Health Care Corporate Governance: Options for Separating from Problematic Directors

Rob Gerberry, Senior Vice President and Chief Legal Officer, Summa Health, speaks with Michael Peregrine about how to effectively separate a problematic or disruptive director from board service. They discuss common traits of problematic directors, issues with the power of removal and “for cause” requirements, options available to the board apart from removal, ensuring board understanding of expectations for director conduct, and the concepts of “offboarding” and “fitness to serve.”

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Transcript

SPEAKER_00 0:04

This episode of AHLA Speaking of Health Law is brought to you by AHLA members and donors like you. For more information, visit AmericanHealthlaw.org.

SPEAKER_01 0:16

Hello, everyone. This is Rob Gerberry. I'm the Chief Legal Officer of SUMA Health and the President-Like Designate of the HLA. I'd like to welcome you to the latest in our continuing series of podcasts on corporate governance issues affecting healthcare organizations. For today's episode, we're going to take a look at a sticky political issue from many boards. How to effectively separate a problematic, or disruptive director from board service. Those of our listeners who have faced this issue understand it's never easy in practice as it may seem it will be on paper. On the one hand, you have a director who's knowledgeable, yet disagreeable, potentially unpleasant, abusive, or disruptive. Yet the board may be reluctant to pull the string on him or her for a number of reasons, such as fear of losing his or her expertise, or inflaming in her tensions, of alienating the director's constituency, or of concern that the director will not go quietly. Any number of issues may uh be faced by a board. On the other hand, you have a real concern that if the director is not separated, the continued problematic conduct could have a significant negative effect on board culture. No board hunts for controversy during these difficult times. But the way forward without creating a board casting or a significant public event is hard to say. It's a real governance challenge that every board needs to be prepared to face. And to help us discuss this issue, we're joined as always by our HLA colleague and friend Michael Peregrine, who's both an HLA fellow and a fellow of the American College of Governance Council. So, Michael, problematic directors, not a new issue, but why are we bringing this up today?

SPEAKER_02 1:57

Rob, I think it's a combination of a couple of things that we're seeing manifest itself in governance problems. On the one hand, and I think obvious to a lot of our listeners, we're seeing in the public milieu some very controversial scandals that are making the people who are implicated absolutely topic from toxic from a board membership perspective. You know, even as a result of developments that didn't occur during board their board service or results of personal associations, but you know, they're they're being involved nevertheless. It's a reputational issue. It looks bad, and I think all you have to do is check the papers every day, and you'll see what we see. What happens when we have a director who is the subject of controversy in the newspapers? Uh then you have the issues of what I would say in on the one hand, increasing standards for director conduct and engagement. We're asking more and more in terms of commitment from our directors and uh evaluation, uh particularly in connection with oversight and major decision making. And that's making directors more concerned with their individual liability exposure. If we're asking more from directors, if the law is expecting more from directors, that has an impact because I think we're seeing that that has the potential for impacting how directors participate in board meetings and interact with their other directors if they feel tense or feel the need that they need to lean in harder on the standards of fiduciary conduct. So those two factors are combining, I think, to increase the potential for problematic director conduct, which is increases the need to have boards have a way to address it.

SPEAKER_01 3:44

So, Michael, for our listeners, can you help them identify um what are some of the traits of a problematic director and what should they be looking for?

SPEAKER_02 3:52

Rob, I use some very complex technical terms to describe these. You know, they're a little detailed, but hopefully our listeners will understand. Uh you know, very multi-syllable phrases. Uh the common traits or the kind of common problematic directors that I see includes, we start with the jerk director. And I bet every one of our listeners can identify more with one or two, people who are just obnoxious and can't get along with anybody. Uh then uh we have what I would call the insistent director. Um the person who just frankly can't shut up, who either believes that the point needs to be that they have in mind needs to be made and made loudly, or uh uh that it needs to be made four or five times before it will kind of stick in the board. Then we have the know-it-all director, uh, that director who thinks he or she is so bright and God's gift to the board that they are willing to dominate the board conversation and wax on and on about whatever topic and prevent other board members from having a say in either lengthening board meetings or cutting off conversation. It's really the you know, the other way to call it, it's the never shuts up director. Um, interestingly enough, I put in this category too, Rob, the unprepared or disengaged director, the director who just doesn't know what he or she is doing, doesn't come to the board meeting prepared, uh, or or it just is included in. And I think that's an extra that can be very disruptive for a variety of reasons because of the concern it would cause amongst other directors. Um then there's the toxic director, uh, the one who is externally uh notorious, uh, and maybe not for his or her fault, but he has for whatever reason an incredibly bad reputation externally, uh, which could rub off on uh on the board's conduct in the organization. And I guess I would throw in there the person who is just intentionally obnoxious to fellow board members, the bully director, uh, who cuts down or is critical of not only board members, but of executives and just doesn't have a good thing to say. And and we all have our own stories about them. But all this is potentially bad news to the extent, and this is the key, Rob, that these type of directors can frustrate the free and full exchange of ideas and communications in the board. It could have harmful effects on the boardroom or leadership culture, or otherwise just have a real negative effect on the reputation of the board and the organization. None of it's good. And what you really, really worry about is that people, directors, pull their punches or stop coming to board meetings. I can't stand to listen to Rob Gerberry anymore, and I can't stand to listen to Michael Peregrine anymore. And I'm just gonna not show up because it's not worth it. You know, we all have those experiences.

SPEAKER_01 6:50

Sounds like a lot of people you don't want to sit next to at the board Christmas party.

SPEAKER_02 6:54

Or vice versa, they don't want to sit next to me.

SPEAKER_01 6:57

So, Michael, let me ask another basic question. If you have these types of directors that are this problematic, why isn't the power of removal enough to prompt action?

SPEAKER_02 7:06

Um, it's a great question. And and I and I do think, as a matter of fact, the sure the power of removal does uh uh provide an answer to take action. My experience is uh that it doesn't always work. I I think the problem with the straight removal process can be its unpredictability. Uh depending upon what the bylaws say, it can contain provisions or requirements that make it very difficult to affect, kind of like a poison pill type of mechanism. Whether, you know, what is it, could be in terms of how difficult it is to obtain the necessary quorum to have a vote on removal, uh, what's the plurality for affirmative votes to um uh to be sustained, uh, the requirements that may be established in the bylaws or precedent to satisfy removal, the timing of the exercise, how quickly can you get a meeting together? Uh and I think one of the things that is becoming increasingly problematic is where you know directors just simply won't leave and they fight it and they'll bring in their counsel, and the council will argue that this is some kind of property right and you know nonsense. But it just becomes an incredible battle, and then some people who were originally in favor of the removal start to change their mind. Um, it just all uh it can become a huge governance distraction, and it becomes rather than a boom, you're gone. It's like a three or four-month exercise, and it's a really big production. But keep in mind that it's not just what the bylaws might say of the removal process. We always have to check the statute, the state for-profit or not-for-profit, corporation law, whatever governs, um, and what that has to say about it. Uh we need to follow the bylaws precisely with respect to is it quorum, plurality, notice, uh the the arguments that the the due process, if that's the case. We have to make sure that the that the removal process extends to committee members and even advisory board members because that may be necessary. Um and and then you know, for the companies, healthcare companies that have are reflect the byproduct of a merger or consolidation, there may be terms in the definitive transaction agreement that preclude or conflict with the right to remove a particular director, especially if that person was named to a certain term in the definitive agreement. So I I guess I would say, sure, removal, straight removal can work, but experience suggests that um it is an unpredictable process with respect to whether or not you can actually make it work in a time frame as necessary.

SPEAKER_01 9:45

So we know the challenges of trying to define cause in a set of governance documents and trying to remove a director for cause, you know, short of that. Are there other options available to the board or its governance committee to try to address problematic behavior?

SPEAKER_02 9:58

Yeah, there is. I was just saying the one thing about cause, and you know, we always advise our clients to not to put a forecase requirement in the BIOS, but realistically, if a board's going to make a major decision to remove a director, you're going to have good cause to do so. I mean, you're going to you're going to, in the in the resolution and the discussions, you're going to point to deficiencies that would probably satisfy a forecast requirement, but that's the board's right. It doesn't extend, we don't want to be extending rights to the uh implicated director and his or her counsel. But I do think that there are some options that are available to the board and the governance committee. Um, you know, to me, the key ones are uh let's, you know, first what whatever we may have in terms of board existing board policies on conduct. Then we have uh the off-boarding protocols that I'm a huge fan of. Then we have fitness to serve policies, which um uh I'm also uh uh uh attracted to because they're self-executing. And and then I think we don't want to forget there's the there's a tendency, Rob, we can kind of merge um our traditional director refreshment protocols like term limits and and and age requirements in with removal rights. And that's not necessarily a good fix, but we can um remember that uh you know a the absence of term limits or a term limit or an age requirement that's tightly set can effectively act as a removal. And sometimes you might say, well, Gerber is almost 80 years old, he's uh a couple of weeks, let's just wait uh uh until he hits his birthday, and then he's automatically out. Let's not fight about that right now. And it's you know, that can be uh a uh uh a good practice to pursue, a safe practice to pursue. I I think the other uh issue is you know, not only looking to terms, but what is the authority of the director? One thing I will say, just as we're gonna start going through um some of these options, is I'll get questions every now and then about, well, can we suspend the director or can we censure the director, you know, using things out of Congress. And I'm just not aware of a uh specific statutory right or judicially accepted concept in the, at least in the not-for-profit corporation, of censuring or suspending a director. Part of the problem there is, you know, we'll put a gag in somebody's mouth but keep them as a director, or we'll suspend them. We you know, we've got a board seat that's not being utilized. We're penalizing our own board process. And so that's why I I don't like those processes. But bottom line, um uh, you know, there there are options available uh that uh to straight removal, which may be helpful.

SPEAKER_01 12:46

So now I'm hearing you say, Michael, is rather than trying to eloquently draft language in your code or in a policy to remove a director, there's really got to be a lot of work at the board level to get buy-in on whether that director should be removed. And I think so.

SPEAKER_02 12:59

Yeah, yeah, every option now is standing. The real issue is, and I think you start working at the very beginning, um, to make sure the board understands the expectations of director conduct. That's the ground floor. What do we expect from our fellow directors in terms of decorum and and performance and skill and engagement? And so there's an understanding that we're you're we're all held to a certain high standard, and and that the board also understands that when someone doesn't uh act consistently with those standards, it's hurting everyone and it's a risk. So if you build that basic mindset, um uh I I think it's very helpful because then there it's it's more likely than not that the board will be more sympathetic to a controversial decision to remove a director because they will realize that this person is falling short of accepted board conduct and that that falling short is a risk. Uh but I'll also point out that as we're gonna go into some of the options, um, that again there are some things about state law that we just need to be aware of. Um, you know, you can play around with the majority versus supermajority plurality thing. You can tighten up the time frame in which a removal action is gonna be held, maybe like having a special meeting of the board. And and you can clarify how removal proposals are presented as a resolution. And you might even be more precise in terms of by which the evaluation of the motion to remove is to be considered and seconded. Um, but you what you really again want to do is make sure everybody gets the standards to which board members are held, and then to do the best possible job you can do to remove the potential for ambiguity in terms of the standards of proof or the or the the that you're you're citing for removal. Um that's always the toughest spot. And I guess my basic message is very, very difficult in my experience to have a friendly removal. People are again angry, and so it becomes a super adversarial process quickly. If you know it's you need to be able to nail the process.

SPEAKER_01 15:18

So I'm hearing there's a lot of prudent, well-thought-out options. There's a moose and racco option where you get some Stern directors that take this on themselves.

SPEAKER_02 15:26

Uh well, Rob, let's first remind our listeners that the first listener who gets your moose and Rocco reference and emails you will get an exciting prize. Uh, maybe some Age lay trinkets with our old name in them, or a copy of your official program from the uh bowl game that Notre Dame went to this past year. That would be a real collector's item. Yeah. Uh but more seriously, I think we start with the concept that's generally referred to as offboarding. That's the one that I think is frankly the long-term solution to the issue of the disruptive director. Um, now I want to be talk slowly for a change and carefully because we've got some a bunch of governance terms that all sound alike. Offboarding is quite the opposite of onboarding. Onboarding refers to the you know, the basic education, training, and cultural measures that are used to prepare an incoming director for board service. Now, offboarding is also different than overboarding, which is all about directors whose service on multiple boards potentially limits their effectiveness. So we've got offboarding, onboarding, and overboarding. Um excuse me, in my mind, offboarding is all about facilitating a director's, I guess, semi-voluntary departure from the board. Or to put it another way, it's kind of like the governance version of the board chair telling the board member, your flight is now boarding. Uh overboarding, it's all about director attentiveness. Onboarding, all about director preparation. Offboarding, it's about easing the board member off the board.

SPEAKER_01 17:18

So, not like having an exploding board chair like in the movie Thunderball.

SPEAKER_02 17:22

I love that scene. You know, the person sits down and all of a sudden push a button, boom, they're gone, they don't exist anymore. I don't think that we could get away with that. Uh, maybe a little bit less dramatic, but you're thinking in the right direction. And and and once again, let's say the third listener who sends you an email with the correct description of what we're talking about gets a free sandwich of coke from you at the annual meeting. They just have, of course, have to find you for you to pay up on that.

SPEAKER_01 17:46

Sounds like I need to start screening some emails then.

SPEAKER_02 17:49

Well, but let's kind of turn back to the offboarding process because again, I think it's something that is probably the most appropriate approach to this issue. Um, it's what we're what we're really talking about is a very focused board process to get to a structured separation from problematic directors without promoting controversy or ill will. The kind of the goal is to allow the board to achieve the turnover it needs in terms of problematic directors more quickly and expansively than through term limits, mandatory retirement, and certainly more gently than removal. And all these things. Again, keeping this low uh uh low controversy is critical in today's governance environment. So, again, it's a focused board process that just is ongoing to achieve a structured separation uh in a gentle, more respectful manner.

SPEAKER_01 18:45

So I'm hearing Michael's a lot of cultural underpinnings to this, really creating a foundation as a board as to how we're gonna police ourselves.

SPEAKER_02 18:53

Rob, that's exactly the point. And what I would encourage our listeners to understand is uh it is a reset of the board director relationship. NACD describes offboarding as the concept of directorship is not to serve as long as you want to, it's to serve as long as you're needed. I think that's really important, and I want to say it again. Offboarding essentially encompasses the concept of directorship, which is really a situation, you're not here to serve as long as you want to. You're here to serve as long as you need you're needed. And as a result, as NACD and others have said, the offboarding process is grounded in a shared understanding. Everybody's clear of why a director was appointed and the board's expectations of performance. We get it, it's a bargain. So from the beginning of board service, and again, this is part of the key of offboarding. From the get-go, directors are ideally made aware of the potential that they may ask may be asked to leave the board before their term is formally concluded. If you we build in, this is why you were identified, this is our expectation of your service, you are elected to a three-year term, but if you are not performing, that doesn't automatically mean that you're going you're going to be allowed to stay to the end of your three-year term. Are you comfortable with that? That's going to be a reset in a lot of boardrooms. But again, the board needs to, to make this work, the board needs to be able to commit to feedback to individual directors on their performance. You can't just, you know, you can't apply an offboarding process and then never give anybody any guidance at all. You can't just drop this bomb that you're you're doing a rotten job. We need to ask you to leave. Uh so uh the the regular evaluation process or other governance monitoring that gives legitimate feedback to board members throughout their term is an absolute prerequisite to an effective offboarding process. And I think it also involves an ongoing evaluation by the governance committee of the skill sets the board needs and frankly, conversations on whether the individual director background continues to meet those needs. Do we still need uh your particular expertise? Um, all those things I think are built in as prerequisites. You you can't make an offboarding program work without that.

SPEAKER_01 21:27

So, Michael, offboarding sounds like a process that uh takes a period of time. And we live in a society where folks want to do things on a more immediate basis. What alternatives is there to a lengthy offboarding process?

SPEAKER_02 21:40

No doubt. I mean, you're right about that. And that's why I say it's it's this it's got to be a cultural thing that starts at the very beginning. Offboarding is not self executing. And you know, if someone says, I don't want to go, even though you uh we you put your arm and say, Peregrine, thanks a lot, but you you know, you're gonna have more free time now because we're you're just not holding up your bar. Will that automatically work? Maybe, maybe not. But it is something that could take time. What I think is valuable about the offboarding process is cultural. Again, this concept is that directorship is not to serve as long as you want to, but to serve as long as you need it. And if that becomes ingrained into the boardroom culture, if it becomes more broadly recognized that this is the bargain, then presumably it becomes a lot more seamless when the governance committee taps the underperforming director on the shoulder and says, I think it's time. So you know that that may answer your question, but again, it's not a guarantee. But as we said before, uh off-boarding doesn't, you know, it doesn't typically incorporate a specific threat of removal when you're tapped on the shoulder. But the concept is there's a there's a separation through a discreet, respectful process that recognizes the director for his or her service to the organization and thanks them for that and makes them a hero. Uh that's part of the process. Again, does it work every time? No. Is it better than a hard-nosed um uh controversy-filled removal? Sure. It just depends on the situation, but it's worth, I think, a shot.

SPEAKER_01 23:18

So, Michael, you get that call from a board chair that says, Mr. Peregrine, what else do you have up your sleeve? Give me another option that's maybe more automatic in nature. Anything you can throw to him?

SPEAKER_02 23:28

Yeah, I you know, I think that uh that's where Moose and Rocco come in, but sometimes that doesn't work. But you know, there are times when you actually need to remove a director from meeting, but that's the subject for another podcast. But I do think the other thing that if a director is or if a board chair is asking me for that question, I'm gonna say, think about the fitness to serve concept, um where there are just deep embedded concerns with respect to a director's qualifications for board service. And it's complicated because fitness to serve questions can arise from both circumstances of the director's own doing or from those over which the director may not have had direct responsibility. You know, we can think of a lot of circumstances that come from the director's own doing. And Rob, I can tell you from 46 years of practice, I've seen some doozies. Uh and we don't, we can speculate as to what those might be, but you know, it's it's really time to go. Um, but then I think what sometimes is is not well understood is that there can be circumstances where you need to move a board member off, even though they they haven't done anything. They're associated with circumstances by virtue of their role or title or you know, volunteer nature that look terrible. Um an association with a business that's declared bankruptcy, and you're sitting as chair of the finance committee. Not good. You're you'll you're you're you are the CEO of a company that's under criminal investigation from the federal government. Not good. Um you've uh you've part of a board that has been uh accused by shareholders or the government of serious uh breaches of corporate ethics. Not good. Um you know that those are tougher issues to handle than if you've been personally uh charged with serious personal misconduct or violations of law. But the bottom line is they all they all raise questions about the director's continuing qualification for board service, Rob, in a way that's kind of different than just the jerk director. Uh these are directors that have bad news uh all over, you know, written all over them. And that, you know, yeah, I get your point. You need something that's a little bit more automatic in that situation.

SPEAKER_01 25:54

So it sounds like the real prize here should be lunch with Peregrine at the annual meeting.

SPEAKER_02 25:58

You gotta pay for that one, buddy. Um, but but you know, I think the situation is the it the the fitness to serve concept is complicated. It's detailed. Uh it's not a perfect solution, but it's it's works kind of like this. In my mind, as I've seen this work, it's a self-executing board policy that requires the director's resignation on occurrence of a specific event, an event that implicates the director's ongoing fitness to serve. The policy is tough to, I mean, believe me, you you you usually draft it with the assistance of a white-collar lawyer. Uh, the kind of policy usually would help define the triggering events, what kind of we're talking about, and you can't describe them all. You you you describe the kind of general terms. Uh, the policy is agreed to by each director at the beginning of his or her term. That's critical. Uh, it it requires the director to make sure that they voluntarily disclose to the board a director's possible involvement in a fitness-to-serve event. And and you know, that could if it, you know, it's easier if it's in the paper. It's not easy if it's something that um uh is is private. Maybe then you know you work out some confidentiality requirements. But in other words, there's an obligation to disclose. Um, and then um uh you you establish a review process for the disclosure within the board in the context of its impact on the company, and then the governance committee determines and then ratifies by the board that resignation is necessary. So there are a lot of moving pieces here. Um I think the best policies, but certainly the most complex, are ones that also could prompt the fitness to serve process by verified information coming to the board in the absence of voluntary direct disclosure. In other words, if board member Jones keeps silent on what he or she knows to be a new or coming event that will dramatically implicate their personal ethics or reputation and doesn't disclose that, um, I have had situations where uh board members who tend to surf the web for information like that pick up and say, do to the board chair, are you aware of uh, in other words, and the information comes from another board member? That sometimes unfortunately is the way to trigger a fitness-to-serve policy. Um all of the, you know, the general concepts is though that there is a process that is designed to get to the board allegations that raise significant concerns as to whether the director really is fit for further board service.

SPEAKER_01 28:49

So it sounds like none of these are easy options or perfect in any way, and there's some inherent risks and limitations. Would you agree with that, Michael?

SPEAKER_02 28:56

It is. And you know, you wish that's why, again, I keep coming back to off-boarding. While it's not perfect, it nothing else, Rob, a more streamlined, tightened removal process tied with an overboarding process is probably the best one to punch. Again, is fitness to serve uh the way to go if the board leadership says we need something tough and we need something that's self-executing and we don't want to screw around? Absolutely. The most obvious disadvantage to us fitness to serve policy is that it requires real precision in its description, detail, and definitions. I remember doing one that took almost a year to get through the board because everybody was, I think they were looking at themselves and trying to figure out what would be the triggering event, what would be due process, all of these things. Um and but I will say that both for fitness to serve and offboarding, um, you know, neither could be more efficient than a traditional removal option. It depends on the circumstances. Um you could really impact negatively direct to recruitment and retention by perceptions of how severe these policies are. Because we said they're different from the norm. Um defining specific fitness to serve triggering events is a challenge. Uh, you know, you could have real problems arise when dealing with allegations or claims as opposed to conclusions of or a factor law. But we are seeing, as you and I are taping this today, we're seeing some of that play out in Congress. Um the proposed adoption of either fitness to serve or offboarding could prompt really heated board debate on matters of specificity, principle, fairness, and due process. And that's especially the case when the director in question has been a valued and effective board member and is well respected within the community. You know, it's conceivable that in some situations uh also one or both of the options could be vulnerable to board challenge. In fairness, though, Rob, I think some of those issues also pop up in removal. Uh I can remember very clearly a situation where the organization had a very popular leading uh board member who was going to be indicted. Uh, and the board was going to be 100% behind him, would not remove, would not ask them to stand down, you know, said fair uh, you know, innocent until proven guilty, until concerns arose that, yeah, innocent should prove guilty, but isn't this just his continued participation in the board um a distraction? Then what is your tool to ask that person to respectfully stand on? It never it's never easy. And I would kind of wrap up by saying none of these provisions are foolproof, none of these provisions are guaranteed to be easy, the likelihood that they will generate ill will is high, but what other choice do you have? So again, I I would say um in the range or the continuum of options, um you start with the off-boarding culture you build in from day one of a board service, that you move forward with also very clear statements of policy on expectations, um, uh that you clean up the removal process so it is effective as it can possibly be. And then you consider possible situations like fitness to serve uh in the work. Well, you know, the one value of fitness to serve, it's like having a signed statement of resignation in the chair's drawer that he can pull out and use at any time. But you got to recognize the the downside, and the full board has to buy in that this makes sense.

SPEAKER_01 32:52

So, Michael, uh for our law students, this may not be something they get in any course, but this is great practical advice. Appreciate you sharing your thoughts on this from all years of practice in tackling these difficult issues. As we look at going forward to our faithful listeners, we'll be back next month with a new episode around developments and director composition and skill sets and competencies. And we look forward to tackling that topic then. Michael, thanks again for uh taking us through this discussion today.

SPEAKER_02 33:19

Thank you, Rob. I appreciate it.

SPEAKER_00 33:25

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