AHLA's Speaking of Health Law

Health Care Corporate Governance: Issues Related to Governance Versus Management

• American Health Law Association

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Rob Gerberry, Senior Vice President and Chief Legal Officer, Summa Health, speaks with Michael Peregrine, Partner, McDermott Will & Emery, about the distinction between the role of the health care board and the role of management. They discuss the current landscape of board and management roles and responsibilities, what corporate law says, what governance organizations are saying, the leading duties of board members versus those of management, decisions around organizational risk, and lessons for health care organizations.

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Speaker 1:

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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 of Summa Health and a member of the HLA Board of Directors. I'd like to welcome you to our latest and our continuing series of key corporate governance issues affecting healthcare organizations. Today's topic is one of continuing interest to our membership and their clients, the distinction between the role of the board and the role of management. It's the basic roadmap by which the organization's senior leadership navigates their approach to issues confronting the organization and whether those issues need to be the responsibility of the board of the management team, or is it a joint issue. It's an issue that becomes, has become more acute in recent years as CEOs encountering increasingly more complex agenda, which requires nimble and proper response from them while boards are feeling pressures from court decisions and regulators as to their oversight responsibilities and leading into management more than ever before. And of course, as the leading governance advisor to the board, the general counsel or chief legal officer is the likely source of guidance on where the distinction lies between the role of management and the role of the board lucky us and this profession. So today's podcast seeks to position our members to have a informed conversation with their client leadership teams on how to best address this sticky issue and reach some form of accommodation and understanding as to their respective duties and allocation of authority. As always, we're joined by my HLA colleague and friend Michael Peregrine of McDermott, will and Emery, who's also an A HLA fellow and a fellow of the American College of Governance Council. Well, welcome Michael.

Speaker 4:

Thank you, Rob .

Speaker 3:

So, Michael, before we get too deep into this topic, I'm wondering if there's risk of making too much of this issue. And by that I mean, do boards in their management teams ultimately have a cadence or a pattern that they've , uh, developed through years of work and informal allocation of roles and responsibilities? Or how formal do you think we really need to get in describing this , uh, level of allocation of responsibility,

Speaker 4:

Rob? I think it's a , a great question, and I think unfortunately, that we need as counseling , um, board and management on these issues that we need to be prepared to push them towards a little bit more formal , uh, recordation of roles and responsibilities. And I say that because from anecdotal evidence or evidence of my own practice, I would say over the last three years , uh, that I have seen more instances of real friction between the board and management, real leadership friction as to who does what than ever before. And I've been doing this now, this is my 46th year, you know, take a little history lesson I think is useful here. Uh, it was my experience that with covid and now we're what, a year six after that , uh, uh, started five or six, that the board was more than willing to take a step back , uh, and let management run with the ball. I , I think principally because the issue was so operational and quality of care related , and that there was a sense that the board , um, didn't have a lot to contribute to, to the conversation. I don't think that's correct, but I think that was the sense, and I think the state's , state attorney generals kind of gave the board some slack in that regard. I think you're seeing now that with all sorts of issues , uh, critical issues confronting the board, and, you know, as you were and I were talking before we started this podcast, you know, Medicaid issues and the , uh, and the issue there , uh, uh, other major crises, the board is realizing that there are issues where they need to lean in a little bit more. And I think that that's, you know, creating a little bit of, of friction that management says, wait a minute, all of a sudden now you're leaning in on me when you've been out for the last couple of years. So, but at the same time, I think , um, uh, management has to be certainly concerned about , uh, micromanagement. The NACD has flagged that it's an issue, but , uh, but I do believe also that management needs to be aware that the board is getting pushed as well , uh, from a , some , as you and I have discussed on these programs before, courts are increasingly looking at whether or not the board is adequately engaged on certain, you know , what I would call top of line issues. They're , uh, concerned about whether boards are exercising the proper amount of oversight and they're holding directors, especially in the for-profit world, viable , uh, for inaccurate , uh, inadequate oversight. Long way of saying, I think it's an issue that we need to, as council , continue to be prepared to address our leadership teams because the natural pressures of business on ma on management and the , and the issues on their agenda are encouraging management to , you know, we need to get things done quickly, promptly, and effectively. And I can't be slowed down by a board that's not prepared or not adequately engaged. And the board is saying, whoa, wait a minute. I've got courts and my lawyer's telling me that we need to be more engaged because we need to be exercising more oversight, more informed oversight. It's, it's a recipe for conflict, and we need to be prepared as council to support our internal constituents in , in resolving that conflict.

Speaker 3:

So often, Michael, I see, as part of that resolution , uh, the issue is brought up to chief legal officer. Alright , point me to what the law says. Let's move away from everyone's feelings on this. Let's point to black and , uh, letter law. Is there anything that you would point to our membership as far as what the corporate law statements are around this?

Speaker 4:

You know , it , we're fortunate, Rob, in this instance where the law actually does weigh in a little bit in , in kind of setting the table , uh, for the question of , uh, the line separating what's the responsibility of the board and what's the responsibility of management? Most corporate laws, most modern state corporation codes provide that the ultimate authority for corporate affairs lies with the board of directors, which the law says is supposed to maintain an oversight and advisory role towards management. I think if you, not that I encouraging our listeners to , uh, drop their headsets and go off and open up the state corporation code, but I think you'll see that they often require certain activities to be performed by full boards and things that can't be delegated to committees. Uh , but more importantly, I think that there's usually a statement in the corporate code saying, the operation , uh, responsibility for operation of the affairs of the corporation lies with the board of directors. However , uh, you'll essentially go to the next sentence of that code and say that the board may delegate the responsibility for management , uh, to competent executive management. You know, if you look at Delaware law as an example, Delaware says that the business and affairs of corporations shall be managed by or under the direction of a board of directors, but ultimately , uh, delegation of management duties to executive employees is gonna be subject to the board's ultimate authority. So what does that mean? It means that the , uh, corporate laws say the buck stops with the board, but they also say indirectly that they know that no board can effectively manage the day-to-day affairs of a business enterprise . So of course, they , they're supposed to delegate affairs to their executive management team, however, what they delegate and how they monitor that delegation is subject to their authority. So we start with that. I think when we're, when we're sitting down and having the conversation and it's, it's a bargain, it's a balance. But I do think it's important to say that the , uh, remind both management of the board that the law does have something to say about that.

Speaker 3:

That's great. So when you look at other governance associations that put out pronouncements related to best practices on governance , um, what advice do they give?

Speaker 4:

What we're looking at in a situation there, Ravi , we know what are our , what are our leading governance principles? Who , what are their statements? And, you know, we look at least from my perspective to groups like the Business Round Table , the common Sense principles , uh, uh, organizations like that, that , um, that generally weigh in on the concept of governance principles. And, you know, I think that , uh, they will say that we understand that the board has an oversight responsibility, but they , the board, in order to truly be effective , uh, must stick to strategic issues and allow the management to address tactical issues. Um, there is a , a kind of an inherent bias for the board to be , um, not standoffish, but to take a higher, more overarching role. And, and not to get out of the way of management, but to allow management to do its job and not to , uh, uh, complicate the agenda of the board with issues that are specifically or at least traditionally considered to be the role of management. And that's, you know, the only thing I I would say about that, Rob, is it's a little bit misleading in the sense that you don't want to draw from that a conclusion that the board should be , uh, you know , uh, absent on some of the critical operational issues of the day. Uh, I think that's a , that's a little bit of a problem. What, what's missing sometimes from some of the governance principles, which have not been updated in a couple of years, is the recognition of, of , uh, the red flag events. It's a recognition of the , um, black swan events, whatever examples you can say that there are just certain fundamental crises , uh, certain fundamental developments, which require the board to lean in more. That's the kind of judicial , uh, color. So again, you know , we're talking about a situation , uh, uh, uh, you know, critical rules and responsibilities. Uh, the general rule is let the board govern, let management manage, and then the really the question go gets down to what are the details , uh, you know, how does that work on a day-to-day relationship? How do you kind of, if you , where do you draw the line , uh, between what's governance and what's management? And I, and I do think that there's some guidance on that.

Speaker 3:

So Michael, like many of my peer general counsel, you're sitting in front of a board chair who is very , uh, deliberate and asking you, I want very prescriptive advice. As we onboard new board members, can you tell me what are the leading roles and responsibilities as we onboard board members?

Speaker 4:

Yeah, I, I think that if I was to brief a new board member, or if I was going to sit down , uh, between board leadership and executive leadership and say, this is generally where I would draw the line, I, I would say as to the board's oversight duties that they would include, a couple of this isn't gonna be a , you know, an all inclusive list, but I think they would , uh, encompass the following nu uh , uh, job number one is gonna be selection and evaluation of the CEO . I think , uh, then you would pick up , uh, establishing the ethical tone at the top of leadership in the organization , uh, ensuring the effectiveness of the corporate compliance program. We know that from the Caremark issues , uh, another critical role is approving the development of a strategic plan and ensuring its implementation. I wanna confirm that the board's role is to make sure that the strategic plan is developed and, and assure that management pursues that, and then monitoring the effectiveness of the plan. But the board is not to do the strategic plan itself. You know, then we have the traditional duties arising from Sarbanes and others about ensuring the integrity and transparency of financial reporting and disclosures. And , and I think , uh, and , and , and also I should add to that, financial plans. I think increasingly Rob, we see the board being charged with , uh, assuring the , uh, protection of reputational risks of trust, which is something that you and I have discussed in some previous podcasts. And then, then I would say another fundamental responsibility of the board, one that I don't think you see picked up in some of the governance statements, governance principle statements that are prior to say, 2020 is the obligation to exercise oversight of the workplace. Uh, I think those are the ones that I would , uh, say about, you know , where if I was to tell the board this is, this is in your corner of the world.

Speaker 3:

So now you switch from that hot seat with the board chair to the hot seat in front of the CEO and the CEO says, Michael, let's make sure that we're educating management on what our responsibilities are. How would you define those?

Speaker 4:

Well, the first thing I would say is it's much easier. I mean, the , the list of of board oversight bilities, and actually areas of where, where the board has fundamental responsibility is gonna be longer than managements, because management's responsibility, number one, is to run the day-to-day affairs of the business. And that encompasses so many the issues. But , uh, the , that includes, you know, on top of that, I would specifically say not only are you responsible for the day-to-day management issues, but you're also responsible specifically for things such as implementing , uh, and developing and implementing the strategic plan , uh, making recommendations to the board on capital allocations allocation, maintaining the compliance plan. Um, I think an increasingly important responsibility of management is the identification and analysis in response to enterprise and operational risk . The whole question of , uh, developing a risk profile of the organization, you know, preparing financial statements, preparing operational plans, selecting qualified man executive leadership , uh, driving talent development and developing crisis management, those kinds of things. But I think it all spins off of Rob, the fundamental responsibility that executive leadership is charged directly with running the day-to-day affairs of the business. Where there , the , the roles of the board and management merge is when the board is, is charged with specific oversight responsibilities of aspects of the day-to-day operations and management feels that the board's involvement there is, is too great, is too , is overwhelming. And, and that's the where I think we as council to leadership can encourage our internal clients to be more accommodating and more aware of what the motivations and interests are. Will there be times when the board, for example, engages in micromanagement? A hundred percent. Will there be times when management is less than engaging with the board on issues? You bet. The, it's easy to say, here are the black and white duties. We know the core duties of the board. Here are the black and white duties of management. Uh, this goes back to your first question. What council can do is help the both parties understand where you move away from the black and white and you move into the gray and where the parties have to work together.

Speaker 3:

Michael, where do you come out on ultimate risk tolerance decisions for the organization, whether it be how many years can we operate in the red with a negative operating performance or thinking of risks on the other side? Do we make a compliance disclosure? Do we enter into a piece of litigation? Um, how do you ultimately see that board management dynamic around risk tolerance?

Speaker 4:

Uh , you know, it's interesting because I've just been dealing with exactly the latter question. I think that , uh, there are just certain issues with, with respect to the long-term viability of the business that have to percolate up from management. And the board has the ultimate call where , and for example, the, this , let's just say on a compliance issue, Rob. Um , the question of , uh, whether we self-report or not , uh, whether we , um, engage in litigation or not. The homework, the , the, the development of the issues, the evaluation of the advantage and disadvantages, it has to come from the management. They are the experts. But those are the issues where the board has the final authority to say yes or no. And again, the, the board's responsibility is to be infor sufficiently informed on these issues. So management is comfortable that the board will make an the right decision. We don't talk about this enough, but the board management has every right to expect the board to be prepared, to be engaged and to be an effective partner , uh, to management and support management in the exercise of their duties. I see terrible problems arising , uh, when management loses confidence in the board's ability to make the final decisions on the kinds of issues that you say. On the flip side, I see terrible problems arise when the board believes that management is making certain decisions that at least should engage the board as a partner in making those decisions. It's ultimately, is there some kind of fundamental compact or understanding , uh, that it's a , that effective leadership is a partnership, a shared enterprise.

Speaker 3:

So you mentioned earlier about, you know , these issues continue to evolve. Where do you see the board management dynamic as we currently sit with boards that you're working with? Is it, is it healthy or is it gonna require more work?

Speaker 4:

I think it's absolutely requiring more work. And that's because , uh, critical funding , uh, issues relating to the viability of, of hospitals and health systems with respect to organic or non-organic growth. Uh, with respect to the current crisis , and I'm not trying to be political here, but the crisis environment we're in right now , uh, the , uh, if , if when we're looking at this, you know , uh, this issue today , late March , uh, early , uh, April, 2025, I , I think I have found that by and large, many large health systems are kind of suffering from , uh, just being overwhelmed , uh, by the , uh, level of turbulence coming out of Washington. Again, not trying to make a political statement here, but acknowledging, which I think is obvious, is the combination of the, the , um, flood of executive orders and change. Uh, it has, has made it difficult for management shoot for lawyers to stay up to speed on , uh, on what's going on, what's new, what's, what's a law, what's not , uh, and concerns about reimbursement especially. And the board has a special role to, I think, weigh in here, be informed, and be there for management. When management comes and says, chairman Berry , what do you think? Uh , and that, I think is what's most important in the current environment. If we continue to , uh, experience turbulence, which affects the long-term viability, operational, reputational , uh, financial of a health system, management is going to and should go to the board and seek its input and advice and counsel . And the board absolutely needs to be prepared to respond , uh, to that. Uh, they need to be informed. They need to be available. Again, as I said, they need to be a good partner to the management team.

Speaker 3:

So Michael, you've been a trusted advisor to many boards through the years. As you look to give advice to our members, whether they're inside council or outside counsel on how to best navigate this topic, any lessons learned?

Speaker 4:

Yeah, I would be proactive at this point, Rob, and say , and use some of the current, the current environment to say, is this a good time for us to revisit, to sit down and have the issue? In other words, I would force the conversation. Uh, it might be something that's unspoken. There might be turbulence under the , uh, surface , uh, in , in the , in the boardroom between executive leadership and management. And I think, I'm not talking about throwing a hand grenade into the boardroom, but I am saying that I think that general counsel can really do a service by simply prompting the issue , uh, uh, using this , the current situation to say, you know, how, how, how do we wanna handle this? What's the , uh, to talking to the management team? Is this something that , um, we should , uh, be involving board leadership on a little more? Should we be preparing more educational programs on the board? Uh, should we ask the board to be spending more time so they can be available to us? Raise it in a non-threatening, discrete way, but raise it notwithstanding, because I think that right now we've, we've gone through so many crises in our industry over the last 20 , 30 years. This one might be different, different kinds of issues. And it's a , it's an opportunity for the general counsel to play a great service by saying, Hey, how about let's just kick the tires on, you know, who does what here? Is this a , is this an issue where management can , uh, roll on its own? Is it an issue where management should be , um, involving letting the board know what it's doing before , uh, when it makes a decision? Is this is , is this an issue where the board absolutely needs to get , uh, management absolutely needs to get board approval? Those are healthy discussions. So, you know, you , you and the general counsel , I think can be because of its dual reporting relationship can be a , a very helpful guide, facilitator, what , uh, whatever in those discussions.

Speaker 3:

So Michael, as you look at this issue, is it gonna be an intractable divide or something where the respective constituents can ever come to a , a meeting of the minds?

Speaker 4:

Well, I , I'll go back to one of your earlier observations, Rob. I think that a , a , a good number of organizations have have settled into a comfortable understanding of roles and responsibilities and the lines of authority. And those are ones , uh, where you've got stable management teams and stable boards of directors. On the other hand, you know, boards of directors are , uh, especially focused on turnover and, and, and being independent and things of that nature. So I wouldn't say it's an intractable issue. I would say it's an ongoing issue, and especially as you said, onboarding where , where there's lots of turnover in board leadership on management team issue , uh, I would absolutely push the refresh button. Uh , again, perfect world is where everybody's used to dealing with each other and they in inherently know to take issues to the board or to defer to management. But when you have new folks coming in, whether you either the senior management level of the board, it, it's good to, to to be proactive, have those conversations so they're not arising in the context of real tension. That latter one, believe me, can be exceedingly divisive and can destroy the relationship between the board management if it's not direct or directly addressed.

Speaker 3:

Great. Well, Michael, not an easy topic by any stretch, but we sure appreciate your perspective. Uh, it's a difficult one that we all continue to tackle in this industry and your comments around having that proactive partnership and that advanced discussion around what are the standards upon which our board and our management team are gonna operate , uh, is really insightful. So thanks as always for sharing those thoughts with us. We'll be back next month for our next governance podcast discussion where we'll dig into the distinction between recusal and abstention and when they're appropriately applied and when they are misapplied. So thanks Michael again for , uh, all your insights.

Speaker 4:

Thank you, Rob, very much. Always a pleasure to be with you.

Speaker 2:

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