (including its own workforce) rather than a parasitic relationship. To express this more colloquially, as an organization are you a taker or a giver?
See related sidebar: Population health initiative seeks special community status
Corporate social responsiveness can take on many different forms. For example, Kaiser Permanente made an impact investment of $200 million to address affordable housing in communities the health system serves (Reynolds, K., Fedorowicz, M., and Eldridge, M., “Why hospitals and health systems are becoming impact investors,” Urban Wire, Aug. 8, 2019).
An impact investment is different from a grant. It is an allocation of funding/resources by an organizational entity with the expectation of a social, environmental and/or health return. Private equity firms are also beginning to focus on population health as illustrated by the Healthy Neighborhoods Equity Fund, LP in Boston, which is now closed at $22.35 million. Other ways to invest in population health beyond a financial investment are the following (Reynolds, Fedorowicz, & Eldridge, 2019).
- Donating space, land or buildings.
- Partnering with another not-for-profit organization in the social services sector.
- Volunteering talent and expertise.
Hospitals are no different: Stakeholders demand accountability
As an industry, less than two out of three U.S. survey respondents (61%) trust healthcare (Trust Barometer, Edelman, 2019). This contrasts with almost three out of four survey respondents in Canada (72%) and eight out of 10 in Singapore (82%). In the U.S., women trust healthcare less than men. A more detailed look at trust in healthcare by sectors reveals a different picture.
In the U.S., trust in hospitals/clinics decreased to 71% in 2019 from 72% a year earlier. Moreover, 64% of healthcare employees agreed with this statement, “My employer has a greater purpose, and my job has a meaningful social impact” compared to 67% in other industries (Trust Barometer, Edelman, 2019). Both of these indicators of trust are significant given that it is generally assumed that healthcare as an industry is inherently focused on corporate social responsibility due to the nature of the work.
In summary, there is a trust gap in the industry and healthcare leaders should ask these questions.
- What is the trust gap in the communities you serve?
- What is the trust gap among employees who live in the communities you serve?
- Can you drive employee engagement when the trust gap revolves around the relationship with the community and is not restricted to management and organizational culture?
The benefit corporation
A fair question is how a healthcare organization can actualize corporate social responsiveness with laws and accreditation standards which may conflict with the 3P model or TBL. The good news is that laws are changing. For example, Northwest Permanente, which is part of the Kaiser Permanente system, became a B corporation. Imelda Dacones, MD, CEO and president, remarked, “The fundamentals of a B corp company of being a force for good, good for workers, good for communities, good for the environment, echo our values of Permanente Medicine (“Northwest Permanente’s B Corp Journey,” Permanente Medicine, 2018).”
To begin your journey to become a B corporation, you must first determine if the state(s) in which you operate or are headquartered allows that type of legal entity. Corporate social responsiveness goes beyond the ideology, will and motivation of board members and senior leaders and must be interwoven into the fabric of the organization in a way that is proactive not reactive and holistic not myopic.
Guidance for healthcare financial leaders
Contemplation and deliberation are laudable, but these cognitive activities alone are ethereal at best. You must act. Below is guidance to reflect upon and incorporate into your behavior as a leader.
- Change now rather than waiting for a change by government or an accrediting body.
- Engage in frank discussion about the degree to which your vision, mission and strategic priorities embrace the 3P model or TBL.
- Align incentives and disincentives, including executive compensation, with the 3P model or TBL.
- Appoint board members who are experts in at least one of the elements of a 3P model or TBL to ensure governance is responsiveness too.
- Evaluate your performance as an organization on the degree to which symbiosis is created with the communities you serve at a minimum and raising the quality of life optimally.