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AHLA's Speaking of Health Law
Health Care Corporate Governance: NACD’s Report on the Board/Management Dynamic
Rob Gerberry, Senior Vice President and Chief Legal Officer, Summa Health, speaks with Michael Peregrine, Partner, McDermott Will & Schulte, about the release of a new report by the National Association of Corporate Directors on “Building a High-Trust Board-CEO Relationship.” They discuss the issues and concerns the report is trying to address, along with the report’s recommendations.
Watch this episode: https://www.youtube.com/watch?v=3ppXlG-9vy0
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SPEAKER_01:Hello, everybody. This is Rob Gerbery. I'm the Chief Legal Officer of Summa Health and the president like designate of the American Health Law Association. 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 is Rip from the Headlines. It focuses on a pronouncement related to a report from the National Association of Corporate Directors and building a high trust board CEO relationship. As many of our listeners know well, the demands on health industry leadership, both CEOs and boards, is rapidly evolving. Not only must they confront the same technology, economic, societal, and global disruptions that all complex businesses are facing, but they also must confront the regulatory, financial, and constituent disruptions that are unique to the healthcare industry. And these demands and disruptions place unusual and undesirable pressures on the board and the CEO's relationship, sometimes to the detriment of organizational leadership. To help these leaders confront these issues, the new NACD report offers a series of recommendations as well as a detailed toolkit. And both the recommendations and toolkit are tailor-made for interpretation and application by the healthcare corporate council in his or her primary role as governance counsel to the board. And as always, I'm joined today by our HLA colleague, Michael Peregrine of McDermott, who is also an HLA fellow and a fellow of the American College of Governance Council. So, Michael, before we dive in, I understand you had the unique privilege and joy of coming recently to my home state to hang out with some governance regulators. Tell us the story.
SPEAKER_02:Well, Rob, you got to remember I sent two kids to college in Ohio, so I think you owe me a rebate given how much I spent there. But you're right, I did spend a couple of days of Columbus. You know, over the years, I've been really fortunate enough to speak uh frequently to the annual meeting of what they call NASCO NAG, the National Association of State Charity Officials and the National Association of Attorney Generals. The NASCO folks are those who serve in the charities bureaus of our state attorneys general offices, and I think who do really care very much about how not-for-profit corporations, including health systems, govern themselves. And I, you know, I think it's important to note for our audience that uh these regulators, at least from my perspective, are very committed to preserving the nonprofit sector. And they're committed, therefore, to its support. And they want to be available to not-for-profit organizations with questions or comments or concerns. So I think it's good for our listeners who do work with not-for-profit organiz healthcare organizations, know who the charities officials are in their state, and to reach out and and and maintain a relationship with them because I think uh it's a good it's a good mix. And they're regulators indeed, but again, we have to keep in mind they want the not-for-profit sector to succeed.
SPEAKER_01:So, Michael, turning to the uh report that we've uh talked about and the issue at hand, are we just talking about general guidance uh that we're used to coming out of the NACD? Or is there a specific new or emerging concern they've identified?
SPEAKER_02:Well, Rob, I think it's very much the latter. Uh keep in mind that each year uh NACD commissions a diverse group of business leaders to examine a governance issue of big time importance and to deliver a report with very specific practical recommendations and support of aids. The last couple of years, I think it in 2023, the report focused on culture in the boardroom, and that was a terrific one. Last year it was board oversight of technology. This year it's on the board management dynamic.
SPEAKER_01:So, Michael, I think most of our colleagues um have an experience with the kind of stress and strain between their leadership groups at one time or another in their career. As you look at current dynamics, is there something special going on in your opinion?
SPEAKER_02:I think uh the answer is yes. And and what the report does is they look at three very specific trends they see, and a lot of these are CEOs, uh, as driving the need to cultivate the board management relationship with some sense of urgency. In other words, I think uh they think it's really time to focus on this issue. And the first issue, the first reason they think so is they see much more pressure on CEOs to perform than ever before, uh, you know, with challenges from a broad group of activist stakeholders, not just shareholders, but stakeholders of all types of constituents on matters going not just financial performance, but a variety of other issues. So, number one, more pressure on the CEOs. Uh, number two, I think what they what the report calls is an unmistakable evidence of shrinking CEO and C-suite tenure, uh, with the average CEO tenure declining and turnover levels reaching really record levels. So that's the second concern. Uh CEOs are serving for a lot shorter tenure. Third is that directors, the board members, uh, for a lot of the reasons we've talked about in our podcasts are confronting just increased complexity and ambiguity. Um, and the same time they're facing uh greater stakeholder and regulatory and judicial pressure as well to be effective uh overseers and to serve as strategic advisors. So I think you know, if you could draw a picture, you'd have two arrows coming uh uh right at each other. Uh both parties, the board and the CEO, were feeling pressure uh from outside forces, from within. Uh, and it's I think from the the NACD's perspective, it's creating an un an enormous amount of stress on their relationship with each other.
SPEAKER_01:So as the board tries to stay calm with these headwinds, can they adopt the approach that these kind of problems will just work out in the ordinary course?
SPEAKER_02:Yeah, let's just you know, work, let's not worry about it, it'll work themselves work itself out. And I think the answer is at least the NADC uh commission is saying a very loud no to that question. They won't work themselves out. I I think a foundational premise of the report is allowing these issues to resolve themselves organically by default uh leaves the answer to be resolved by on the basis of personalities, uh, implicit behaviors, you know, without any clear direction or structure. And in the current environment where there's all sorts of business and economic volatility, that's not a great thing. Um organic evolution of the board management dynamic without support is going to fall short. And you know, we've all seen it. I certainly have seen it in my career. Uh it's a sensitive issue. Uh people don't want to don't want to poke the bear. They they know it's a concern, but they they don't want to confront it, and understandably so. NACD is saying confront it.
SPEAKER_01:So, as we think about confronting it, what do you think the alternative is?
SPEAKER_02:I think this is for our listeners, this is the real message. What the NACD report says, all right, we've got this problem. It's a big problem, we've got to confront it. How do we confront it? Um, we we again we just don't let it evolve organically. We we we move towards a very deliberate process. We we have a deeper commitment from both the board and the CEO to implementing and then refining leading practices with a lot greater purpose, a lot greater intentionality, all with an eye towards the problems that the organization is having. In other words, it's a call for boards and their CEOs to really build a strong foundation of trust by clarifying the parameters of their relationship, you know, who does what, and by operationalizing the trust between them by building into their culture trust-building behaviors like better communications, uh, more specific evaluations, use of executive sessions, and personal support. So stuff like that. But they're saying formal, commit, let's really zero in on focus on this. Let's not let's let it back and resolve it. So, because it probably won't.
SPEAKER_01:So, if our audience goes out and reads the report, will they find more specificity on all that?
SPEAKER_02:Well, you know, I'm gonna show you on my camera. I don't know if you can see this, but uh, here's the report. It's big, uh, it's about 90 pages. So they're gonna take some time to, you know, don't don't pick it up and and uh and try and get it during halftime of this weekend's football game. Um, but uh one of the the real values of these blue ribbon commission reports um is it goes into a lot of detail and and they offer specific recommendations. This one uh on uh the board management dynamic, they break into three particular categories and nine specific recommendations.
SPEAKER_01:And so, Michael, you're very good at encapsulating uh big reports down to a manageable uh set of information for our audience. Can you walk us through what you see as the report's key recommendations?
SPEAKER_02:Yeah, and you gotta understand I'm struggling with it. They had nine, not ten. So I that that I have a hard time coming to grips with that, but I'll survive. Uh but again, three specific categories of recommendations. And the first category they describe is building the trust foundation. And you've got to understand that a big part of this report is making sure that there is complete trust between the board and the CEO. So step one involves, again, an intentional effort, not just letting it evolve organically, an intentional effort to establish the basis for a real collaborative relationship between the board and the CEO and the discipline to go back and kick the can kick the tires of it uh over time to make sure we're reinforcing this mutual trust. So they identify three specific action items under step one. Uh, number one, something that a lot of us have done much over the years, uh, uh delineate specific roles for the board and CEO. The point is the more we clarify the relationship, you do this, we do that, uh, clear swim lane, so to speak, going to do better to anchor a strong relationship. But then explicitly define how the board and the CEO will work together in meetings and in other interactions. And then I think importantly, Rob, for the the board chair, it's strengthening the independent board leaders, whether that's a board chair or independent or lead director, strengthening that board leader's role as the key, the linchpin to the relationship that makes it all work. So we're we're adding a bit of uh responsibility to the chair's role, and that may come uh as a problem for some organizations which which where this chair does not like to take a leading relationship. Um going back to your point, though, I think the report makes it clear that none of these steps are you know particularly new or unique or novel. What NEC is doing is underscoring the importance of a renewed commitment, greater consistency, and more thoughtful understanding to this critical relationship between leadership factors. Step two, all right, we we've talked about building the foundation. Step two is to operationalize it. This is intended to build that strong board-CEO relationship by assuring that traditional governance processes and board and CEO interactions intentionally, you know, we we designed it to operate to reinforce trust. So again, it's one we're we're purposely structuring the way the board deals with the CEO to build trust and to sustain trust. And that means to commit to ongoing communications beyond formal meetings, to enhance board and CEO evaluations, to reinforce intended behaviors. I think that means the message to boards, we need to make sure our evaluations of ourselves are tougher. Um, to use executive sessions as levers for accountability and transparency. And then an interesting one, Rob, to prioritize the CEO's overall well-being, which I think is a really important factor. Um then step three is to one that some of our listeners may not be familiar with per se, and that's leveraging trust for strategic impact. Um this step focuses on establishing again consistent behaviors. We come back to talk about the consistent behaviors and board practices, and it focuses on two things. Number one, very important, very important, maximizing the board's value as a strategic advisor to the CEO. Number two, continually assessing board composition to align with strategy and value creation. Let me tell you what that means to me. Number one, I think a very major message of the NACD report is that there is an expectation that this that the board is perceived as a truth real strategic advisor, not just a bunch of folks who come around, sit around the table, nod their heads uh horizontally or vertically, that they bring, they really bring value to the table, their strategic vision, their expertise, their perspectives. So they're a resource to management. And if the CEO and the executive leadership don't see the board in that light, it's a problem. So again, it goes back to reinforcing roles and relationships in the board's three recognized roles decision maker, oversight body, and strategic advisor. I'll also say one thing that I found really interesting in all this, and that is I found, and I may be misreading it, uh, I found the the report is encouraging boards to move away in their composition process from uh competency-based boards. In other words, trying to find fill every seat with someone with a specific discipline. Uh, and I I I've never been a fan of that. Um, but I think the NACD report is is also encouraging moving towards boards with people with true strategic vision, because you're never going to get all of the uh subject matter experts you need, you know, uh uh and that are that that could, you know, you'd have to go back to a 40-person board. So, anyways, I think those are the three categories of recommendations, and they are laid out very colorfully, very uh attractively, and very clearly in the report. It's tremendous risk for the mill of both the CEO and the board.
SPEAKER_01:So, wow, Michael, you're right. There is a lot of detail there, but it sure seems to be a nice checklist for boards and the CEO to be guided by. I gotta ask, do they say how to operationalize prioritizing the CEO's overall well-being?
SPEAKER_02:Uh I I think that's one of them. They they certainly draw that and they they hammer home that that's one of the important uh aspects of the interpersonal relationship. And it goes back to the point that uh that the the interactions between the board and CEO go well beyond the just the strategic meetings. And I think part of the factor is again concern that that CEO tenure uh is is is increasingly short, and the pressures on the CEO are great. So I think this concept of the CEO's well-being is you know, it's an obvious factor, but they do emphasize it. Um the report provides a lot of supplemental material on each of the recommendations. They just don't, you know, it's not five or six words. Again, it's an 80-page report, 40 pages on recommendations, uh, uh, and and that's a lot, you know, a whole lot for the board to dig into.
SPEAKER_01:One of the things I've always found valuable about the NACD reports is they also offer practical tools to help implement those recommendations. Do you think they've achieved that here?
SPEAKER_02:Oh, absolutely. I I think almost half of the 80 pages are are committed to uh actionable and practical guidance to help boards and CEOs implement the recommendations. They identify 12 specific tools for consideration, uh, ranging from guidelines that clarify the boundaries of both parties. In other words, a list of here are the basic duties of the board and the big of the CEO, uh, and we've all seen those, but they they do a really good job of that. And then specific ways of you know institutionalizing the board's role as a strategic advisor. Those are some of the ones that I thought particularly important. There are there are a couple of rec uh tools with respect to uh the compensation committee and the CEO's comp too. So again, 40 pages on practical tools, it really it's I think from a corporate counselor's perspective, boy, it's a terrific resource.
SPEAKER_01:So after having gone through this report, would you say the NACD report constitutes a best practice for us in the industry?
SPEAKER_02:You know, you you and I have had this conversation before, and it's and uh uh it's a hot button for me, and not just because I'm a crabby old guy. Uh, but I I do think the term best practice is one of the most misapplied and misunderstood terms in governance discord. To me, um uh best practices are defined as uh a process, a method, or a conceptual approach that has a clear historical record of success, achievement, or accomplishment. It's worked. It goes beyond uh the level attained by less structured efforts, it's more than what's minimally required by law. And again, the best practice is designed to identify or flag behavior that's required that goes again beyond what's accepted by minimum legal standards. It's not intended to reflect the full spectrum of applicable law. They're aspirational goals, they're not legal requirements or mandates. In the governance context, they're proposals designed to enhance and improve corporate responsibility and boardroom conduct. So again, I'm just really careful about saying that's best practice, that's not best practice.
SPEAKER_01:So taking note of that and not wanting to hit that hot button, do you think others may consider it a best practice report?
SPEAKER_02:Well, you know, for a particular price, I'm happy to say anything's best practice, but we can negotiate that offline. Um but the answer to your question is sure. I think I do think so. Um, you know, it's a subjective judgment. There's no accrediting body or commissioner or a grand high exalted Mystic Ruler who, and by the way, if anybody on this listening to this podcast remembers who the grand high exalted Mystic Ruler is, call Rob Gerbery and he will award you a prize. I have the answer to that question, though. Anyways, I you know, uh there's no there's no body that says this is a best practice. With the NECD, I think their Blue Ribbon Commission, the the way they go about doing it, I you know, uh 20, 25 recognized executives, board members from across the spectrum, uh who are they the ones providing the real work. I think you gotta say that's best practice. We're not talking about a consulting firm survey. We're talking about real intellectual capital from people that have a strategic perspective. Uh it's aspirational goal setting at its best. So, yeah, I tell my clients, consider this best practice. And remember what the courts have said for years, that the conscientious pursuit of governance best practices is the best prophylactic for direct reliability. It, you know, it the effort to consider and review and address best practices and how they would apply to your organization is what counts. It's not that you have a resolution of the board that says we're going to adopt every recommendation in the NACD report. No. It's you, you know, and I think this is the real message that we want to send for today's audience. Talk to the board chair, talk to the CEO, say these are things that you know we we think we we recommend that you consider. Whether it's the governance committee or it's an ad hoc committee with the CEO or uh and board leaders, whatever, look at these, review them, and decide what makes sense for our organization, if at all, but it's the effort to consider them, Rob, that I think is the real demonstration of good faith that you do get a goal star for.
SPEAKER_01:So, Michael, thank you as always for sharing these thoughts with us. We'll be back again next month with the first of our two-part series where we'll be discussing the guidelines for board oversight of artificial intelligence implementation and other ways in which the board may interact with new technologies. Until then, this is Rob Gerberry and Michael Peregrine saying thanks again for joining us. We look forward to talking to you in our next podcast.
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