Corporate governance and financial performance: the case of English NHS hospitals

• Date: 26 September 2024
• Pages: 896-912
• DOI: https://doi.org/10.1108/IJPSM-02-2024-0061
• Published date: 26 September 2024
• Subject Matter: Public policy & environmental management,Politics,Public adminstration & management
• Author: Laura Obwona Achiro,Venancio Tauringana,Mohammad Alta'any

Corporate governance and

financial performance: the case

of English NHS hospitals

Laura Obwona Achiro and Venancio Tauringana

Department of Accounting, Southampton Business School,

University of Southampton, Southampton, UK, and

Mohammad Alta’any

Department of Accounting, Business School, The Hashemite University,

Zarqa, Jordan

Abstract

Purpose –Hospitals’ corporate governance (CG) mechanisms oversee critical operational issues and evaluate

the outcomes. This paper investigates the impact of CG (i.e. board size, board independence, board expertise,

board meetings, board gender diversity, CEO gender, and academic directors) on the financial performance of

English National Health Service (NHS) hospitals and separately by hospital type (i.e. trusts and foundation

trusts).

Design/methodology/approach –The sample includes 128 NHS hospitals. The data were collected

through document analysis and archival work from annual hospital reports from 2014 to 2018.

Findings –The findings indicate that board expertise, board meetings, board diversity, CEO gender, and

academic directors significantly and negatively affect NHS hospitals’ financial performance. For NHS trusts,

the results reveal that board expertise, board diversity, and CEO gender have a significant negative effect,

while for NHS foundation trusts, only CEO gender has a significant negative impact.

Originality/value –Overall, this study contributes to the literature on the healthcare system. It holds

significant practical implications for hospital governance and has important implications for theories.

Keywords Corporate governance, Financial performance, National health service, Hospitals,

Trusts and foundation trusts

Paper type Research paper

1. Introduction

The National Health Service (NHS) is the umbrella body that provides universal health

services in the United Kingdom (UK) (Drummond-Hay and Bamford, 2009). In this paper, we

aim to examine the impact of corporate governance (CG) mechanisms, focusing on board

attributes, on England NHS hospitals’ financial performance. The primary objective of the

NHS is to deliver the highest quality health and care service, but there is also a secondary

objective of balancing its finances (NHS Improvement, 2016). Ensuring sound financial

performance is vital for the sustainable operation of hospitals, making it a significant

concern for hospitals (Chen et al., 2021). In this regard, good governance is a pivotal

contributor to the financial health of hospitals (Murray et al., 2014;Afriyie et al., 2020;

Agnihotri and Arora, 2021). Whether hospital boards influence financial outcomes is

important (Chen et al., 2021;Aly et al., 2023). Especially since hospital performance is under

growing scrutiny due to economic pressures and legislative changes (Aly et al., 2023).

Although hospital boards are tasked with financial oversight to benefit stakeholders

(Chen et al., 2021), evidence of their effectiveness within the NHS is limited and mixed

(Mannion et al., 2015). The results from the few studies identified are mixed. For example,

some results suggest that the presence of medical staff and hospital CEOs on hospital boards

results in higher operating margins (Goes and Zhan, 1995;Molinari et al., 1995), improved

financial performance (Molinari et al., 1993) and financial resource management (Veronesi

IJPSM

37,7

896

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/0951-3558.htm

Received 29 February 2024

Revised 2 July 2024

20 July 2024

Accepted 4 September 2024

International Journal of Public

Sector Management

Vol. 37 No. 7, 2024

pp. 896-912

© Emerald Publishing Limited

0951-3558

DOI 10.1108/IJPSM-02-2024-0061

et al., 2014). Other studies, however, indicate that clinicians’ involvement on boards results in

lower efficiency (Succi and Alexander, 1999), higher operating costs (Goes and Zhan, 1995),

and negative financial performance of hospitals (Chen et al., 2021).

Besides the contradictory nature of the studies, they are also mainly based on United

States (US) data (Molinari et al., 1993,1995;Goes and Zhan, 1995). Notable exceptions include

studies conducted in Ghana (Abor, 2015), Germany (Kuntz and Scholtes, 2013), Taiwan (Chen

et al., 2021), and the UK (Veronesi et al., 2013,2014;Aly et al., 2023). The disproportionate

concentration on the US context is restrictive because of the differences in the regulatory

framework and competitive nature of hospitals in the US compared to other countries (Goes

and Zhan, 1995). For example, the US is one of only two countries in the OECD without a

universal healthcare system (Kumar et al., 2011). The competitive nature of US hospitals is

also in marked contrast to the UK, which has a universal health service funded by taxpayers.

Therefore, the findings from US studies may not be generalised to other countries, such as

the UK.

Given that, and due to the conflict in objectives of providing the highest quality of

healthcare while maintaining financial balance, as well as the concerns regarding

governance failures in NHS hospitals (Prowle and Harradine, 2014), it is not clear whether

hospital boards will be effective in influencing financial outcomes. In this paper, we bridge

this gap in the literature by organising empirical research around the following question:

RQ1. What is the impact of corporate governance mechanisms on NHS hospitals’

financial performance?

This study further examines the impact of CG separately for NHS trusts and foundation

trusts, because of their governance and financial differences. For instance, NHS trusts are

governed by a unitary board of directors (Hodges et al., 2004), while the foundation trusts

have a two-tier structure consisting of a board of directors and a board of governors

accountable to the local community (Wright et al., 2012). Furthermore, foundation trusts

benefit from more autonomy and reduced accountability to the central NHS (Hoque et al.,

2004). In contrast, NHS trusts are directly accountable to the Secretary of State and must

balance their budgets annually (Ballantine et al., 2008).

Using a sample of 128 English NHS hospitals from 2014 to 2018, our findings indicate that

board expertise, board meetings, board diversity, CEO gender, and academic directors

significantly negatively affect financial performance. After splitting the sample, the results

reveal that board expertise, board diversity, and CEO gender have a significant negative

effect on NHS trusts’ financial performance. The results also show that, for NHS foundation

trusts, only CEO gender has a significant negative impact.

We contribute to the existing literature in three ways. First, our results provide new

evidence on the CG-financial performance nexus in the UK, which remains largely

unexplored except for Aly et al. (2023),Veronesi et al. (2013), and Veronesi et al. (2014). Unlike

Veronesi et al. (2014), who focus only on clinicians on boards, our study considers several

board attributes. The current study also differs from Aly et al. (2023), which is based on one

year’s data and restricted to foundation trusts. We have covered five years and investigated

foundation trusts and trusts hospitals. Second, our findings show, for the first time, that most

CG mechanisms significantly negatively affect financial performance, suggesting that NHS

boards may prioritise quality health services over financial balance. Finally, our results show

that the “one size fits all” CG model from private institutions may harm public hospital

performance, as NHS hospitals have adopted the private sector’s Anglo-Saxon unitary board

model (Chambers, 2012).

The rest of the paper is organised as follows. Section 2 is the theoretical framework and

hypotheses development. Section 3 presents the methodology, and the findings and

conclusion are found in Sections 4 and 5, respectively.

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Journal of Public

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