In the third episode of this three-part series focusing on health care governance issues, Rob Gerberry, Senior Vice President & Chief Legal Officer, Summa Health, speaks with Michael Peregrine, Partner, McDermott Will & Emery LLP, about how legal counsel can advise their clients who are board members of nonprofit health systems. They discuss how chief legal officers can effectively share information with the board, approaches to board education and training, and the role of board assessments. From AHLA’s Business Law and Governance Practice Group.
Listen to the first episode, which discusses the duties of nonprofit board members, here.
Listen to the second episode, which discusses issues facing nonprofit board members, here.
To learn more about AHLA and the educational resources available to the health law community, visit americanhealthlaw.org.
This episode of ala Speaking of Health Law is brought to you by ALA members and donors like you. For more information, visit american health law.org.Speaker 2:
Thank you everyone for joining us today. I'm glad that you can join us on our, my conversation today with Michael Perrin around best practices in healthcare governance. In the first two podcasts in our series, we discussed the nature of board members fiduciary duties. In our most recent podcast, we discussed emerging issues in the healthcare sector that are implicating those fiduciary responsibilities. And today we're gonna look to explore ways in which HLA members can best advise their clients on the exercise of these fiduciary responsibilities. So, Michael, thanks again for joining me.Speaker 3:
You bet, Rob. Great to be with you.Speaker 2:
So, let's, Michael, start with the basic question. Since the average health system board agenda is extremely tight right now, how do you see chief legal officers outside legal counsel and those that are advising boards, uh, getting boards to focus on governance best practices?Speaker 3:
Well, I think that's a real challenge because as you know, better than anybody, uh, the time the board has, uh, for the regular strategic issues that, that are on us agenda is limited enough. You, how do you carve 5, 10, 15 minutes out of their time to talk about the governance issues that you and I have been discussing in the first two podcasts series? And the answer in part is you're not gonna accomplish that with a five minute cutout, uh, at the October board meeting. Uh, it has to be a lot longer commitment because the changes of governance structures are so significant. Uh, you've got, but you've got to find the time. Uh, delaying the message is not an option because it's not fair to the director. And so I think in part, you've gotta focus on beyond meeting conduits, uh, using the, the, uh, board portal for reading material, using PO separate podcasts, uh, other resources. Um, and, and as some of the governance, uh, uh, discussion has been been noting of late, the board really has an obligation to do some education on its own. Uh, so I think it's a combination of, uh, organizational prepared documentation access to, uh, external governance resources, and the board kind of going doing, its some of its home homework. All of these, again, are, are beyond meeting conduits because it is simply impossible to devote enough time in one board meeting, uh, over the, uh, uh, board's year to say, Okay, now we're gonna have a governance update. Here's Rob and he, he's got seven minutes to give you everything you need to know about what's different in governance. That's just not only is that not going to work, it's insulting to the board.Speaker 2:
So Michael, many governance committees have, as part of their responsibility board education, how do you see them being kind of the initial, um, filter for what that board education may look like? And then how do you see those governance committee members rolling it out to their peers?Speaker 3:
Well, that's a great way, and the governance committee members are typically very attuned to some of these issues. But again, the, the chief legal officer is gonna be in position to know just a little bit more. So I think that the governance committees is typically the first source or the first landing spot, uh, for the COO to make his or her approach and agree upon, make sure that they are up to date with the, uh, with the COO's agenda and say, All right, these are the issues that, that we really, you know, prioritizing for our board of, of the entire scope of changes to the gov to governance law over the last year. Let's focus on, you know, what's most important and meaningful to our board and let the governance committee lead. Uh, the more that it's a peer driven discussion, the better it's gonna be.Speaker 2:
So, Michael, as we know, the chief legal officer serves a key role as the legal advisor to the board. How does that, uh, chief legal officer, though partner with his management team in sharing information with the board? The COO may find a good article around a financial issue, but how does he make sure that's something the CFO wants to go out or may find a good quality issue and partner with his chief quality officer? How do you see that relationship working?Speaker 3:
Well, I think there are a couple steps here, Rob, cuz it's obviously very sensitive. Number one, I would, I would make sure that the coo, that the CEO and the management team understand that the COO is indeed, unless there's some obvious case of divergence between the board and management. The CLO is rightfully the board's, uh, uh, primary advisor on corporate governance issues. And I'm not sure that lots of CEOs see that way, but there is a potential conflict between a CEO's view that no one will have access to the board except through me and the board's rifle expectation that they can reach out to the COO on legal matters. Again, everybody has to be sensitive when there's a divergence of issues between the CEO and management. Uh, and, and maybe that often is the time when the ceo, when the board will turn to outside counsel and with the danger that you want to avoid, is a situation where an inability of the CEO and the COO to agree on information flow forces the board to bring on outside council and forces the board to bring on outside council that represents only the board's interest. That's a, that's a pathway to a very rocky relationship. So I think start, it's, this all starts with an understanding that there needs to be, uh, an awareness by the management team of the COO's dual reporting role. Then I think there's a question of all three parties sit down, the coo, the ceo, and the, uh, board chair, and talk about what's the kind of information we need? How do we need to disseminate it? And it's gonna be difficult. Um, I if every piece of paper that goes from the general counsel to the board is, has to be reviewed by the ceo. So again, it's a three part process. What's gonna work, It's ridiculous to think that the CEO shouldn't be involved. He or she must be involved. But there needs to be a, I think a general understanding of the level infor information that goes to the board and who it's sent by and how it's approved. This goes back to your first question and the real answer is, we have to find a way to put the board in a position to exercise informed oversight in informed decision making. And I'm always starting with the presumption that whatever we're doing now, it ain't enough. Because the law has changed so much over the last couple of years that, that it's a, it's unlikely that boards have been able to keep up with the, their expectations in that regard.Speaker 2:
So Michael, how have you seen Chief Legal Officers have success in getting their CEOs to buy into, uh, legal training, governance training, regulatory training, those important topics that we all know our boards need to become aware of?Speaker 3:
I think more than anything else, Rob, the, the question is, if we don't tell'em how are they gonna know and that we have a base, we being the coo as a member of the management team, we have a basic obligation to keep the board informed. It's been an obligation that's been manifested in some of the recent iterations of the Caremark case. Uh, and I think that the, it would be the board has every expectation to be a right to, to look to the board, to management and say, We expect our management team to keep us posted and advise us on what we need to know in order to do our job. If we think you're not doing that job well enough, we'll let you know. If we think we need to bring in our own outside resources, we're going to do that. But I think, uh, the whole question is manage the management to board information reporting system is critical. It's been made more critical by recent Delaware cases. And manage management team needs to be aware of what that, the obligation to do the best job they can in satisfying and fulfilling those information requirements. Because if they don't do it, uh, the board is gonna be very unhappy because we're putting in the board in a bad position.Speaker 2:
So Michael, if you were looking to structure a program for the board around board and governance training, what would you advise our members maybe to start with, are the key issues they should focus on?Speaker 3:
I think number one, Rob first and foremost is what's the information that we think you need? In other words, I think they need to hear from the chief legal officer on, on the basic education as to what's going on, what's different, why the big rush? How is the law and the concept of effective director effectiveness and director best practice changing. You, you, the board needs to understand what's so different, um, that requires this, this level of urgency. Second of all, then I think it's a question of the format of the information flow. How does the board like to get its information? And that goes back to, I think your second question. Uh, do we have to do some external conduits and to, in order to get it to them, do they like to read articles? Do they, do they like to listen to podcasts? Do they like to look at on on board portals to like one page memos from the general council? What's the, what's the best format? Um, and then I think you help them understand, uh, what's not only what's been changing, but where are the target areas that they may wanna focus their, uh, means of addressing that change. Uh, do they wanna look at it in the context through their relationship to corporate structure? Do they wanna look at it in the context of their, their own, uh, board and composition? Do they wanna look at it in the context of their committee structure? Do they wanna look at it in the context of how the board turns over and makes room for more directors and new and diverse directors? Do they wanna look at it in the context of the board's culture, uh, the board management relationship? Uh, do they wanna look at it in the context of the degree of their oversight, which is frequently the best area to start with. And as I said, again, ultimately they wanna look, they should wanna look at it in the context of their relationship to management. Um, I think as we're seeing Rob, especially in the context of some of the newest iterations of governance principles, like the new framework document from N A C D, that these, the big challenge is, uh, the governance observers and governance principles are urge, encouraging bores to be more muscular in their approach to take a, a, a wider range of responsibilities to be more vigorous in the exercise of their duties. Uh, and that, and, and certainly the recent decisions are pointing'em in that direction. That's gonna rub CEOs the wrong way in a lot of situations. And I think the, perhaps one of the most important jobs will be to, to broker an understanding of both the board and management of, of their respective roles and responsibilities in a new environment. Because if you roll that out without an understanding by the ceo, that's gonna be an unhappy CEO who, who may see this as an unnecessary effort by the board to get into management. So, you know, we may start that at that.Speaker 2:
So Michael, what if you have an unhappy board member who says, I'm on the board, but I'm not on certain committees where I think I need a greater line of sight. A board member that's set on the audit committee or not on a finance committee, uh, but on a separate committee and they share with you, All I'm getting is report outs, but I don't think I have a deep enough line of sight to really truly exercise my fiduciary responsibilities. How do you manage that issue?Speaker 3:
I give'em your phone number, not mine. Um, the, the, in all seriousness, I don't want that board member calling me. Um, I think there, there has to be a clear enough understanding within the board as if you gotta beep. That's what the board chair is there for. In part, uh, it's a certainly legitimate issue. And we often see that, uh, board member, individual board members may have very legitimate complaints about this, and sometimes that they can be the canary in the coal mine. Uh, sometimes they can be wackos. Uh, but the, the individual directors who have complaints, uh, in our industry, Rob, they, they have a variety of ways they, that they express those complaints. You need to hear that person out. Uh, they have a choice, uh, uh, fairly or unfairly of, of taking it to the attorney general, taking it to the media or manifesting it in a books and records request, or even potentially in a, in a derivative action. Uh, the, the comments and concerns of, of, um, irritated board members, uh, need to have it a channel for them to be addressed. They can't be dismissed again, even if they're perceived within the management team or on board leadership as total wacks.Speaker 2:
So let's go to the other side of that equation. You have board members or management, uh, that aren't as concerned maybe as they should be about the regulatory, uh, landscape that we live within in healthcare. How do you get them to pay attention and get them to focus on the training that's needed for them to exercise their responsibilities?Speaker 3:
Rob, I'm not a big fan of using the fear factor to motivate boards. I think that usually if you're smart enough to board member, uh, if you give them the right information, they're gonna understand it. Uh, the liability threat is only to be used, I think in certain situations where they're just at after repeated advice, they're just not taking the action that they should. I think the most important motivator, frankly, is, uh, number I i, if you want to enjoy your job more, if you want to pursue your job comfortably, uh, and w with, uh, the ability to kind of have an open field to run on free from concerns that you're, you're not living up to the performance expected of you. Uh, you're going to, you're, you're going to listen to people tell you on what your responsibilities are, and you're going to dig into areas that may be less comfortable to dig in because that's your job. And there's a great comfort coming that comes from knowing that you were doing your job professionally and fully. If you don't have the time to do your job, if you are subjects that you wanna avoid, if they are too ugly to get in with, you know, you need to ask the question, Should you be off boarded? Is this not of service for you? Is this not a job for you? Difficult to be a director of a healthcare organization in this environment without getting in a sticky and difficult issues. And then, you know, as it may relate to compliance, for example, you have a specific obligation under the, under, uh, the law to exercise oversight of compliance and if, uh, and, and other regulatory matters. Uh, and for, there's another, you know, the obligation to exercise oversight of workforce culture is another one of those areas where if you turn away, uh, and want, don't want to get into these messy issues, you could find yourself, uh, in a bad spot. Uh, ultimately I think the greatest motivator in my experience, Rob, has been, uh, reputational risk. It, it, you, it's, it's one thing to say, well, if you fail to exercise this oversight, uh, it's gonna, it's gonna manifest itself in some type of litigation or investigation, which may or may not happen. Uh, but I think the, I've found over the years that directors are motivated more, uh, swiftly and strongly by concern that they may be criticized in the media, uh, in their local media of, of being on the board when something significant happened to the organization that was embarrassing. No one wants to be called out, uh, in front of their peers, uh, by a media source or something like that. That's to me, the greatest motivator.Speaker 2:
So, Michael, for some of the regulations in our industry, industry that may be counterintuitive to board members who live in other industries, how have you seen us best educate them on some of the nuances of the healthcare regulatory environment? If they're looking on, you know, to whether invest in a medical group and they wanna look at what business may come from that, how do you recalibrate them to, you know, their mission based responsibilities?Speaker 3:
You know, that is such a great question, and we see that all the time. And I, I think that this goes to back to the governance committee. Uh, I have in my 43 years of practice seeing that happen time and time again, well intentioned people saying, Look, you asked me to, uh, serve on your board because of my business expertise and why the heavens wouldn't, you know, this is our primary referral source. Why wouldn't we wanna do everything we possibly could to enhance that? Uh, we need to diversify our business. Why wouldn't we to get get into new areas of, uh, of commerce, we have to pay these people more and we have to give them incentives. Why wouldn't we do this? Um, I think the role of the governance committee, uh, and the board chair is critical here, where you have to say, you are not looking at your responsibilities fully here. Yes, we want you for your business expertise, but you can't serve effectively on this board if you are not view exercising that business expertise in the context of what you know or should know is the regulatory environment, you are harming us. And that's where I think, uh, board evaluations and, uh, individual and full board, uh, evaluations are, are so critical because the word can get out, uh, that this person is well, well intentioned, is not fulfilling his or her duties. They are not taking the time to understand the regulatory environment, the competitive environment in, in this industry. And that's a useless director. So, you know, and this goes to the ultimate point, rob, that off-boarding and, and things of that nature will have to increase in our industry because given the magnitude of issues, uh, facing our organizations, um, the challenge they face, you just simply can't succeed. If you have, uh, a number of board members who are not attuned to these risks, who don't care to be attuned to these risks or who are not willing to really understand these risks, uh, that's dead weight on the board. And, and they will drag the board down,Speaker 2:
Like we mentioned, getting data on the board's performance. How effective have you seen board assessments be to help a board understand when they benchmark themselves compared to their peers where they may be fallen short in governance best practices?Speaker 3:
Well, I think the, the, uh, what we're seeing now is that there's a greater emphasis, as I said before, on indicating to people that board services are right and not a privilege. And really the question, it's one thing to create a, uh, a, a careful, thoughtful, incisive directory evaluation program. And those are usually done under privilege and those can be very successful. The question is what do you, you do with the data? Um, our boards are historically, uh, lenient and tolerant, uh, of aberrant behavior. They're not often apt to use the removal concept. That's why I think this question of off boarding has to be more vigorously considered by governing boards. I cannot stress enough, Rob, the importance of moving underperforming boards off the board. It you, uh, in the context of the environment in which we are, our clients are operating, you just can't afford to have someone who's dead weight because that person will weigh you down. So the answer to your question, again, is vigorous offboarding is ultimately the key to you. Link that with the information from the evaluations. It's easy to, it's relatively easy to con to ask the right questions. It's relatively easy to evaluate the answers. It's often more difficult to affect the necessary response.Speaker 2:
So, Michael, during the year you've worked with the board, you've worked with board leadership, you've worked with management, they've gotten your respect, and they said, at the end of the year, at our board retreat, we want you to come and bring forward a, a game planner, a program for us to commit to board education next year. And we want you to prioritize the issues. What would you bring forward at the end of this year as you look, uh, forward to 2023?Speaker 3:
I think, uh, it's the concept of the more engaged board. It's the concept that's advocated in the N A C D principles. It's the perspective that the board now has a much heightened expectation and responsibility that the scope of their duties are, are intended to cover the entirety of the organization, that they need to be more vigorous in their job. Uh, if they cannot give of the time to that job, they should step down and they need to exercise that enhanced responsibility in a context of a partnership with management. So it requires both management and the board understanding where the other is coming from management and appreciating that the board has enhanced responsibilities, the board reach, realizing that management has an exceptionally difficult task, uh, and they have to reach an understanding. I think a renewed understanding Rob as to which who does what, uh, and to, that's where I would start. Because unless that board management dynamic is properly set, you're gonna have a lot of fits and starts and, uh, uh, it all the other issues of board size, composition committee charters, things of that nature, they'll follow. But you, I think where you, I would en respond to your question and say, let's, let's kind of revisit where we stand now. Three years after the pandemic, there's been a big change we need to buy into it. All organizational constituents at the executive and leadership level have to buy, buy into it. And if we can't, we have to start there.Speaker 2:
So Michael say you've done an excellent job of educating your board this year around the systemic issues that are facing our industry, particularly the financial challenges and the inflationary pressures. Do you see, how quickly do you see boards needing to execute on a path forward on a turnaround plan? Can it be a multi-year plan in light of what we're currently facing?Speaker 3:
I think the key is what's in their best If they, if they've talked to the right advisors, if they've considered the situation, if they're fully informed, uh, then it's a matter of business judgment in terms of the turnaround plan. Uh, uh, but I think you, you raise the question of which is a sticky wicket for some organizations, which is, uh, uh, you know, does the CFO think the board should keep their nose out of the financial matters because they couldn't possibly understand the, the, the, the questions and that the, and therefore there's a level of distrust between the board and management on the answer. Uh, I think that's critical to, to overcome. Uh, again, it goes back to the point I made before. Management needs to understand what the board's responsibility is in these situations. The board needs to understand that management needs the freedom of operation. So you've gotta come to a consensus. Ultimately, informed business judgment carries the day. Uh, but you've gotta make sure that, I think management realizes that, yeah, the board does have a role here because more than anything else, Rob, uh, in matters of financial distress. The questions will be absolutely raised about where would the, where the board was, you asked about scaring the board. That's the one area where they should be scared is, is if the organization is in, uh, financial headwinds, in their role in exercising oversight of operations is, is been standoffish or has been excessively deferential. That's an area where I would be concerned.Speaker 2:
Great. Well, Michael, thank you. Hopefully it's clear to our members from our podcast series just how important corporate governance is to the operation and sustainability of thriving healthcare organizations.Speaker 3:
Thanks so much, Rob. We appreciate it and we appreciate alaSpeaker 1:
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