A well-organized, thoughtfully composed, and industry-attentive committee structure can provide substantial support to the governing board of a health care organization, especially when multiple items compete for attention on the board’s agenda. Rob Gerberry, Senior Vice President and General Counsel, Summa Health, speaks with Michael Peregrine, Partner, McDermott Will & Emery, about the role of board committees and why it is so important to monitor their formation and operation. They discuss common traits of effective committee practice and structure, delegated powers versus advisory powers, the importance of having independent members on committees, and some of the key issues facing health care board committees in 2024.
To learn more about AHLA and the educational resources available to the health law community, visit americanhealthlaw.org.
A well-organized, thoughtfully composed, and industry-attentive committee structure can provide substantial support to the governing board of a health care organization, especially when multiple items compete for attention on the board’s agenda. Rob Gerberry, Senior Vice President and General Counsel, Summa Health, speaks with Michael Peregrine, Partner, McDermott Will & Emery, about the role of board committees and why it is so important to monitor their formation and operation. They discuss common traits of effective committee practice and structure, delegated powers versus advisory powers, the importance of having independent members on committees, and some of the key issues facing health care board committees in 2024.
To learn more about AHLA and the educational resources available to the health law community, visit americanhealthlaw.org.
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Speaker 2:This episode of A HLA speaking of health law is brought to you by A HLA members and donors like you. For more information, visit american health law.org.
Speaker 3:Hello, everyone. I'm Rob Berry. I'm the Senior Vice President and Chief Legal Officer for Summa Health, and a member of the HLA Board of Directors. Welcome to our podcast titled, the Key Principles of Board Committee Practice. A well organized and thoughtfully composed and industry attentive committee structure can provide substantial support to the governing board, especially when multiple items come for attention on the board's agenda. Delegating key tasks to standing and special committees can facilitate the efficiency and thoroughness with which the board can best fulfill its responsibilities. Committee's abilities to satisfy their delegated tasks depend on a keen understanding of topics and trends that are likely to be encountered in the upcoming year. That's why as part of HLAs educational process, we wanna offer today's podcast. Our goal is to offer an overview of the key principles of the use of board that board committees use to help our HLA members better assist their boards and their board committees that they staff. Today's guest for my podcast is Michael Peregrine, a partner at McDermott Will and Emory Michael represents corporations, their boards of directors and individual directors and officers, and connecting with their full range of governance, fiduciary, director LI liability and leadership issues. Michael's a fellow of the HLA. Michael, welcome to today's podcast.
Speaker 4:Thanks, Rob. Happy to be with you.
Speaker 3:Appreciate you joining us again, and we'll start right into our questions. So let's start off with your perspective on the basic role of board committees and why it's so important to monitor their formation and operation.
Speaker 4:Rob. I think the , the key answer in a nutshell is that committee practice is a hugely important aspect of effective corporate governance , uh, and something that I'm not sure we pay close enough attention to as, as lawyers and compliance officers. Um, and , and it's, we're capable of messing it up if we don't do it right. The overarching issue that I think is pushing this renewed focus on board committees is what I call the engagement issue. If you ask me what the number one theme in corporate governance has been over the last couple of years, I would say that the increased expectation of director engagement has to be either one or one a . And there's only so much time that we're going to get from directors within the context of the board activities. We really need to have an effective committee structure to take the pressure off the board and to provide that vehicle for engagement in a more efficient way. I do think that , uh, effective oversight of committee structure and formation and operation is a best practice. So I don't think that we need to justify it to the executive leadership team from that perspective. What's critical to understand, though, are a couple of areas where if we don't do it right, things can get balled up . Uh, we look to committees to either provide the basis for board decisions in terms of the reliance , uh, on committee recommendations or conclusions or, or, or suggestions. Uh , we also look to committees that have board delegated powers to make their own decisions. And so it's important that we, the committees operate in a format that will support either the reliance on their recommendations or will support the decisions that they make . Uh, committee function can also lead to extraordinary , uh, helpful, efficient board practices. They can make the board's role and function easier. They take the burden off the board, and that helps recruit and retain directors because they know they have their board actions are supported by this network of committees. Committees can also be very useful support for training new directors. And I think it's also , uh, kind of an indirectly rob, it's a great way to support the teaming of officers like the chief legal officer, the chief compliance officer, and for organizations that have one, the chief governance officer. So I think that's why, in a nutshell, why we care about effective committee practice.
Speaker 3:Great. Well, Michael, you've got the benefit of seeing boards across our country. As you look at committees that are high performing, what are some of the things that you see as common traits?
Speaker 4:I think the committees, the , or the boards that focus really spend the time , uh, and put effort into effective committee practice. We see the, a couple of things that are good indicators. Uh, number one, there's some , there's some process by which staff to the board monitors the, the committees that , that often can be the chief governance officer. But there's an , there's an awareness or an appreciation of whether or not the committees are, are , uh, meeting on time. They're, they're crossing the , uh, uh, t's and dotting the i's. They are acting in a manner accordance with the formalities of their charter and their bylaws . Um, the, the meetings are well attended, their staff. In other words, the trains are running on time. Uh, it also in , in terms of effective board use of committee practice, I, I think you see it in the context of , uh, decisions that are adopted by the board that have the backup to prove it, they're sustainable decisions, or you see recommendations that a committee might make to the full board. And there's the backup to support it. As I said, also, again, that the committees function consistent with corporate formalities , uh, with appropriate notice and quorum requirements , um, and consistent with the nature of their charter. Uh, we see , uh, I think the most effectively governed health systems periodically kick the tires of the structure of committee practice. So , uh, we have the right number , uh, and the right topics that are covered and delegated to the committee. The next, I think, indicator of really effective committee practice is that there's appropriate vertical and horizontal reporting vertical in terms of committee reporting up to the board on its activities . Horizontal, in terms of what I would call a right hand , left hand function, that the committees, even if they don't overlap and function, which we hope they don't, are sharing their reports and information and focus. So there's again, a sharing of ideas in a more coordinated aspect of , uh, uh, board function committee functions. And then I think the, another indicator of effective governance practices where they have the right mix of people on the board, doesn't have to all mean subject matter experts, but if there's some thoughtful , uh, deliberation given to who's gonna sit on each committee, what their background is and what they're expected to bring to the table, those would be kind of the check marks, Rob, that I would look for.
Speaker 3:So as we look at the issue of delegated powers versus advisory powers and the scope of the committee charter, how are you seeing right now boards delegate , uh, down to their committees , uh, effectively those, those different powers to them?
Speaker 4:I think the biggest question in my mind, Rob , what would you see is that it's kind of like, oops, I don't know. I better check the chart. Uh, and by that I mean, I'm not sure this is something that , uh, the board and its staff focus on enough and have to check it and see, well, what , how, when this committee was set up, what were the powers? And, and that's why it's again, useful to have an understanding of what's in the charter, hopefully, you know, and I think the , the best governed organizations are those that have consistency in the corporate charters. Um, but ask ourselves the question, what were we trying to do here? What was our goal in terms of an overarching committee structure? Uh, what was the intent here? Uh , were we gonna try and push as much down to the committees as possible, or are we looking for the committees to do the legwork and give us their recommendation and then we'll vote accordingly? That's a policy issue. And I think it's important to understand when you're looking at that policy issue that I believe that there's a , a , an unspoken but general presumption of the law against wholesale delegation of board authority to committees. And I think we have to watch that. Um, so the question is, what's the , what are we asking of a committee? What should we be asking committee? How will that committee's function serve the board's interests? Uh, has that been made clear to committee members? Uh , so I'd start with the charter there . If you had to , you know , if you , um, put me on the spot , I , it's probably gonna be split 50 50 in terms of the, or maybe even 60 40 in terms of advisory versus delegated powers. If you are going to have many committees with delegated powers, you'll need to monitor them. And that will ask people like you and the other chief legal officers and compliance officers to spend a lot of time making sure that tho those committees function appropriately.
Speaker 3:So one of the other roles we always get as chief legal officers and board secretary is chief recruiter. So as you look at committee composition, what, what's your opinion on the correct size in today's environment, the expertise that should be recruited for? Um, do we include mostly voting members? How many non-voting members of the board do we include? Any perspective you wanna share there?
Speaker 4:I think we start from a , the bigger picture issue, Rob, of , uh, how stressed out is our board? How often are we meeting? What's their flexibility? How much time do they have to spend on committee matters ? Uh, I've always been a believer that in the states that allow it, it's great to bring on people who are not board members to serve as voting members of the committee. If , again , the state corporate statute, whether it's business corporation or for-profit, allow that, that's a great thing to do. Uh, it allows people you to train and educate committee members with , uh, without having to add or expand the size of the board. Uh , you know, I don't think there's a particular best practice in terms of committee size. Uh , you know, generally I think a great, you , you're looking at five to seven people. I , I, there's no, you know, legal , uh, statute or, or a regulation that would say this, but I like to keep it small and effective and efficient. Um, as far as expertise , uh, I think, you know, it's interesting , um, and I think you and I talked about this a while ago. The conference board recently issued a survey that indicated that while that boards were becoming more diverse , um, they were losing out in that process on directors who had strategic judgment. And I think that's their way of saying in a , with , in a very nice way, let's be careful about how wild we go in terms of , uh, appointing people from diverse backgrounds and experiences with , if we, if we don't en enough , appoint enough people who have just fundamental good judgment, the , uh, uh, you know, what we would call , um, in , in sports, the the glue person, the glue guy, someone who could put it all together. So I think there are some committees where expertise and subject matter expertise is critical, whether that's comp, hr, audit, something like that. But I think it has to be balanced just like it has to be balanced at the board level with people who have just plain old , uh, good horse sense and , uh, strategic judgment.
Speaker 3:So as you think about having independent members on your board committee, do you see that as a, a training ground for the full board participation? Or do you see it more as being able to recruit for a specific skillset based on the subject matter of the committee?
Speaker 4:You know , I think that I , I look at the independence issue in a little bit different way , Rob . I think most of our , uh, listeners know that the concept of director independence was, has always been out there. It was renewed in interest after the Sarbanes oxley , uh, Enron era, where there's a great deal of focus of making sure that boards were controlled by a majority of independent directors. I think independence is getting a res , uh, resurgence and interest in corporate governance discourse. So I think the question really is , uh, uh, from a board composition perspective , um, how important it is to have independent members on committees, and what are those committees where we have to have a, a , a really strong subset, majority, if not a hundred percent independent directors , you know , use . We as, as most of our listeners know, there are some committees where statute might actually designate that dependent on your state. Um , that might in particular be for the audit committee. Um , then there are IRS requirements for the not-for-profit exempt organizations on , uh, the executive compensation committee. I think there's a great value in starting from the presumption that on any committee it should be composed of a majority of independent directors, just so you don't have to get into the question of , uh, whether they're , you know, whether they're , uh, what is the nature of their bias and what it with the management team, and whether that's gonna mess up the vote . It , it . So I, I'm seeing a greater focus across the board on ensuring that there's at least a majority of independent directors on a particular committee , uh, in , in order to reduce concerns about bias, influence bias or conflict influencing the decision making process.
Speaker 3:Is there anything in the McDonald's decision or in the Delaware courts that you see affecting the role of committees at all?
Speaker 4:Yeah, I, I , I think there is , and I appreciate your raising that, Rob. I think that the McDonald's decisions from January and March of this year, the latest of the Caremark line of cases are , are just aren't getting the attention that they need to incorporate governance, because I think people are kind of , uh, overwhelmed with issues. But as I think a lot of people recall, McDonald's did a couple of things. It's, again, it's the latest discussion of the board's Caremark responsibilities, but it also added two additional aspects of this. One, was it , uh, actually three things. Number one, it made clear that , um, uh, participation by some , uh, by someone , by , by , uh, sexual harassment as a breach of fiduciary duty. Uh , because as you know, those cases were grounded. That case was grounded in c-suite sexual harassment allegations. Uh, the McDonald's decisions also indicated that corporate officers have fiduciary responsibilities with respect to the , the scope of their responsibilities. And I think that that's something that's an issue that's flying under the radar in terms of , uh, our , the expectations of corporate officers, the c-suite officers, and how that affects their reporting and engagement with the board and committees. And then there's the , uh, other aspect of , uh, of McDonald's, which calls upon, essentially it confirms that the formal reporting requirements within a , uh, governance structure, leadership structure should go from , um, uh, the managers to the executive level officers to whom they report. And then again, from those that get executive level officers up to the board, and those that report , those reporting relationships should provide information not simply on the mission critical risks of the organization, which was what we previously thought under Boeing and some of the earlier Caremark cases, but on all of the primary compliance risks of the organization. So, going back to your question, yeah, I, I think that the McDonald's decisions , uh, arising out of Delaware do affect the role of committees with respect to information flow, reporting, relationships, and oversight. Uh , I just think, and maybe , uh, beating the drum too loudly, but I just think these ca those, the, the preliminary and final decisions in McDonald's just hit much more governance implications than, than, than we've been , um, embracing so far this year.
Speaker 3:So as we think about evolving corporate governance practices in the healthcare space, are there core committees that you think every organization needs to have? And what are some of the newer committees, be it enterprise risk management, human resource committees , community committees that are evolving to , uh, address the challenges of health systems?
Speaker 4:Well, I , I , I think I focus less on what we call 'em and more on what they're doing, but I, I , I think from the purposes of the outside world and dealing with regulators, you really wanna have something that says audit slash audit compliance. And you really wanna have something that says executive compensation, just so you're signaling , uh, that they are, they're out there. Obviously, these are two critical committees. Um , it's always been my , uh, concern that the, the board nominating committee, or the governance committee or whatever it is that develops , uh, recommendations for committee structure , um, look clearly at , um, how do we address risk, audit and compliance? Um, is the current structure sufficient? Are we loading too much up on the audit committee? Are we having an inadequate analysis of risk , uh, and compliance because we split them up into different committees? I think that's one question. Uh, two things. I, I'd make an observation on three things. Number one, I think the governance and nominating committee of the board is, is becoming much more important now than before. Uh, one reason because , um, of the general sense that the kinds of , uh, direction that , uh, on corporate culture that had been highlighted so prominently this fall by the National Association of Corporate Directors , uh, they're expecting that that's a duty, the oversight of culture that should be subsumed or assumed by the , uh, governance and nominating committee. That's a big deal. And I think that does up the, the focus on , um, that committee. The other thing I think in any regulated industry , uh, but especially one that's evolving so rapidly as healthcare is the strategic planning committee. And I think that's another one of those , uh, biggies that you've just got to have and you've gotta make it function. That's a kind of a tough one in the sense that, you know, this , our , our C-suite leaders will say, well, we we're the ones that have to do strategic planning. And , and that's true, but the way that works is they're conducting strategic planning at the request of the board, and it's , and their , the strategic planning efforts should be supervised by the strategic planning committee, and then the final plan approved by the committee, and then subsequent board decisions subject to consistency with that strategic plan. One other committee that I think is , um, a , a sleeper out there that , uh, it , that needs, needs more focus because, you know, we've all seen the, the data from challenge or gray and others , uh, executive search firms and things of that nature about the extraordinary turnover of CEOs in our industry. Um, I, I'm always surprised at the, at the relatively few number of clients that I serve that have active , uh, search and succession committees and with the level of turnover in the industry in the CEO suite. I think that's kind of a roll in the dice there. They , I think, so those are the kinds of committees I think that may be more important than others. Certainly. One other point I would , uh, and I think NACD has made, the point of this is , uh, just like we look in and , and see if we can coordinate more, more , uh, efficiently the roles of risk compliance, internal audit and avoid siloing , uh, NACD has been making the argument that instead of having a four or five or six different committees covering it, privacy , uh, security, and now ai , uh, do we, do we load them into a science technology and innovation committee or something like that. These are the kinds of things that management and the board should be talking about.
Speaker 3:Great . So as we stop and pause and kind of reflect on the , uh, external factors that are impacting , uh, organizations now on the unique headwinds we're facing, what are some of the factors you think then 2024 that will be key for board committees to evaluate going forward?
Speaker 4:I'd probably bust 'em up, robin , to , uh, practical or tactical and strategic issues. I, I , and you have to start with the engagement issue and the expectation that board members are called upon to work harder, faster , uh, uh, and , and , and more completely in , in the , their oversight and decision making . So I think the question number one is, is does our committee structure at the present time serve the purpose of helping the board be more efficient in its core activities? Uh, are they properly, and , and by that I should say, do we have the right committees? Uh, do they have the right charter? Are they, whether they're with delegated powers or, or , um, advisory powers, are they doing what we want them to do ? Do, are they making our job as a board easier because that's what they're supposed to do? Then the second, you know, issue that I think faces this question of our , our , our board committee practices, do we have 'em properly staffed and composed and composed of , you know, of directors and out and volunteer , uh, uh, non directors is one thing. Uh, the other question is from a management perspective, who serves on the staff, who is providing staff support to them , uh, helping and coordination things of that nature? Uh, that's a critically important thing. Uh, then the third question is, 'cause I'm just a big sticker. 'cause you see how things, when people push back rob on committee decisions, they're gonna number one, look to see if they followed the committees a acted in a manner consistent with their charter and , and follow the corporate formalities under the charter and under the bylaws, who's watching that? Who's keeping an eye on for it? You worry a little bit. That committee functions get to be a little bit too lax. And, and it's hard if you have a, let's say a board with 10 committees that it's hard for the chief compliance officer, the chief legal officer, to police them in terms of , uh, dotting all the administrative , uh, i's and t's. So I think with the question of whether they follow formalities will be a big issue. Um, another question that I think committee practice has to look at is as do we overwork the staff? Do we overwork the board? Are we asking too much of , uh, uh, too few people? Is is our structure look good on paper? But when it comes down to the number of meetings and the number of personnel time and the volunteer time, are we counterproductive? That's a legitimate issue. Um, ultimately, I think, you know, then the other question is do we have the information reporting systems that, that McDonald suggests? Do we , uh, acknowledge the , uh, scope of responsibilities of officers and their role as fiduciaries? Uh, are the committees getting the information they need to make their decisions? But ultimately, I think for those of us who are members of A HLA, the question is, will the recommendations of the committee, will the reliance on the board on those recommendations and will be, and the will the decisions of the committee, are they made in a manner that they will stand up to enforcement or litigation challenges? Will they, will they will , can we support them? Uh, or will they be knocked down along with whatever action was taken? I think that's the , and maybe one other point , um, is we really need to be looking at compensation. I'm , I'm a huge believer in board compensation, and that certainly is a concept that would trickle down to the committees as well.
Speaker 3:So when we look at the big body of work, we're asking our committee members to undertake, obviously we need to educate them on a , um, orientation basis and an ongoing basis. How do you see that best being delivered?
Speaker 4:Well, you only have so much time with them . I think the , it's best being delivered through , through , uh, means such as , uh, uh, electronic devices , uh, and , and things of that nature. Training sessions, the podcasts, video, webinars, things of that nature where we can , um, walk, we can reach board members in a situation where they have the time to do so. I think we're getting to a world in which , um, we need to find alternative ways of educating board members and onboarding, onboarding , uh, committee members with respect to their responsibilities. And, and those , uh, current and future committee members need to take the responsibility to do that. So I'm a big believer in making the information and the onboarding and orientation activity , uh, accessible to the individual directors. At some point, you've gotta bring everybody together though, and q and a in a manner and , and help people , uh, learn how to operate as a committee. And that's also a question of strong leadership from the committee chair
Speaker 3:Is if you were a board chair, would you limit your board members to the number of committees they can serve on?
Speaker 4:Yeah, I, I would, I I , I'd be very careful about that because I do think, and I've been in situations where , um, when I've seen a regulator question, this usually happens in a situation where the board is relying on a committee's decision. Uh , the regulator's gonna be all over every aspect of it. And then I say, well, well, Mr. Berry, I see that you're, you're not only a member of this board. You're a member of five other boards and you're on four committees of this particular board. Uh, you must never sleep Mr. Berry, otherwise, I, I don't know how you're able to perform your committee functions. And I think that's the, that's the worst case scenario. So yes, I do think you gotta be smart about that because otherwise we can undermine the purpose of the committee.
Speaker 3:When we look at the executive committee specifically, we know the importance of that committee and meeting in times when the full board can't meet. How do you though create the rate scope in their charter so that it is solely that we've had conversation in my own organization about the board owning decisions as a whole, but how do we allow that executive committee to function in the right way?
Speaker 4:Well , uh, I , I , I always thought that there's a great, from a governor law perspective, a great danger of , uh, the board functioning through the executive committee. We , we all know that under both the business corporation X and not-for-profit corporations acts of our state, that there are typically limitations on what the executive committee can do . Uh , but I, I have seen more often that I would be comfortable with where, where organizations essentially run the board through the executive committee, that that's the body that essentially provides the greatest amount of oversight and decision making . And it's a , it's a counterweight, it's a reaction to a board that might be too big or that might suffer from having a lot of board members who aren't able to contribute , uh, where there are real questions about people participating in board meetings. And the simplest way through is, well, let's just, we're not gonna get done. If we continue to have these board meetings with 20 people that nothing gets done, we'll just move it to the executive committee. Uh , that's not, I think what the law expects. And I think the danger is , um, you know, you're, you're trying to address a problem the wrong way. Uh, instead of confronting the problems with the current board, you're creating a new problem if you over-rely on the executive committee because ultimately you're gonna create a two-tier board, and they're gonna be issues which the full board has to , uh, vote on or approve. And they won't, they won't be able to do so because they weren't involved in the initial , uh, groundwork. And the, the other question is the, the full board is not gonna be involved in the oversight of matters. And so you have fewer thumbs on the pulse of the corporate , uh, wrist , so to speak. So executive committees can be terrific if used properly. I think , uh, major governance danger area is that they are overused, that they are used improperly.
Speaker 3:So Michaels, we conclude our conversation for today, and we sit here in the fourth quarter of 2023 and project forward to 2024. What are key things that you think , uh, board should be thinking about as far as emerging issues around board committee practice? What are key risks? What are key benefits?
Speaker 4:I think the number one message is , um, when done right, committee practice can significantly ease the pressure on board functions. In other words , uh, it can , effective committee practice can dramatically increase the efficiency of the governance process and hopefully of the oversight and decision making of the board. It is the obliga. I don't think people realize enough that it really is , uh, a best practice to periodically monitor the effectiveness of the committee structure and practice. It's not a real sexy thing, but it's out there, it's an obligation. And so there's a super upside in having effective committee practice. You're gonna have a more efficient board and you're gonna have rested directors, and you're gonna have a, a better, more reliable oversight process and a better, more reliable decision making process. The risks are you screw it up, the risks are, you don't pay attention to it. The risks are you , you haven't looked at the committee structure in 15 years or 20 years . The charters , uh, go back way long and , and you that you need to rely on the committee structure to exercise oversight or make decisions to provide recommendations, and they can't do it. Or, or the structure by which they followed , uh, you find out subsequent to that didn't , uh, follow the charter or was otherwise alter virus . So I, I think that boards need to recognize that with the benefits of committee structure, there's a , uh, a con risk that if the committee structure is ignored , uh, it , it can really cause problems. And rob , they're the kind of problems that don't pop up until after the fact. When somebody looks at the charter closely and says, you guys weren't authorized to do this, or You are only advi an advisory committee, you don't have delegated powers, you couldn't sign that contract. Those are unbelievably unnecessary mistakes. And, and so I think what the bottom line message I would leave are our colleagues today is we don't have to have problems with the committee practice. Uh, we just need to pay attention to it. I realize it's easy for me to say we've gotta find the time to do it. Uh, but I think ultimately , uh, the time and effort spent on cultivating an effective committee practice and assuring that the formalities are followed and the committees are the right ones, and we've set the charters upright is gonna pay enormous dividends later on. No board member wants to step into a situation where they are embarrassed because the committee screwed up in its duties.
Speaker 3:And Michael , I'll piggyback on your comment from my practice. I think highlighting the importance of having that period of reflection, looking at your charter, doing a self-assessment, we do one every two years for our committees against best practices, is a really good exercise to make sure your committees stay on target.
Speaker 4:Absolutely.
Speaker 3:Well, Michael, thank you once again for providing your insights to our membership at HLA and thank you to our listeners.
Speaker 4:Thank you.
Speaker 2:Thank you for listening. If you enjoyed this episode, be sure to subscribe to a HLA speaking of health law wherever you get your podcasts. To learn more about a HLA and the educational resources available to the health law community, visit American health law.org .