The impact of the board's strategy-setting role on board-management relations and hospital performance

Background: The appropriate governance of hospitals largely depends on effective cooperation between governing boards and hospital management. Governing boards play an important role in strategy-setting as part of their support for hospital management. However, in certain situations, this active strategic role may also generate discord within this relationship. Purpose: The objective of this study is to investigate the impact of the roles, attributes, and processes of governing boards on hospital performance. We examine the impact of the governing board's strategy-setting role on board-management collaboration quality and on financial performance while also analyzing the interaction effects of board diversity and board activity level. Methodology: The data are derived from a survey that was sent simultaneously to German hospitals and their associated governing board, combined with objective performance information from annual financial statements and quality reports. We use a structural equation modeling approach to test the model. Findings: The results indicate that different board characteristics have a significant impact on hospital performance (R-2 = .37). The strategy-setting role and board-management collaboration quality have a positive effect on hospital performance, whereas the impact of strategy-setting on collaboration quality is negative. We find that the positive effect of strategy-setting on performance increases with decreasing board diversity. When board members have more homogeneous backgrounds and exhibit higher board activity levels, the negative effect of the strategy-setting on collaboration quality also increases. Practice Implications: Active strategy-setting by a governing board may generally improve hospital performance. Diverse members of governing boards should be involved in strategy-setting for hospitals. However, high board-management collaboration quality may be compromised if managerial autonomy is too highly restricted. Consequently, hospitals should support board-management collaboration about empowered contrasting board roles.