It is critical that health care boards remain aware of trends and developments in corporate governance. This helps board members execute their oversight and decision-making functions and better evaluate the effectiveness of their own board’s operations. Rob Gerberry, Senior Vice President and General Counsel, Summa Health, speaks with Michael Peregrine, Partner, McDermott Will & Emery, about the ten most significant corporate governance developments of 2023.
To learn more about AHLA and the educational resources available to the health law community, visit americanhealthlaw.org.
It is critical that health care boards remain aware of trends and developments in corporate governance. This helps board members execute their oversight and decision-making functions and better evaluate the effectiveness of their own board’s operations. Rob Gerberry, Senior Vice President and General Counsel, Summa Health, speaks with Michael Peregrine, Partner, McDermott Will & Emery, about the ten most significant corporate governance developments of 2023.
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 everybody, and welcome again, I'm Rob Berry. I'm a Senior Vice President and Chief Legal Officer at Summa Health, and a member of the American Health Law Board. One of the critical areas of board responsibility is to maintain a level of awareness with respect to trends and developments in corporate governance. It's information that helps board members execute their oversight and decision making functions, and best evaluate the effectiveness of their own board's operations. This is an area in which corporate legal officers can play a particularly valuable role given their traditional role as the board's legal advisor on their corporate governance responsibilities. And there's no better time to re revisit these developments with the board than as we change the calendar from 2023 into 2024 as we look to share a concise list of the top 10 most substantive court corporate governance developments of the past year. We'll also look to share some thoughts today , uh, from the general counsel on how they may relate to his or her client. That's why as part of the HLA educational , uh, process, we look forward to continuing these podcast series as we move forward. Our guest for today's podcast is Michael Peregrine . Michael's, a partner at McDermot Will and Emory Michael represents corporations, their boards of directors and individual directors and officers in connection with the full range of governance, fiduciary duties, director liability, and leadership issues. Michael's a fellow of the American Health Law Association, Michael Michael , welcome to today's podcast.
Speaker 4:Hey, Rob . Thanks for having me.
Speaker 3:So, Michael, as we know, there's no universally accepted top 10 list, whether it relates to the debate going on right now in college football as we get ready for the playoff or in corporate governance. But a good place to start may be what's on your list, given the closeness you have , uh, with current governance development. So let's, with the channel of our inner David Letterman and start from the bottom up, we'll have a drum roll and start with our number 10, the antitrust hyperdrive. Michael, your thoughts?
Speaker 4:Well, you know, I think this is one Rob that goes back to the very beginning of the year and the , uh, aggressive policy efforts of the Biden administration with respect to competition. And it really relates to the impact on board oversight and decision making of the extraordinary level of antitrust enforcement , uh, and how that's going to affect the strategic planning, including non-organic growth opportunities. Uh , it's been hard for boards to address growth in the context of what seemingly is a government challenge to just about every merger transaction that's out there. And I think that that's , um, been a difficult one for boards to address together with the proposed revisions to the Hart Scott Rodino Act, which actually contemplated a much greater board focus in the process and truncates the , uh, decision, you know, incentivizes a much shorter decision making process in which the board will have to really get engaged in in early stage. So I think number 10 is the question of the difficult issues facing directors , uh, whether , uh, concerning whether to pursue transactions that pursue antitrust risk or develop alternative growth options. It's kind of an either or, but again, it's also, as you , as many of our listeners know, it's the , uh, board implications of the new HR instructions. And I guess I would also add a third one on this. Number 10, robin . And that is , uh, the compliance oversight issues associated with some of the other antitrust issues that the government has pursued over the past year. They seem to be winding down their , uh, attempts to litigate , uh, poaching , uh, employee poaching issues. But I think issues of market , uh, division , uh, and confidential information sharing and certainly , uh, across directorships or other areas where antitrust has become a huge strategic issue for board members. So that's number 10.
Speaker 3:Alright , our drum roll next, the number nine. Michael , as we look at conflict of interest, your perspective on the latest developments there,
Speaker 4:You know, conflicts of interest will always be out there. And I think the issue popped up again lately with the Supreme Court's new code of conduct that cont , which contains lots of juicy language that if you wanted to , uh, take a , take a look at that and see how those may apply in tightening up descriptions and definitions in your own conflicts policy. That's a good one. But for number nine, I added this on the list to focus on what I call conflicts that arise on the margin. That's the where I think there's been the biggest movement in the conflicts of interest area this year. Conflicts that arise on the periphery of relationships that traditionally are recognized as a conflict. These are the ones that board members might miss , uh, financial and personal relationships and agreements for which they have the potential to create conflict. Uh , it is less obvious. You don't see it the first time. Uh , it's not apparent or clear , uh, as those that are traditional conflicts. And I think those are, you know , personal relationship intra board relationships, attenuated , uh, financial arrangements, co-investment opportunities , uh, serve , uh, uh, dualities of interest. Again, they are conflicts that arise on the margin of relationships and are easily missed. And ultimately, I think it requires rob board members supported by the chief legal officer and the compliance officer to encourage board members to look at the entirety of a particular arrangement or contract or , uh, uh, investment and ask themselves, does this some way possibly implicate my board role? So number nine is the expansion of the scope of the conflicts review to conflicts that could arise on the periphery of the relationships and to develop an effective process for identifying them, disclosing them, and resolving 'em . And this is one that is going to irritate a lot of people because they never , you know , they , they involve situations or relationships that they wouldn't immediately think of as posing a conflict.
Speaker 3:Michael, I could tell you, my phone rings off the hook as we just , uh, put out our conflict of interest , uh, submission every year and get questions and feedback , uh, every year. That seems to focus on exactly what you just described. So our next drum roll takes us to number nine, board composition, and we know chief legal officers are heavily involved, is being that recruiter for the organization on finding strong board members with the skill sets and competencies needed.
Speaker 4:I think what's important this year is that the issue that at the nominating committee is really challenging in terms of new issues that have arisen in 2023 regarding board composition. I think that we see the conference board , uh, pushing hard on , uh, strategic experience at the board level. We have , uh, the ongoing calls for industry specific experience. We have the focus on emergency emerging competencies that are favored, and we have the interest to serve to include former CEOs on board members , uh, as board members there . The challenge to incorporate every possible relevant constituency is extraordinary, and it really requires the gut nominating committee to essentially prioritize through a matrix or whatever, what the greatest , uh, area of need is. I do think there's a particular concern to avoid tokenism that's been spoken about in, in the press and some of the governance policy statements , uh, and also board division issues that arise from the Supreme Court's decision on affirmative action earlier this year. I'm not sure that all boards and nominating committees have really fully digested those, that decision and how it can indirectly affect their composition process. Once again, I will point out that antitrust and conflicts issues also , uh, affect the no , uh, board composition process as it relates to issues with overlapping , uh, directorship. So , uh, a much more difficult job for the governance and nominating committee with respect to , uh, the increasing and often competing calls for inclusion of nominees representing different skill sets .
Speaker 3:And Michael, as I think about , uh, this development, I think to our last podcast around , you know, board and board committees and the work that's being done right now to properly delegate some of the work down to those committees and seeding some of those members as well.
Speaker 4:I think one of the things that reminds me, Rob, is, is the value of compensating committee members, because so much heavy lifting is done at this level. And I think the decisions that , uh, um, at the governance and nominating committee are often some of the most important and , and really , uh, serve as the focus of for board development in the future. And again, I'm not surprised when I get calls and saying, can we compensate the governance and nominating committee members?
Speaker 3:So, moving to development number seven , uh, last March, Silicon Valley Bank hit our radar. Michael, what's the takeaways that you saw there?
Speaker 4:Well , it doesn't time fly, Rob. We were talking about, this just seems like yesterday in the collapse of the middle market banking industry. I've always been one to see a lot of con comparison and similarity between , um, the governance issues in the banking industry and those in healthcare. And I think we all remember that this was the collapse of a , a , uh, Silicon Valley Bank , uh, a , a regional bank that focused on specific types of , uh, customers and the financial i , the financial lessons that , uh, fin and financial oversight lessons that arose from that debacle , uh, really apply across industry sectors. Uh, uh, the FDIC when they're not , uh, too busy partying and having lots of fun , uh, in , in their offices are really laid out an important report , uh, that identified problems that I think apply certainly to healthcare as well. Are we recruiting directors that are capable of recognizing the unique vulnerabilities of our company's business model? Are , are we training , uh, future board members to be capable of identifying financial flags? Um , are we exercising heightened financial oversight during periods of rapid corporate growth and economic volatility? Uh, are we appropriately structuring incentive compensation? Are we incentivizing the right kind of conduct? Uh, and do we have as the F-D-A-I-C said, robust , uh, uh, management to board financial reporting mechanisms? Uh , virtually every govern , uh, Silicon Valley Bank has been referred to as a , as a complete crisis of , of mismanagement and failure of governance. And , uh, just so many of the issues there really highlight the importance of financial oversight in , in healthcare organizations as well. So I think it , well , it goes back to March, as you said. I think it's one of the most important of all corporate develop governance developments affecting healthcare. And four, we can draw some real lessons.
Speaker 3:Great . Well, as we move to development number six, our regulatory environment is not lightened and board , uh, the fiduciaries that are on those boards have new compliance pressures to think of. What's your thoughts there?
Speaker 4:It's interesting, Rob , I was looking at a , a copy of a speech from , uh, one of the , uh, uh, leads of the criminal division had given a speech to , uh, today on , as we're taking this on , uh, corporate fraud oversight. And while the government's principle , uh, corporate fraud enforcement efforts started in September of 22, it really wasn't until earlier in 2023 where they began to roll out their specific initiatives , uh, with respect to compliance focused executive compensation incentives and dis incentives , uh, and recommended enhancements to compliance programs in that area. And I think that , um, as , as the DOJ official, again reminded , uh, US all today , uh, there is now a direct link, at least in the vines of the Department of Justice between executive compensation and compliance, which should form a greater link between the audit compliance committee and the executive compensation committee. We have , uh, since February, March, the Department of Justice saying, at least as to them and their perspective of corporate compliance that they expect boards to implement , uh, executive compensation incentives and disincentives relating to compliance. And they expect board members to implement , uh, executive callbacks as well relating to compliance. And I think it's, you know, rabbi , a a lot of people have different experiences , uh, with their clients on these issues. It's a tough one. You've got on the one hand, the , uh, focus of the executive compensation committee that says, you know, we, we don't think these are necessary. You've got the focus of the audit compliance committee saying, Hey, we've got an obligation to exercise oversight of compliance. The Department of Justice is telling us to do this and, and we need to do it. Uh , and I'm not sure that's a conflict that's been resolved , uh, yet by the end of the year. So I think it's important this , this is a development that is , uh, gonna carry over until 2024 , and I think it's a subject for continued board review. You , you'd hate to see this one be kicked down the road until there's , uh, some serious , uh, corporate , uh, criminal enforcement action against an organization. And that organization is penalized because it failed to adopt these , uh, compensation related compliance measures. So , uh, this is an unfinished , uh, development, I would say for boards.
Speaker 3:Great . So pivoting to development number five, open ai . And you wrote a really interesting piece recently on Forbes that I know Spark Day Thanksgiving conversation and event that I was at. What's your thoughts there?
Speaker 4:You know, I think we haven't seen the end of AI as we start into Decem open ai . We start into December. But bottom line, I think that they're just an extraordinary number of , uh, relevant corporate governance developments from that. I think most of our listeners today know the story. But I look at that and it speaks to me in terms of a couple of key areas, I don't think in any particular order. One is to make sure everybody invited to the party understands the, the focus of the corporate structure and the mission and what it's trying to accomplish, and doesn't have any misconceptions about the corporate structure. Uh, again, everybody who's invited to the particular party understands that the role of the board is different than the role of management, and it's not the board's job to support management, it's the vice , uh, vice versa. Uh, and I think everybody needs to understand that it's the board's obligation to exercise oversight. And if they feel that the chief executive officer is not exercising candor in its commu his or her communications with the board, well, that is , uh, the board has a right to get irritated and take action. And I think the other thing , um, Rob that's gonna be interesting for our industry is something that's not resolved . There were indications early in the process that the part of the , uh, lack of candor that was alleged related to safety concerns or , uh, concerns that management was pursuing to rush AI products to the market before safety issues have been resolved. Now that's, you know, been contradicted in later conversations, and the chief scientific officer is saying, no , I never meant that. I'm not sure we're ever gonna get that resolved. But I do think, and this leads to another , um, of , of my top 10, that it does demonstrate again, the importance of having a close board oversight of the risk , uh, associated with , uh, technology and the importance of management to board reporting on com , uh, compliance risks of the organization. Uh , open AI , I think is probably going to continue to have , uh, uh, spinoff governance developments and will probably be something that will be providing examples in boardroom fodder for months to come.
Speaker 3:So as we move to development number four, officer and director risk oversight,
Speaker 4:Well , uh, I should , I should be eating my fries , uh, heavily salted fries with this one. This is , uh, the, the McDonald's case from , uh, January and February of this year in Delaware, which is, I think in many ways one of the most substantive , uh, harder to read , but substantive of all the Caremark related cases in recent years. Um, and this makes kind of a couple of key points that , uh, I think it missed a lot of. If we see, you know, what , if we look at a couple things where there still is work to do from a board oversight perspective, Rob , certainly that con compensation and compliance issue. And, and it's also the issue of understanding that according to McDonald's corporate officers as well as board members owe a fiduciary duty of oversight as to matters within their area of responsibility. And also, number two, the case says that the information reporting system that the Caremark requires boards to make sure exists , is supposed to focus on the central compliance risks of the organization. Now , that's an undefined term and not just on its mission critical risks. So I think that there are, from a board's perspective, a number of, of unresolved questions or work to do to implement throughout the organization the lessons of McDonald's. And I think it's especially important for corporate officers , uh, to realize that they are being held to a , a where Delaware law will apply, that they'll be held to a Caremark like standard. And therefore, I think everybody, directors and officers are really motivated to make sure that an effective reporting system on central compliance risks is in place. Some work to do here still.
Speaker 3:Michael, you alluded to not being done with AI development number three, board oversight of ai.
Speaker 4:You know, I think this more than anything else, Rob , uh, it was way before , uh, OpenAI became an issue. But this is the point that the corporate board of directors of a healthcare organization has a role in artificial , uh, intelligence oversight. Um , I , I know that I have frequently been confused by , uh, references to AI governance , uh, which doesn't really mean , uh, board governance. It means more , uh, uh, uh, governance or , uh, compliance and oversight function at man at the management level . But I think as the regulatory framework for AI moves forward and who knows how it's gonna be affected by open ai , um, the board of directors is increasingly being pushed to a adopt its own approach and role with respect to ai. Uh, I think this would include, for example, will there be a board committee through which directors address AI application in their own companies and the creation of other internal structures that'll provide for board education, that critical monitoring and reporting, risk prevention and regulatory compliance. Bottom line, even though risk AI is a complex technology with a lot of board members probably don't understand yet, they're gonna have to, and it's gonna be vitally important for the board to send a message that it has a role in how AI is acquired, developed, and rolled out by the organization.
Speaker 3:So as we get close to our end board development number two, leadership culture ,
Speaker 4:Um, I think this is a , a , a good news development, Rob, the NACD in, in , uh, mid-September rolled out it's , um, uh, blue blue Ribbon commission report on , uh, uh, organizational culture. And it's really the first formal , uh, position paper I've seen from a recognized corporate governance policy organization that on co on organizational culture , uh, a leadership culture, it defines it, it demonstrates very clearly that kinds of problems that arise within an organization if there is a , um, an ineffective culture. And it identifies with, I think, remarkable clarity and detail how to go about iden building an effective culture. And I think it comes pretty darn close to saying, if not now, pretty soon, boards are really going to be needing as a matter of , uh, uh, governance expectations to take some of these steps to ensure , uh, an effective board culture because the failure to do so will clearly affect the effectiveness of the governing board. So I think that the, the NACD report and the message it sends and the detail that provides is , is , should be welcomed by boards and their nominating committees. I think nominating governance committee is where these issues will be addressed. It , it's a very , uh, very much a good news message and something that I think all boards in our industry should really tackle .
Speaker 3:And Michael, as David would say, and then the number one development that you've seen in 2023 is,
Speaker 4:Well, it's something that actually was mentioned Rob, in the NACD report as a cultural problem. And, and that is , uh, the, the challenge in confirming as correct both the board and management's perceptions and expectations of each other's responsibilities. This is an anecdotal development that I have seen with so many engagements over the last year where part of the problem within the boardroom is that the board doesn't fully appreciate the challenges of the chief executive officer and the need for autonomy of the CEO and essentially the need for the CEO to have support from an input and guidance from the board , uh, in order to be successful and, and confidently that the CEO doesn't truly understand the role of the board in the overall leadership of the organization , uh, uh, doesn't understand their particular fiduciary responsibilities and the role that they play in oversight and decision making . And I think the messages, and this is certainly made by NACD , um, directors and executives really are encouraged to jointly confirm their respective roles, responsibilities, and lines of authority in order to preserve the proper balance between governance and management and to make sure their collaborative partnership works. It's gotta be a respect that's, that's grounded in an awareness of the fundamental roles of both positions. And I, I think it where a little bit of time is invested, whether in a retreat or during a board member or side conversations, or a partnership between the chair and the CEO , uh, where a little bit of time is invested, this problem can be overcome where that time is not as invested, the problem confessor and it manifests itself in , uh, greater stress , uh, organizational stress between the executive suite and the boardroom. So that's number one. Although Rob, I'll tell you that if I were to per an umbrella or an overarching super duper number one over all this, I would always come back to , uh, the topic that's been at the top of my list in prior years since maybe 2018. And that is , uh, board member engagement. And very simply that the courts continue to hold board members across industry sectors to a level of conduct and performance that is essentially all in that there's a high level of expectation amongst the policymakers and the , uh, judiciary and regulators that corporate board members have a busy and important and fulsome job to which they must be dedicated to , uh, and as a result , uh, make sure that they're contributing sufficient time to the performance of their duties. Uh , that's always one that's out there in today's environment, whether it's on the top 10 or not,
Speaker 3:Michael, needless to say, 20 24, 20 23, I'm jumping ahead, has been one interesting year in healthcare and particularly in the governance space. We appreciate all that you've shared with our membership throughout the last year. It's been a year of change. We've reestablished meetings in person for our board. Our boards have tackled a lot of financial headwinds. Well,
Speaker 4:Rob , it's my pleasure and thank you and thank , uh, a HLA for this opportunity.
Speaker 2:Thank you for listening. If you enjoy 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.