For Immediate Release - May 27, 2011

Senate Passes Amendment Seeking to Limit Compensation of Charitable Board Members

BOSTON - An amendment that would limit the ability of charities to compensate their boards has been passed by the Senate last evening. The amendment follows a report by Attorney General Martha Coakley that determined there was no justification for board members to be compensated at the Commonwealth's four major not-for-profit health insurers.

The amendment is modeled after legislation filed by AG Coakley and Senator Montigny in April. Specifically, the amendment would prohibit Massachusetts-based public charities from compensating their directors unless they obtain approval from the Chief of the Attorney General's Public Charities Division. It would also provide the AG's Office with the authority to rescind any such approval upon a finding that the amount of compensation paid is more than reasonably necessary.

"Compensation of board members creates, at a minimum, an appearance of conflict of interest and diverts resources otherwise focused on achieving the mission of the charity," AG Coakley said. "These organizations enjoy significant tax and other benefits due to their charitable status, and this amendment would simply require charities to have a sound justification for why their board members should be paid in contrast to the vast majority of board members that volunteer their services."

"Charities are granted special privileges because of their missions and contributions to the community," said Senator Montigny. "For half a decade I've maintained that excessive compensation for executives and pay for board members is unacceptable and a breach of the public trust. During that time I've pushed legislation that would help the vast majority of charities, those that do amazing work and play by the rules. This is a victory for them, which should be celebrated and become law."

In April, AG Coakley's office issued a report pdf format of AG Director Compensation Report
following an extensive investigation into the compensation of board members of 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.

During the course of the investigation, the boards at both Blue Cross Blue Shield and Fallon agreed to suspend board compensation, while the Harvard Pilgrim and Tufts boards affirmatively decided to continue compensating board members.

"We believe Blue Cross and Fallon did the right thing by suspending compensation of their directors, and commend their actions," AG Coakley added. "We do not believe that Harvard Pilgrim nor Tufts have an adequate basis to continue to pay their board members. Their refusal to voluntarily suspend this practice is further reason why we believe there must be a legislative solution to this issue."

As outlined in the report, the organizations submitted similar explanations for why their charities are unique and thus required their board members to be compensated. Harvard Pilgrim and Tufts stood by those rationales while voting to continue compensating their board members. Among the explanations provided by the insurers were:

  • Their organizations were more complex and required more highly skilled directors
  • Nationally, health insurers pay their directors and, as a result, they must do likewise to compete for directors; and
  • Their directors committed significant time and effort to their board duties

The Attorney General's Office found these and other explanations to be unsubstantiated. The report noted that it found no basis to support that their organizations were "more complex, more regulated, have thinner margins, or enjoy more skilled and experienced directors, than (for illustrative purposes only) our large hospital systems and their uncompensated boards." It also found no evidence that board members at the health insurers commit more time to their duties than do volunteer board members at other charities.

The Attorney General's Office found the rationale that the health insurers had to compete with other national health insurers for directors to be "irrelevant." In fact, the report noted, "nearly all of your directors live and work in Massachusetts, which suggests at minimum that none of your organizations compete nationally for talent."

In addition to filing legislation, the AG's Office also announced that to bring further transparency to this issue it would require annual statements from all Massachusetts based public charities that compensate independent directors explaining, in detail, the basis and rationale for the practice. Those statements, director compensation levels, and AG evaluations will form the basis of an annual public report on director compensation practices at public charities.