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AHLA's Speaking of Health Law
Health Care Corporate Governance: Developments in Board Refreshment Practices
Rob Gerberry, Senior Vice President and Chief Legal Officer, Summa Health, speaks with Michael Peregrine, Partner, McDermott Will & Emery, about the concept of “refreshment” and how health care systems can use this concept to effectively address board turnover. They discuss various refreshment tools such as director removal, term limits, mandatory retirement, evaluation mechanisms, director offboarding, and fitness to serve, as well as when to use exceptions in a board refreshment policy.
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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 the latest in our continuing series of podcast on corporate governance issues affecting healthcare organizations. Today's topic is one of continuing interest to our membership and their clients refreshment practices of the Board of directors. By refreshment, we're not referring to physical and emotional ability of directors to serve their companies in a fully engaged manner. While that's becoming increasingly important , uh, as a governance concern as well, given the volatility of today's regulatory, financial, and operating environments and the related pressures on board members, rather, we're referring to the various practices available to the board to periodically refresh their board membership and a manner that balances the value of organizational familiarity and experience with new perspectives and observations. It's more than traditional practices of removal, term limits and the rest. And our recommendation is that healthcare boards give thoughts to preparing a me menu of refreshment practices that might be available to them as they address the continued service of their members. And of course, as the leading governance advisor to the board, the general counsel or chief legal officer is a likely resource of guidance on effective refreshment practices, especially given the fact that they can implicate state corporation law and the common law. So today's podcast seeks to position our members to have a useful and informed conversation with their client leadership teams, including the chair of the nominations and governance committees, and how best to approach this issue of Director refreshment. And as always, for these conversations, I'm joined by our HLA colleague, my friend Michael Peregrine of McDermott, will and Emery, who's an HLA fellow and a fellow of the American College of Governance Council . So, Michael, before we get too deep into this topic, isn't refreshment just consultants speak for how can we get rid of a director?
Speaker 4:It , it's a good question, Rob . In a sense, it really is. Uh, it's consultants speak for sure, but it's really much more than how to get rid of a director. I use the term refreshment to, to reflect. What I think we see is the real sophistication of the broader governance question. How do we assure a useful and productive level of board turnover? And, and I'm not referring to any of the taboo topics here. We're talking about an organized approach to making room for new directors with fresh ideas and fresh perspectives while maintaining where appropriate directors with unique skills and experience. So it's a big picture process,
Speaker 3:So fair enough. But even given that, aren't we , were talking about director removal and term limits, aren't those the two biggies we're really concerned about in this space?
Speaker 4:Perhaps they may be the ones that are most well known within the boardroom, but I think they're really far from the primary refreshment options, for example. Uh , while I think every set of bylaws should provide the board with the right to remove a director without cause, that's a mechanism that in my experience, is rarely used because it's such a pain. It's controversial by nature, and, you know, you know, it's, it's likely to involve a lot of boardroom drama, maybe even litigation or certainly the threats of litigation in an extreme situation. Uh, but at the very least, it's an effective lever , uh, to induce resignation or or other departure from the board. But the process by which removal is affected should be locked down under state law. I , it , I , I think you, you , uh, really, really wanna make sure that if you have to use removal, it's consistent with what the statute might say and what common law might say in your state about how to affect a removal process. It's not a , uh, weapon to be used , uh, without ammunition, without knowing that you've got that process down. Right. Term limits are also an absolutely a recognized refreshment practice. Uh, but you know, the surveys that I see show that's , it's not as widely adopted as we might think. I mean, sure. We in a 25 to 30% level, yeah, if you believe surveys from the consultants, it's a refreshment tool to be sure. But I, I wouldn't say it's as ubiquitous enough to meet the definition of best practice. And , and, you know, best practice, I think is such a loosey goosey term, and we're really, well , if we use the term as it's meant to be used, we're talking about not , uh, aspirational goals that are above that, that are required by law. Um, term limits are out there, they're recognized, they're appropriate. I just don't think they're the one , uh, uh, one all be all .
Speaker 3:So I thought for my practice term limits were pretty clearly a best practice. In your opinion, they're not.
Speaker 4:Well, no. I think they're, again, but I just wanna say I , I think the survey showed that they're just not widely as adopted as one might think. Um, the, you know, and I think that it's not, it, it's a tool in the tool , uh, box of refreshment, but it's just not the primary or sole or gotta have , uh, vehicle. And I think the same goes for , uh, for mandatory retirement policies. They, they go hand in hand . I see nominating committees considering one or the other. Sometimes if they're pretty tough, they have both , uh, you know, mandatory retirement policies can be very effective. Um, again, I don't think their , their usage is, is broad as some folks , uh, would expect. It's, it's kind of like , uh, term limits. They're both major pieces in the refreshment toolbox. They just aren't the only ones. Uh, governance and nominating committees like to have options. They don't wanna be boxed into something that's mandatory if they can avoid it. And I think that's one of the things that our members should be aware of, that , that , uh, the extent that there are other options that are available, some of which are, are , uh, not mandatory, but are optional , uh, or, or give , uh, exceptions to , uh, hard and fast rules are becoming more and more popular.
Speaker 3:So now , Mike, we've had a lot of discussion with our board. Is a six year timeframe the right , uh, term limit for board members is a nine year , uh, term better as we look across the industry. Anything from your experience that you chair as far as timeframes for director term limits or mandatory retirement?
Speaker 4:Uh, y you know , uh, uh, I usually see nine years is what I recommend. Is there any scientific , uh, analysis that that's the right time? No, I think what you're looking at, Rob, is at what point does a director become entrenched, and that is the key word , uh, again, is , is by entrenchment, I mean, so involved, so ingrained with the board process and with the organization , uh, that there's a sense of loss of independence, that it's impossible for the, the, in the director to view himself as other than part of the organization. And, and whenever that happens, is it six years? Uh , I don't know. I mean, certainly you could do that , uh, nine years, 12 years. Uh , you're pushing it a little bit, but I think we all come back. It all comes back to the key point. We're trying to affect a level of turnover , uh, appropriate turnover at the board level. So we keep things fresh, we keep new ideas coming. Uh, we, we're not throwing out really skilled board members unnecessarily, but, but we keep the , uh, pot boiling, so to speak.
Speaker 3:So, Michael, apart from term limits and removal, you know, what are other big refreshment tools that you see?
Speaker 4:Well, I think first and foremost , uh, the one that I think is really, really, really critical these days is , uh, uh, full board and individual director evaluation mechanisms. I think those are really key in terms of facilitating board turnover. Uh , you know, if you do them right, and there are a lot of different ways to do it. And certainly I always like to say you do it in , uh, in a manner consistent with the attorney-client privilege as possible, because sometimes you ask questions and you get surprising answers. But if you do it effectively, evaluation processes will provide the nominating governance committee with really useful snapshots of performance and reliability. They can inform committee decisions about renomination and compensation. Rob, I wanna underscore that. You know, I think that , um, I, I am seeing increasing situations where board members are challenging , uh, their , uh, their failure to be renominated for another board term. And in that situation, a file that, you know, like it's a property, right? Or something which is crazy, but you see it , um, and, and a file at the nominating governance committee level that shows that this board member is viewed poorly by , uh, his or her peers can be very effective. I also think that if you're going to enter into a director compensation program, which , uh, as you know, you and I have talked on this program, I'm a huge supporter, you really need to link it with , uh, an evaluation process. Very difficult, I think, to be able to stain under, if scrutinized a director compensation , uh, program, if you don't have it tied to some type of performance evaluation. Otherwise, it's, it just, it looks like there's no protection , uh, or no quality , uh, associated with it. So , uh, I , again, I think we start with , um, d uh , full board and individual director evaluation , uh, mechanisms. But then I think we have the whole concept of offboarding. Uh, now I wanna say that director offboarding is a focused board process. It's really a concentrated commitment to achieve a structured separation. In other words, we're gonna negotiate and work out a separation of from certain directors and the board without prompting controversy, or ill will. In other words, you're kind of, it's a process that greases the skids for a director and the , uh, the board to kind of part ways it's intended to allow the board to achieve the necessary turnover more quickly and expansively than through term limits or mandatory retirement ages. And more gently than through removal doesn't always work, but it's, it's increasingly popular as a kind of environmental process to approach turnover.
Speaker 3:So, Michael, as we think about the concept of offboarding, could you expand on that concept a little more?
Speaker 4:Yeah. As we talked about a second ago, offboarding is , is all about facilitating a director's departure from the board in , in a, I guess, quasi friendly manner. You know, OVERBOARDING is all about addressing director attentiveness. Onboarding is all about facilitating a director's entrance to the board. Uh, NACD, for example, has been a strong advocate of offboarding. And , and it's, if you, and in some of this material, it says that the concept of directorship isn't to serve as long as you want to, is to serve as long as you're needed. And I think that's the essence of, of offboarding. It , it's a process that's grounded in a shared understanding amongst all directors of why someone was appointed as a director and of the board's expectations of performance. So from the beginning of board service directors are ideally made aware of the potential that they may be asked to leave the board before their term is formally concluded. It's a performance based concept, Rob . It's not part of the traditional, voluntary, not-for-profit board experience, for example. It's much more part of the for-profit board experience. Uh, but I think you're seeing off-boarding becoming more popular because as we, you mentioned before , uh, uh, healthcare boards just can't afford to carry people who are not performing their jobs well.
Speaker 3:So Michael, the concept of fitness to serve, can you expand upon that?
Speaker 4:Well, that's a , uh, it really, it's, it's one of my favorites from one sense, because, you know, we always see in , in newspaper stories about people who get into controversial situations and , um, uh, have moved on from the board to pursue other interests or something like that. And that really, in , in my mind, that suggests that there's been a fitness to serve trigger . Uh, I have been involved in too many situations with clients where something unfortunate has occurred with the director's personal or professional life. Uh, in the, in the question is, hmm , is this person, do we still, from a reputational perspective , uh, uh, from a, from an immediate attention perspective, is it still a good thing for this person to sit on the board? Um, it's a tough policy to draft, but it can also be brutally effective. And it works kind of like an advanced resignation that the chair will just keep in his or her drawer. Uh, the, the triggers can range from something basic, like a change in job status, where the old position was advantageous in terms of exposure or experience or prominence. You know, kinda like we as a company always want a representative of X serving on our board, and if you're not on X, then we don't need you. Then there's the extreme, A director's indicted , uh, is an officer, a director of a company, then there's bankruptcy is accused of some form of moral turpitude. You know, there's a whole list of situations that if they occur, allow the chair to accept the previously signed resignation letter that he holds in his desk drawer. Uh , now the , the problem is, I shouldn't say it's a problem, but the challenge is that there are a lot of boards who wanna be in a position to move quickly beyond a director who sudden notoriety is probably the best word, becomes a reputational concern for the board. But a lot of boards, you know, decent people, they also wanna be fair and loyal to a director who served the company well. And you get into the whole presumed innocent , uh, argument. And that can make for a pretty contentious boardroom meeting. All , all I'm saying, Rob, is I think that that needs to be considered at the nominating governance committee level. When you're talking about refreshment options, again, is it pretty much out there? You bet. Is it easy to draft? No. Uh, are , are you happy it's there when you need it? Yeah. Uh, so again, fitness to serve , uh, deserves to be in , in the tool , uh, box of refreshment options.
Speaker 3:So these concepts seem severe, this , uh, fitness to serve , uh, the offboarding concept, just how do you see those practically playing out? Are are boards adverse to them or embracing them?
Speaker 4:Oh , I think that boards are becoming increasingly aware that , uh, that that performance has to be a such a level that they need to have something policy-wise in writing to affect turnover. Uh, we're in an environment now where, you know, we're talking about health systems in the nine, 10 , uh, 11 figure , uh, annual revenue numbers. And there's just simply , uh, you, you can't have a low performer on the board for very long. Everybody has to hold their own weight, especially in situations where you don't have a large board. You , you need to have a more formal process for removing board members. And again, as I said before, I think that we're , uh, we're, we're seeing situations where board members don't want to leave the board, or they complain that they have some type of legal right, or equity and board service, which is crazy, but it just, you know, they hire some , uh, uh, an attorney who's willing to take it on. And all of a sudden you just have a terrific controversy , uh, books and records requests and things of , you know, you , you just simply don't want a battle over moving somebody off the board. So that's a long way of saying, yeah, I think boards are looking much more closely to , uh, how effective their refreshment policies are because they just can't afford to have a controversy. Uh , you know, and the controversy, Rob, could be a situation you're gonna have a little battle of, of , and we may talk about this in a few minutes, more about when's the when, if you're gonna have a mandatory retirement, when does that occur ? 72, 75, 80? You know , I don't <laugh> as , as someone who's approaching the , the 70-year-old barrier , boy, boy , uh, that's, that's , uh, that's kind of frightening. And, and so I think there needs to be conversations about, within the board, about what works best if we're gonna have a mandatory term, if we're gonna have a mandatory retirement age, what is appropriate under the circumstances.
Speaker 3:So it sounds like you're advocating to our membership that we should have a written board refreshment policy with standards and really making this more objective , uh, as we look at potential challenges versus subjective at the governance or nominations committee level as far as , uh, board members continuing. Am I hearing you correct on that?
Speaker 4:Yeah, and I think you see that , uh, a lot of the , uh, statements of governance principles, Rob will say, well , for example , uh, we're not advocating , uh, best practices or retirement , uh, limit , uh, levels as mandatory. We're not saying that they're best practice that you should have them or that you shouldn't have them, but we're saying is that you should have a policy that discusses your approach to refreshment, which is , I think is interesting. Uh , in other words, they're , they're , they're not safe . Whether , let's just take for example , uh, the business roundtable or common sense principles of corporate governance. They're not saying you need to have one or the other, or both. They're saying whatever you do, you should have a policy that describes your approach to turnover. Because I think, again, more than the , the real key we keep coming back to and refreshment is , uh, do we have a process that's effective enough to pursue director turnover without causing great damage to the fiber of the board? And a policy will lay that out.
Speaker 3:So as we think about potential exceptions in that policy, how do you feel about boards , uh, adopting exceptions to those policies and putting those in place?
Speaker 4:Yeah, I, I , I'm not the most flexible person in the, the world, simple people, you know, like rules and no exceptions and things of that nature. But I, I do believe that we're, we're seeing more and more , uh, uh, situations where exceptions are being recognized , uh, for , in unusual circumstances for exceptions from mandatory policies. The , the most often I am seeing is , uh, for term limits where you say it is just critical to our company that we retain the chair of the audit committee for another couple of years because of the nat , you know, the str strategic situation we're in as a corporation, we, we just, it would be disabling to us to lose a , this person at , at this time. Same would go, for example, if someone's the , the head of a strategic or m and a committee or something like that, and you're in the middle of a transaction where it's just really clear that , uh, losing this person from the board because of some mandatory provision , uh, could be , uh, critical. So I think that's, those are situations where acceptions work in the same way. Uh, you know, the , the , uh, age limitation, age mandatory retirement thing, it's just so subjective. But , uh, you know, that we see , uh, you know , uh, when , when people are performing at , at a very high level , uh, uh, well into their seventies, it , it is very, you , you can say, look, we're, we're gonna lift the requirement because this person has, you know, more years to go into it without before terming out, and they're just an extremely effective board member. At the same time, we see examples of, of people in the public world where , uh, their ability to function at a high level dramatically declines after a certain age. So that has to be handled, I think, with the real discretion. But policies that say, we'll consider exceptions to the general rule, I think are just smart. People are different experiences or different circumstances are different. You don't wanna be locked into a black and white situation.
Speaker 3:How about exceptions, Michael, for board leadership? If you become a board officer, does that grant you an exception to , uh,
Speaker 4:<crosstalk> ? Oh, yeah. I , I , I think so. I think many , uh, of our, my clients Rob , uh, do have a situ , an exception or carve out if, for example, the vice chair would otherwise term out if you didn't give an extension. So I think that's increasingly normal practice.
Speaker 3:Great. Well, Michael, thanks as always for adding another level of complexity to the world of healthcare corporate governance. Refreshment seems a little complicated and a lot more sensitive as it relates to board members than maybe our membership or I initially would've thought. Uh, but in all seriousness, thanks as always for sharing your thoughts with us. We'll look forward to being back next month for our next governance podcast discussion, where we'll dig into the distinction between recusal and abstention when they're appropriately applied and when they're misapplied. So, Michael, as we begin baseball season, all the best of your socks, and I look forward to being with you next month.
Speaker 4:Thank you, Rob . Worst team in baseball. Let's not forget that.
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