AHLA's Speaking of Health Law
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AHLA's Speaking of Health Law
Health Care Corporate Governance: Conflicts of Interest in an Environment of Scrutiny
Rob Gerberry, Senior Vice President and Chief Legal Officer, Summa Health, speaks with Michael Peregrine, Partner, McDermott Will & Emery, about what the change of administrations in Washington, DC can teach health care boards about managing conflicts of interest. They discuss lessons learned from the current transition, including the difference between “potential” and “actual” conflicts of interest, financial interests, personal ethics programs, and non-traditional arrangements and relationships.
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Speaker 2:ALA's, popular health Law daily email newsletter is now a daily podcast exclusively for a HLA premium members. Get all your health law news from the major media outlets on this new podcast. To subscribe and add this private podcast, feed to your podcast app, go to American health law.org/daily podcast .
Speaker 3:Hello everyone, this is Rob Berry. I'm the Chief legal Officer at Summa Health and a member of the American Health Law Board of Directors. I'd like to welcome you to the latest in our continuing series of corporate governance podcasts related to governance issues that affect healthcare organizations. Today's topic is one of many, which our listeners are called upon to advise on a regular basis. The topic is the board's conflict of interest process, conflict of interest. Management's always an important corporate governance principle and any kind of environment, but it's even more so in the case of the transition that's occurring within our presidential administration in which nominees and their financial and other interests are scrutinized by Congress and the media. That in itself isn't anything new. It's something that occurs every four years. But in this current political environment, the issue of nominee conflicts of interest has received a particular intention , and that level of attention is spilling over into our corporate settings. It's sharpening the awareness of regulators, board members, corporate constituents in the media as to what kind of relationships board members may have that create conflicts of interest issues. So the basic message is boards and health lawyers. As we start into 2025, we should be more prepared than ever for this increased scrutiny to help us with building out that plan. I'm joined by my friend and colleague, Michael Peregrine of McDermott. Will Emory Michael's, an HLA fellow, and a fellow of the American College of Governance Council . So Michael, is it really a good thing to model best practices and board governance after developments in dc ?
Speaker 4:Well , well , Rob , we should have a laugh line in here, but I think in this instance, it , it, it does make sense , uh, because as you said, the entirety of the administration transition process is offered tremendous tutorial on how we identify and disclose and resolve conflicts. And, and by that I mean this, this is a very traditional process, which, as you say, goes on every four years. Uh, but it , it carries on conversations about nominee conflicts in a very public way, and it's just a great learning tool. It's not that everybody wants to watch all these, but again , uh, the manner in which they've been the shared in the public, I think is , is , uh, is a super training for boards.
Speaker 3:But many of our members, Michael, don't have , uh, board members that are being nominated for a position in the administration.
Speaker 4:I'll speak for yourself, bill . I was hoping to come out of this as being a nominated for chairman of nasa, but I guess I'm gonna have to wait for another four years. Uh , but , but seriously, every time in that process, there was a reference to a possible conflict, whether it was material and whether it would be better identified or managed through some form of personal ethics policy. So it serves to educate board members just as well as senators. There's just a , just in terms of the topics , lot of overlap
Speaker 3:And reporters, regulators, plaintiff's counsel as well. I presume
Speaker 4:They're all interested. Sherlock, you presume correctly. Uh, but I wanna make clear that by citing these nomination processes as teaching moments, n neither you or I are making any value judgements on the nominees or the personal or financial interests that are being discussed or how those are gonna be worked out. That's the job of the Senate, not for two health lawyers on the podcast.
Speaker 3:So with that CYA behind us today, what are the most applicable lessons that you're seeing from this year's transition process?
Speaker 4:I think when we're talking about stuff like this, we , we always wanna begin at the basics. And as, as you know, in most states, corporate board members and officers have a fiduciary duty of loyalty to act in the best interest of the corporation. That includes an obligation to avoid where possible relationships and arrangements that could create an actual potential conflict with the corporation and a related obligation to disclose them when they might arise. In other words, I think a lot of people say, well, we have a conflicts of interest , uh, obligation. Well, you don't have an obligation to go into conflicts of interest. You have an obligation to do your best job to stay out of them . And , and that's really hard to do. But I always tell clients, you just can't have your board members after they're appointed the board go hunting for arrangements. They know we'll create conflicts. That's the problem. The other problem is when they have 'em, they gotta raise their hand and disclose 'em . So , uh, you know, I think the other thing to keep in mind is , uh, for our listeners who are representing , uh, other types of entities like LLCs, LLPs, and other kinds of joint ventures, they really need to check the applicable state law to see how the , the , uh, underlying statutes cover the duty of loyalty and whether it can be waived. Uh , we know it can't be waived in the context of a corporation,
Speaker 3:And as I seem to recall from law school, the duty of loyalty is a big issue in this fiduciary world.
Speaker 4:Yeah, absolutely. Judges and regulators have a lot of intolerance , uh, for it's violation. And, and I think it's really the concept of , uh, and the worst case scenario was a media story , uh, discussing a conflict of interest because that creates smoke, whether it's appropriate or not. And from that basis, you know, a , a good example is the attorney general's office in most states have a , have the technical equivalent of a clipping service, and they'll have some 21-year-old kid or somebody like that checking the papers, checking the wires, and if they see something that , uh, in their jurisdiction that talks about conflict of interest, that gets , uh, shot up to a couple floors up upstairs in the building, and they're gonna be monitoring this. So we , we care about this stuff a lot .
Speaker 3:So you mentioned potential conflicts of interest. Is there a meaningful difference in your opinion from actual conflicts?
Speaker 4:Yeah, and I , I think what we need to get into a little bit of the weeds here because it's important , uh, in terms of , uh, conflicts of interest , uh, review , um, uh, most conflicts policies simply refer to the term conflict of interest without distinguishing between conflicts that are actual and conflicts that are potential. And they also , uh, rarely touch on arrangements that simply create the appearance of a conflict. We don't get into gradations perhaps as much , um, as we might in our conflict policies. So there's a lot of unintentional wiggle room in the policy on what's, what has to be disclosed. And, you know, realistically, you , you don't want the officer or the director , uh, to make that distinction. The , the board and its governance committee or whatever wants to make that distinction. But we, they, we want the opportunity at the board level to at least consider arrangements that create the po potential for or for the appearance of a conflict. And I wanna repeat that . Um , the , the potential for conflict and the appearance of conflict, the board wants to know all of this. If it's just, if it's , uh, the business arrangement or other arrangement is creating bias, or if it looks like it's creating bias, it's the optics thing. So I think one of the governance , uh, committee questions is if it wants directors and officers to disclose potential conflicts or arrangements to create the appearance of a conflict, they're gonna need to be specific about that. That has to go in the instructions on the disclosure form . It has to be clear to the board members, and they're gonna need training on what that is. Um, and I I would also say that we've got some new case law here coming outta Georgia , uh, last year, that gives a , a greater guidance on why , uh, boards should care about the appearance of conflict alone. So, you know, I think there's a , a , a lot to follow in this regard.
Speaker 3:And did we learn anything about financial interest from the nomination process ?
Speaker 4:Yeah, I think actually that's been one of the most fascinating and valuable processes from a board perspective. Uh, WW with the transition process. And , uh, I think we've learned two things. One, you know, it's kind of obvious the type of people who are nominated for senior government positions are gonna have complex financial portfolios. They've been successful business people , uh, uh, in , in many respects. And those portfolios have to be examined closely for potential conflicts with government interests if they're the nominee. And the same goes for the type of people who are offered, considered for board positions, by and large, gonna be people with , uh, a lot of business relationships in the community , uh, and , uh, and the significant personal investments of their own. And the issue gets more complicated , uh, when the company they're gonna be serving. Also, it's a complex asset and investment portfolio. There's a lot of work to be done in vetting those . I think we also learned from the , uh, the hearings is that financial interest can come in a variety of arrangements , both business and fam . And I think we also have learned that, that the protections and barriers that we sometimes think to work to remove bias or conflict out of the relationship don't always work as well as we would like.
Speaker 3:So there really does need to be a close diligence of a director's financial holdings. Doesn't there?
Speaker 4:You know, I , I , I think that's absolutely the case. And , and this is a little bit of heavy lifting. Uh, i , I believe it's important for both the organization and the individual to really invest time and effort to disclose as much as possible and, you know, to keep the proverbial proverbial head on the swivel, so to speak, in terms of agenda management, strategic planning to kinda keep an eye on what's coming down the pike on relationships and transactions that might trigger conflicts of interest. Uh , this kind of diligence protects both the director and the company.
Speaker 3:Meanwhile , it seems like those , several of the prominent nominees have adopted their own personal ethics program to help them avoid conflicts from arising and to provide them a mechanism to marginalize any associated risk. Is that something individual directors within a corporate entity should adopt as well?
Speaker 4:I, I don't think so. I, you know, first of all, I , I , I commend those people who have adopted their own , uh, ethics programs and hired people to monitor them for , I mean, that shows that they're, to me, that they're, they're trying to do the right thing. Um, I don't think it's, it carries over necessarily into the corporate setting , uh, unless , uh, uh, uh, you're , you're , um, bringing on a , a gazillionaire onto your board and that gazillionaire, you know, has heavy investments in healthcare industry, a , a good conflict of interest disclosure program is gonna help reduce the complex identification risk that arises . But as I've said before, that kind of program works west best when the process is well staffed by teams from either legal or compliance or in internal audit. And individual directors are committed to identifying and disclosing because it's in their interest to do so. I will say that some of these individual nominee ethics plans resemble the kinds of conflicts of interest management plans that, that our organizations will adopt from time to time to manage conflicts that the board may have accepted as part of approving a business transaction. And, and we all do this, we all will say, we're gonna, we're the conflict not withstanding, we're gonna go ahead with this deal, but, but, but, but we're gonna manage the conflicts on an ongoing basis. And if, and if it's not, if it , if it's not working out, we'll take some action. Uh, but I think as a fair number of our listeners are gonna say, those types of plans don't always work out as well as we would like , uh, human nature of being what it is , uh, to resist the pressure of , uh, identifying a conflict under a management plan, let's say six months or a year after the deal has been done. That takes a certain amount of courage, and it's just, it's just tough. So I do, do think these ethics programs are interesting. It's , uh, useful to consider how they've been drafted. They , they , they might provide some good examples, but , uh, I, I don't think an individual director needs one, but I do think they, again, remind us of, of the value that a well crafted and supported conflicts management plan can actually have.
Speaker 3:So Michael, what about some of the more non-traditional arrangements and relationships that have raised conflict concerns in some of the recent news reports?
Speaker 4:Rob , I think that's one of the real challenges for the whole conflicts process for both the individual director and for the company. I kind of refer to these as potential conflicts of interest that arise on the merger , uh, excuse me , on the margin that , you know , on the periphery of relationships that we traditionally recognize as creating a conflict, we're so fixated on employment relationships, contracting relationships, vendor relationships, that we sometimes aren't as focused as we should be , uh, on the kinds of financial and personal relationships that on the one hand have a real potential to create a conflict of interest, but on the other hand, aren't so obvious, they're not so clear , it's hard to see the conflict from them .
Speaker 3:So, Michael, can you give us some examples?
Speaker 4:Sure. Uh, I think a lot of them are , involve personal relationships, family and, and , uh, other , uh, uh, personal relationships within and outside the boardroom , uh, family relationships, gifts , uh, inboard business arrangements, complex stock ownership arrangements , uh, and over overlap and obviously overlapping board positions with actual potential competitors, which have their own antitrust considerations. But again, they're the kinds of things , uh, relationships. And , and that's why I say personal and financial relationships are a bit of a particular issue because we , we, we, they don't immediately project to say, well, where's the conflict from that? Uh, uh, and then if you look back and follow the money or follow the interest, the questions, oftentimes the conflicts arise , uh, if they , uh, create the potential for influencing one of the parties , uh, to act in a biased manner. And so , um, you know, they're just, you know, they're , they're potentially problematic, but they're just rec less recognizable as , you know, what we're used to seeing investments, ownership, interest, employment, relationships, things of that nature, that, that are the , the bread and butter of our conflicts policies. And, you know, I think what's particularly the case is in today's very intense competitive and media environment, there's a lot greater chance for these kinds of on the margin arrangements , um, to attract the interest of the media and to , and to be characterized as creating an actual or apparent conflict. A board member might say, you know , I never saw that one coming. And so I think as health lawyers , that's the where I would really place a lot of my focus , uh, on and digging down and kind of , uh, yeah , looking at not just across the street, but down the block and around the corner, so to speak , uh, for the potential for conflicts.
Speaker 3:So I know there's always questions when we send out our conflict of interest questionnaire. I'm thinking it may be a hard sell at the board when we get down to that level. I'm not sure those kind of marginal conflicts are gonna be obvious to , uh, our individual directors and thinking through how we best educate.
Speaker 4:I I think that's right. And , and they're not gonna be, and people are gonna push back and, and the board member will push back to the CEO and the CEO will push back to the, to the general council . Uh, you know, you see this happening. So I think the best way to do it is when examples of these kinds of arrangements , um, pop up in the newspapers or whatnot , you flag 'em , you get 'em to the governance committee , um, and you , uh, identify them that way and you say, see, this is what we're talking about. Um, you know, I think , uh, a perfect example is , uh, intra board business arrangements or personal arrangements, relationships with people, you know, it's none of our business , uh, you know, in a sense to, to call out , uh, personal relationships between board members. Uh , but to the extent that they are , um, uh, I don't know the right word, I guess intense enough that, that they create the ability to influence somebody's thinking. But we have to say that . So bottom line , uh, we, we as council need to be scouring the , the, the media for , uh, examples in which these kinds of relationships have been cited by the media as creating a conflict, and we build up that file. I think that's the best and most practical way of getting board interest.
Speaker 3:So Michael , it sounds like the takeaway in the homework from all that says , the governance committee's next internal education project should be watching C-SPAN returns of those Senate hearings from January. Yeah.
Speaker 4:Wouldn't that be torture , uh, almost as bad as watching Notre Dame get blown away in the national championship game?
Speaker 3:Well, Michael, as an attendee at that game, I might remember that national title game a little bit differently. I think Notre Dame had a great second half. They really made it tight there at the end, and a lot to be proud of,
Speaker 4:Hard .
Speaker 3:He might be conflicted.
Speaker 4:Well, all I know is that the TCU beat Michigan a few years ago and , and went to the championship game. I, I think they didn't , uh, I , I can't remember the score or what they, I think they lost to Georgia, but I , I think the score , uh, never was fully recorded in the record books. But , uh, I'm glad you had a nice time in Atlanta, and you'll have to tell me more about that. Um ,
Speaker 3:16 degrees for the national title game , uh, is only good if your team wins. So it was tough. I ,
Speaker 4:I guess so. Well, you know, we, we appreciate as always, Rob the chance to talk about these. And actually, I do think that, you know , um, if you're really into it, the , the CSPAN stuff, that's not a bad idea for the governance committee to the extent they're available to sit back and, and, and spend some time , uh, watching , uh, the Senate, a particular committee interview, one of the nominees, you , you , you might get a chance to focus in on some of these issues that we're talking about. And really, I think the bottom line message is we really in the coming year need to be worried about the conflicts on the margin, the , the nuances, the , the , the fringe issues, the , the relationships that we didn't normally consider to be cons , uh, creating a conflict. But when you look at it more closely, the potential for bias is really there. And I think that's , uh, not only the job of council, but also the job of the committee members themselves.
Speaker 3:So to our members, Michael and I are excited to share , uh, continuing thoughts this year with you on governance. Michael, thanks , uh, for sharing those thoughts today. We'll be back next month for our next podcast governance discussion, where we'll dig into the always interesting question on how is that line between governance and management walked . So Michael, thanks very much for being with us today.
Speaker 4:Thanks, Rob . Always a pleasure.
Speaker 2:Thank you for listening. If you enjoyed this episode, be sure to subscribe to ALA's 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.