For Immediate Release - September 27, 2011

AG Testifies in Support of Legislation to Restrict Director Pay

Legislation Follows AGO Investigative Report on Director Pay at Major Health Insurers

BOSTON -- Today, Attorney General Martha Coakley testified pdf format of AG Director Comp Testimony
before the Joint Committee on the Judiciary in support of legislation that would prohibit Massachusetts-based public charities from compensating their board of directors unless they obtain approval from the Attorney General's Office. House Bill 3516, An Act Regulating Compensation of Board Members of Public Charities was filed on April 14, 2011 and co-sponsored by AG Coakley, Senator Mark C. Montigny and Representative Martha M. Walz, Vice-Chair of the House Ways and Means Committee.

"Voluntary service by board members is the practice at the overwhelming majority of public charities, and for good reason," AG Coakley said. "Compensation of board members raises concerns about maintaining board independence and ensuring the proper use of charitable funds. Our bill strikes the right balance by providing the necessary tools to protect the public interest and ensure the appropriate use of charitable funds."

In her testimony today, Attorney General Coakley pointed out that the practice of paying board members creates an unavoidable conflict between board members personal financial interests and their obligation to safeguard the organizations charitable resources. The AG's Public Charities Division is responsible for the oversight of more than 25,000 non-profit charitable organizations, which includes everything from local social service organizations to large healthcare systems. Joining AG Coakley in support of this bill and testifying today were State Senator Mark C. Montigny (D-New Bedford), Representative Martha M. Walz (D-Boston) and Harvard Professor F. Warren McFarlan.

"Public charities should focus on their altruistic mission and not use funds to pay outrageous salaries to employees and directors," stated Senator Mark Montigny (D-New Bedford), who for 6 years, has been working to pass legislation to limit excessive compensation for executive directors and boards of directors of public charities. "We must make sure that these charities operating practices are regulated and that sufficient oversight is in place to prevent executives and directors from receiving disproportionate salaries and benefits"

"The vast majority of non-profit organizations do not pay their directors," said Representative Walz. "This legislation would continue that practice, with exceptions being granted in the unusual situation when compensation is appropriate. With this reasonable approach, we will ensure that board members make decisions based solely on how to achieve the non-profit's mission and without regard to their personal financial interest."

"I support the legislation proposed by the Attorney General and am deeply troubled that it is even necessary," said Professor F. Warren McFarlan, Harvard Business School Albert H. Gordon Professor of Business Administration, Emeritus, and co-author of the book Joining a Nonprofit Board: What You Need to Know, with Marc J. Epstein. "In addition to teaching and publishing extensively on the issue of non-profit governance, I have personally served as a board member for both publicly-held companies and public charities for more than thirty years. In my capacity as a trustee and as a chairman of the board of a public charity, I have never had any trouble recruiting the right number and quality of directors who are happy to serve. Without exception, all of these public charities have had their board members serve as unpaid volunteers because of their deep belief in the mission of the public charity. I firmly believe that this is the appropriate role of a public charity board member."

The filing of this legislation followed a report pdf format of AG Director Compensation Report
issued by the AG's Office in April that examined the compensation of board members at Massachusetts' four major charitable health insurers: Blue Cross Blue Shield, Fallon Community Health Plan, Harvard Pilgrim Health Care and Tufts Health Plan. As part of that investigation, the health insurers were given extensive opportunities to justify the rationale for compensating their board members in contrast to the overwhelming majority of charitable board members, including those at large hospitals and universities, who volunteer their time. The Attorney General's Office found that the rationales provided by the health insurers were unsupported.

Since then, Blue Cross and Fallon have stopped compensating their board members, while Tufts and Harvard Pilgrim have continued the practice. As a result of this investigation, the Attorney General's Office will also require annual statements from all Massachusetts based public charities that compensate independent directors explaining in detail, the basis for this practice. The AG's Office will make those compensation levels and explanations available to the public in an annual report.