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AHLA's Speaking of Health Law
Health Care Corporate Governance: Issues Related to Abstention and Recusal
Rob Gerberry, Senior Vice President and Chief Legal Officer, Summa Health, speaks with Michael Peregrine, Partner, McDermott Will & Emery, about the concepts of recusal and abstention, including what they mean, how they’re different, and when it is appropriate to use them. They discuss quorum issues related to recusal, whether abstention only applies to conflict of interest scenarios, best practices for effecting recusal and abstention, and the risks involved.
Watch this episode: https://www.youtube.com/watch?v=ax_4717AWcM
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SPEAKER_01:Hello, everyone. This is Rob Gerberry. I'm the Chief Legal Officer at Summa Health and the President-Elect Designate of AHLA. I'd like to welcome you to the latest in our continuing series of podcasts on corporate governance issues affecting healthcare organizations. Today's topic gets us into one of the areas of law for which us true governance geeks profess their love, but which in actuality is becoming an issue of increasing importance in the proper conduct of board oversight and decision-making. We're talking about the concepts of recusal and abstention, what they mean, how they're different, and when it's appropriate to use them. It's a technical issue to be sure, but one for which my experience suggests is popping up more and more for several reasons. One, there's an increasing public focus on actual and potential conflicts and on board members having the issues more on the top of their minds. Second, we're seeing more directors being risk adverse and being more willing to use abstention recusal than in the past to potentially shield themselves from liability. Third, some directors are using abstention recusal to avoid making a record within the context of a highly controversial or contentious agenda item. So it's natural we reach back into our files, so to speak, dust off our collective memories about state corporate law and Robert's Rules of Order, because our clients are more likely than before to seek our advice on these issues. And of course, as the governance advisor to the board, the general counsel or chief legal officer, likely teaming up with their chief compliance officer or their chief governance officer, can best brief the board and its key committees on these concepts. So joining me as always to talk over our topics today is my friend and colleague from AHLA, Michael Peregrine of McDermott, Lone Emory. Michael is an HLA fellow and a fellow of the American College of Governance Council. So Michael, we've got to start this one off with the obvious question. How would you define the difference between recusal and abstention?
SPEAKER_02:Rob, I'm glad you asked that question because some people use the terms interchangeably, and they're really not supposed to be used that way. If you strip it down to a basic level, recusal refers to the situation when a board member removes himself or herself from a particular matter coming before the board due to concerns with potential bias or conflict. You're bailing out of the whole thing. You're removing yourself from the entire process related to a discussion item or a vote. Abstention is typically considered as a more narrow concept, referring to a director's action in actually withholding or deciding not to vote. Again, you're deciding not to vote on a specific matter for reasons of bias, conflict, or other division of interest. The emphasis of abstention is on the final action and the final vote, while the emphasis of recusal is on the entire process of deliberation.
SPEAKER_01:Michael, as you know, lawyers, we always love to look for applicable references, definitions, something we can point to. Is there something you'd point our membership to on recusal and abstention?
SPEAKER_02:You know, I don't usually find these definitions or treatment in the bylaws themselves and only rarely in state corporation laws. If you're a real Roberts rule of order fan, and I'm not, nevertheless, there's a good discussion about recusal and abstention contained in there. The question is whether your bylaws and your processes have deference to Roberts rules. But I think, Rob, I'd also look at case law, federal and state, State ethical opinions and also the opinions of the state attorney general. Sometimes in those resources, you'll find a reference in the context of a corporation. Sometimes, though, I would say that when you dig into the research, you're going to find the discussion of recusal in the terms of a context of a judge, so you'll have to extrapolate from that. My advice to members is when they have some time, spend some time reviewing what the law of their client's primary state of jurisdiction is to figure out what's the most applicable definition of these terms. I'd want it to be at their fingertips when they go into board meetings. I think it'd be a fascinating research project for summertime. But, you know, Rob, as you've not discussed, I'm a Chicago White Sox fan. So you need to take what I think is fascinating with a little bit of grain of salt. I will say in fairness that Robert's Rules contains a pretty interesting discussion of all of this.
SPEAKER_01:As a White Sox fan, you have been suffering, Michael. We apologize. So when would you think it's appropriate for a director to consider recusing him or herself from a board-level process?
SPEAKER_02:Well, I think timing is the key when it comes to recusal, Rob, because it really needs to be addressed before the discussion of a specific agenda item on which a director may have a conflict is to begin. You know, when we look back at the goal of recusal, it's to remove the director from the entire process. So it becomes important that directors are made aware when the conflict or other bias actually begins. That gets us into the weeds of an effective conflicts disclosure and resolution process and the ability of the chief legal officer, maybe the chief governance officer, the chief compliance officer, to review future board agenda items against director disclosures. You know, it's interesting, Rob, I'm not a big AI person, but I've understood that this whole question of Tracking director conflicts disclosures against board agenda might be one way to be efficient in the identification of conflicts as they pop up on future agendas. But again, I think it's a really critical issue for our board members to ask this question. I love recusal because when properly applied, it's a terrific way to shield the board decision from sustainability challenges because the interested director has removed himself or herself from the get-go. There's no possibility that the conflicted director is going to be injecting himself inappropriately into the board's discussion of an issue or tainting the board's discussion of an issue because he or she is not there. So again, I think it's really important to identify, and this is usually the CLO's job, what's on the director's disclosure questionnaire and when is a potential conflict issue coming up on a board agenda so you can set the timing date for refusal way in advance.
SPEAKER_01:So Michael, any quorum issues you see associated with refusal? We're always looking to make sure we've got the right number of board members for a vote.
SPEAKER_02:Yeah, I think this is one of the areas where recusal can really trip you up. The basic answer is yes, there are quorum issues. So when you're considering a recusal situation, the CLO or CCO or CGO should take a look at state corporation law and the bylaws and see what they have to say about quorum, especially in the context of a recusal. My basic understanding has always been that the typical statutory approach with recusal is that All agenda items that call for a vote following a director's recusal can go forward. as long as a majority of the original quorum remains present. So you do get into some tricky math here, especially if the recusing director doesn't even attend the meeting as opposed to simply stepping out early. So again, bottom line, I think, yeah, you've got quorum issues with respect to recusal. Check the state law. Does the quorum, does it relate to a majority of the original quorum or does it relate to following the director's actual recusal? recusal and leaving the meeting.
SPEAKER_01:So Michael, is the always infamous close but not quite work as an acceptable standard for recusal in quorums?
SPEAKER_02:That's a real trip wire because I don't think so. It's one of those governance scenarios where I would call the Mary Poppins practically perfect in every way rule needs to apply. If you're going to recuse yourself in the process, then just do it. The CLO is going to be helpful in identifying the start date. But if you wait and you decide not to recuse yourself until the board discussion has already begun or even the documents are out, things of that nature, I think it's too late. I'm sorry about the reference to Mary Poppins, but Rob, I got to disclose I had a crush on Julie Andrews when I was 10 years old. So, you know, that rule sticks in my mind.
SPEAKER_01:Like corporate governance, these podcasts are all about transparency. So thank you for the disclosure.
SPEAKER_02:Full disclosure.
SPEAKER_01:Let's talk a little bit about abstention rather than Mary Poppins. Is it applicable only in conflict of interest scenarios?
SPEAKER_02:That's the primary and most appropriate scenario. questions as to whether the director can participate in the actual decision preceding the vote on which the director had a conflict can usually be resolved. Again, reference the state corporate law or the bylaw. But there are other scenarios with various degrees of justification when we see abstention apply, not just to conflicts. These include, and I'm just going to list them, and there could be others, but they include the fear of being the only director to express a particular opinion on the topic. In other words, you're abstaining because you don't want to look like an idiot. It could be a situation where the director strongly disagrees with the views of one or more board members, but doesn't want to vote because he wants to keep the peace within the board. And then there's a situation where there's a basic disagreement by the director with the statement of facts that's been accepted by a majority of directors. In other words, the director wants to abstain because he sees or she sees the facts in an entirely different way and there can't be any reconciliation. And then there's the question, sometimes you'll see an abstention. I had this last week where the director feels he or she simply doesn't have enough information to express a position, whether due to lack of his or her preparation or poor staff support. It's not a good look in either way. I'm not sure, Rob, if any of these additional reasons for abstention really work for me. I've always taken the position that you're serving on the board to share your perspectives, your experience, and your background. Using abstention on some of these non-conflict-related issues raises the issue of being a little bit too chicken for me, that you duck out when the issues get tough. So that's going to be a challenging political issue for the chief legal officer to address.
SPEAKER_01:So sticking a little longer out with the abstention, are there any picky procedural issues that you see in employment use?
SPEAKER_02:You handled that alliteration in the question well, Rob. There can be some picky procedural issues and it depends on the circumstances. Yet remember again, the act of abstention is that of declining to vote on a matter. So whether it affects forum will depend on whether the director simply didn't attend the meeting or or did and then passed when the voting is called. Most boards require, including in the minutes, the names of directors abstaining from voting. And sometimes with the rationale for why they abstain, they also will include a roll call vote with the number of abstentions. So, you know, Rob Gurb decided to abstain from voting on this issue because he slept through the previous meeting. And we include that in the rationale on the roll call vote. But again, I'm coming back to, I think it's always important to check what the bylaws say and what the state corporation code has to say about this whole question of quorum and abstention, because it's so important. And I think you've got to have that comfort before you give the advice as to whether or not there's a real quorum issue in an abstention.
SPEAKER_01:It looks like, Michael, there's a lot of moving parts on this conversation on certainties with putting in place refusals and abstentions. any easy button at all we can give to our members or to our directors?
SPEAKER_02:Yeah, I think education on what they mean is really the critical thing. What is abstention? What's recusal? When it's appropriate to use them and when it's not. It won't really make sense if it's going to be an essential part of director on boarding and regular conflicts and ethical education. I really think you got to pour the education to the board on this issue. Management and board leadership both really have an obligation to make sure that directors truly and clearly understand the terms and use them properly. We don't want to battle over whether or not a director properly or improperly recused himself or herself or abstained. But I think the real key, the real key, Rob, and this is something you and I've talked about before, the real key to making abstention and or recusal work is a conflicts identification, disclosure, review and monitoring process that works. so that directors can be sure that they'll be advised well in advance of a board meeting of agenda items that could trigger a reason for them to consider either abstaining or recusing with respect to a conflict. So the question would be, in my mind, you've got education and then you've got this whole process of a conflicts disclosure and ID process where the board leaders are going to know when these possible conflicts pop up and then they're going to let the individual director know that what's coming up and there's going to be a potential conflict at the next board meeting. And then the director can also independently ask the CLO or his own counsel what their first option should be in terms of of abstention or recusal. Some organizations, Rob, in my experience, will actually pay for a board member to seek independent counsel advice on the question of recusal or abstention. Others won't. But again, bottom line, education, proper conflicts process, getting the information to the implicated director well in advance of the meeting at which the conflict might arise.
SPEAKER_01:So Michael, this really isn't all theory, is it? this world of recusal and abstention. You're seeing this practically take place a lot in your practice.
SPEAKER_02:Absolutely. And again, I think, Rob, it goes back to the point that people are concerned from the board leadership side that the abstentions and recusals need to be effective in order to help support the sustainability of board decision-making. You want decisions... not to be tainted by conflicts. You want them not to be tainted by ineffective abstentions or recusals. And because of this, I'm regularly encouraging my clients to tighten up their conflicts and related policies to reduce these, what I again call sustainability risks. In my mind, kind of in addition, We have right now the need for an enhanced, what I call stealing a term from the early 2000s, an enhanced tone at the top in response to events in the larger business environment that suggests an increased willingness on behalf of leadership to normalize conflicts and ethical violations. We see the stories in the business journals all the time. And when you do that, there are going to be attendant risks to the sustainability of leadership decisions and to individual and corporate reputations. So, yeah, we're seeing a lot more. But what I worry about most all than anything else is that we're moving towards the normalization of certain types of conflicts and ethical violations, letting those fly, and those come back to bite us in the tail later on when someone challenges a board vote.
SPEAKER_01:So Michael, as directors try to see where those challenges may come from, where would you educate them on where those risks are most likely to come from?
SPEAKER_02:Rob, this kind of goes back to a point you made in your introduction that some board members use recusal or abstention to shield them from personal liability. And I'm not sure that works. And I think there's some case law that says if you've affected a recusal or abstention improperly, it don't count on helping you at all. I see the groups or the constituencies that look closely at conflicts and ethical violations and certainly recusal and abstention are the state and federal charity officials. the folks who work in your state charity divisions of the Attorney General's Office, as well as the IRS. And I do believe the IRS Rob Last Eye Checks does still exist. I think you're going to get pushback sometimes on abstention and recusal from dissenting directors, directors who are angry and who are complaining about board processes. You're going to get it from vendors and contractors who had felt they'd been misused by the company in both these situations when the dissenting director or vendor has a right under state law to sue the company. And then we also see these from challenges from federal corporate fraud regulators who are inclined to associate a corporate tolerance for conflicts of interest with a larger organizational willingness to kind of push the edge of the envelope when it comes to compliance. But Rob, most especially, I see the risks to board processes arising from abstention and recusal from what you and I have discussed is called the new media, the politicos, the propublicas, the stats, these well-organized and functioning non-traditional media who really know how to zero in on potential board controversies. I think that's the greatest risk that I see.
SPEAKER_01:So, Michael, with our podcast being full-service educational content, any mnemonic devices that you would offer to our members for distinguishing between recusal and abstention?
SPEAKER_02:Well, that's a state secret, Rob, but I'll tell you, if you can spell mnemonic for me, then I'll be happy to share with the group. But actually, I don't think I could have spelled mnemonic before this podcast. But actually, here's how I remember the differences, and it's kind of a circuitous approach. I look at the re beginning of recusal and remember that it's close to pre, which suggests something that happens before a big event. And as we've talked about today, the process for recusal really needs to start well before the subject or a discussion. So re, pre, before the discussion. As for abstention, I go a little overboard. I look at the stain part of abstain and think that that suggests the stain on someone's reputation when they choose to abstain from voting. So there you go. And I'm sorry you
SPEAKER_01:asked. That is pretty slick. Appreciate that tip. So Michael, thanks again for always sharing the latest educational thoughts and insights that you have related to these topics. We look forward to being back with you next month for the next in our series of governance podcasts. Next month, we're going to dive into the business judgment rule, what it means, what it means to officers as well as directors. And we look forward to being back together next month.
SPEAKER_00:Thank you. you