Health Care Corporate Governance: Effective Board Committee Practice

Rob Gerberry, Adjunct Faculty, University of Notre Dame, speaks with Michael Peregrine about one of the “nuts and bolts” elements of corporate governance—the structure, organization, and operation of board committees. They discuss why this is the perfect time to address committee practice issues; how to create actionable items related to committee practices; considerations related to committee structure, subject matter coverage, charter, and authority; how effective committee practice supports the board’s ability to rely on the work of the committee; and the importance of independent committee members.

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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 American Health Law.org.

SPEAKER_02 0:16

Hello, everyone. This is Rob Gerberry. I'm the president-elect of the American Health Law Association, and I'd like to welcome you to the latest in our continuing series of corporate governance issues affecting healthcare organizations. Today's episode has had us digging into one of the real essential nuts and bolts elements of corporate governance, the structure, organization, and operation of board committees. It's a topic to which we health lawyers and governance professionals sometimes maybe give short shrift. Yet the functioning of our boards and the decisions they make depend in large part on the effectiveness of our committee process. Indeed, the care and maintenance of the committee process is often kind of like the cars we drive. It's something we just assume will run well until the famous warning engine light comes on, it flashes and it demands that we pull over to the curb right away. And it's kind of the same way with our corporate governance and committee processes. The functioning of our boards and the decisions that they depend in large part on the effectives of the committees for are something that's crucial to board success. And when the process is well maintained, the governance engine runs smoothly. But if it's not properly maintained, and if the committee ignores those warning red lights, we better pull over to the curbs quickly because it could become a pretty treacherous process. And to help us look today under the hood of our committee process, we're going to turn to our favorite mechanic and HLA colleague, Michael Peregrine, who's both an HLA fellow and a fellow of the American College of Governance Council. So, Michael, I'll bet you our audience takes one look at you in today's bow tie and says that's a guy that has to know his way around a good car engine.

SPEAKER_01 1:52

Oh, absolutely, Rob. I'm a real gearhead in every sense of the word. You know, and perhaps for the next episode, we can ask our wonderful producer, Matt Ostos, to post a photo of me and my set of boss wheels, my old 1970 or Riviera with the brown roof, vinyl, tilt steering wheel, and reclining, reclining front seats in front of my fraternity house at TCU. I think that'll get me banned from AHLA for life, probably. But it would be fun, nevertheless.

SPEAKER_02 2:21

So I'm sure, Michael, that was back in a day gone by. Maybe the price of gas was a little differently for us at that in that time period.

SPEAKER_01 2:28

Yeah, I think 30 cents a gallon. Can't we get gas that way right now?

SPEAKER_02 2:31

I ever it would solve a lot of the world's problems. Yeah. But in all serious, Michael, committee maintenance is a big governance issue. And it's August when our podcast will go live. So is this the perfect time of the year for boards to consider looking at their committee practices?

SPEAKER_01 2:46

I think so, Rob. Because in August, you know, we're just on the cusp of those big September and October board meetings where uh so much of the board's work for the year gets done, and the utility of committees really comes into play. I think it's a great time to make sure everything from a committee perspective is working well before the agendas get set out. And by working well, you know, I mean tracking the state corporate law, following the bylaws, acting in a manner consistent with the committee charter, and making sure that we haven't created a committee structure that, you know, whether it's too big or too small, just isn't able to support the full board in the manner intended. So I and I do think it's important to state at the top of our conversation today that the risks of messing up the way the board uses its committee are really significant, like ineffective actions, void or voidable decisions, unsupportable reliance, and presumptions of ineffective governance. The kind of things that board chairs and CEOs don't want to hear about uh from uh their their lawyers, but the risks are real, and I'm not sure that we emphasize them enough.

SPEAKER_02 4:00

So, Michael, we said today we're gonna do this deep dive into committee practice and committee process. Can you expand a little bit on your thinking and those two areas?

SPEAKER_01 4:08

Yeah, uh it these are terms that I that I use. It's my way of referring to all of the elements, the the gears, the pistons, and the bells, if you will, that are part of what makes board committees function effectively. And and from my experience, those elements range from what does the statute say, what do the bylaws say, how many committees we have and how are they identified, what does the charter say, what's the authority of the committee, who comp who composes it, uh, what's its leadership, what staff members have to attend committee meetings, committee termine existence, vertical and horizontal reporting, and the application of board policies like conflicts and independence. In other words, it's kind of the the the stew mate fixings that we would go into some kind of so we we we all the various different things we want in our checklist as we look at whether or not committees are working right. And there's a lot, and I think sometimes we miss out on that.

SPEAKER_02 5:10

So let's move from cars to planes. Sometimes our governance professionals want to make sure they have a checklist of action items for the year of things that they need to do. If you're advising uh individuals that want to prepare that kind of pre-flight checklist related to committee practices, are there suggestions, Michael, you'd bring forward?

SPEAKER_01 5:26

I think, and and you know, and and our listeners know that uh I'm a big picture person, principally because I'm not smarter to do anything more than that. But I do think that if we're going to do an annual pre-flight checklist for committees, the first thing we start with is a really a big picture approach. How the board expects to use committees. Ask the question, whether it's the board or the governance committee, how can we structure the board process to supplement the work of the board, to increase its efficiency, to provide for more in-depth examination of specific issues, to engage in special investigative or evaluation exercises, and to establish a basis for reliance by the full board and the work of the committee. In other words, I like it's kind of like a policy statement. It's often prepared by the governance committee as a template to guide the board's use of committees. But I do think, Rob, again, it's useful to start with that. Why do we have committees and what are we intending to do with them? And once the board acknowledges that, I think and management too, I think the maintenance of committee effectiveness becomes a lot easier.

SPEAKER_02 6:33

So, Michael, we're talking about being at that 30,000-foot level of the plane or seeing things at a big picture level. How do we take ourselves down to the next level of actionable items? What should we be looking at?

SPEAKER_01 6:44

Well, I think, Rob, we we start where governance lawyers usually start with what does the state corporate law provide and what do our bylaws provide? Uh in most states, there's really not a lot of difference in the way the business corporation statutes provide for committees and the way the not-for-profit corporation law does. There's a core similarity between both. You've got the basic authorization of the board to create standing and special committees, you've got the connection to the bylaw provisions, you've got the identification of tasks that are prohibited from being conducted by the executive committee, and the minimum size and composition of committees. Those are the kinds of things that most state statutes speak to about committees, but it's always best to go back and make sure that that's it, that you're familiar with the statute. And then does it link up with the bylaws? I wish I had a nickel for every time I had a client say I'm picking up the bylaws and that doesn't match what the statute says. You know, and that happens over time because it's not one of the high-profile items to have a review of the bylaws and to make sure that they're consistent with state law. I would also note, though, for our listeners that in some states where you've got a very active state attorney general or secretary of state, there's often uh on their website uh guidance to uh to boards on corporate governance, including information on how the state views the role and function of specific key committees. The New York State Attorney General's Charities Bureau website is a good example. There are others, but you know, it's uh it's in terms of what do we want to check? It's not just the statute, but it's, I think again, it's the AG's website and the Secretary of State's website, just to get a background of what the law says in all this.

SPEAKER_02 8:28

So, Michael, at the recent HLA annual meeting in New York, I was asked the question: should every board have the same committees? Should we be delegating uh different subject matter areas to certain committees and should it be consistent across all organizations? You know, what's your perspective on where we're parking those different areas of content and the ability to um delegate decisions down to those committees?

SPEAKER_01 8:49

Well, I, you know, I think because I get often the same question, what are the what are the core committees that we need to have? And I do think that it goes back to a basic understanding of what committee service is all about. Um it'd be rare to find the answer to your question in the state corporation statutes, but sometimes you get guidance uh from accreditation standards, uh the governance principles that are out there, or even in regulatory guidelines, especially with respect to audit and finance and compliance, and increasingly technology-oriented committees. If we don't, you know, absent that the bylaws can provide some direction, but I think typically it's up to the governance committee to be responsible for monitoring the number of committees and their purposes. Now that can be kind of dry work, but it has to be done. It's a topic that I think would be governed by factors of where does the board need assistance of real subject matter committee member experts who can drill down into the necessary detail. Best examples, uh uh audit executive comp compliance. And and and certainly now is as boards adopt uh tech committees. I'm not sure that there's any set number of committees that a board should have. And it wouldn't be super unusual for to if the board, I said it would be super unusual for the board to act as a committee of the whole for some issues. Um I've seen that happen. It would be super unusual for the board to have no committees. That would be an unbelievable red flag. Uh, regulators and other third parties would ask the question how can a board possibly address all of its responsibilities without the assistance of committees? Most often, the question is answered by a recognition of the clear topics of importance to board oversight and decision making. Where do we need the most help as a board? And I think that guides the question of what committees we should form, what their scope is. And it really, again, Rob, it goes back to what I said at the beginning: having that concept of purpose, an understanding of what do we need committees for. I would note that we're starting to see now more boards adopt a human capital committee as opposed just to an HR committee, because of the growing recognition of workforce culture as a valued board asset and of the role of the board in overseeing uh AI-related layoffs. So again, it's a concept of staying on top of what's developing and maybe making mid-course corrections to existing committee charters, as well as maybe adding new ones and maybe dropping some as well.

SPEAKER_02 11:31

So, Michael, without an established best practice framework on which committees to have, are there trouble spots that you'd advise boards? Is they have some flexibility to navigate this area?

SPEAKER_01 11:40

Yeah, I think the problem uh most often, Rob, is that um uh spending time uh uh having the governance committee spend the meeting on reviewing the committee processes, that's gonna be pretty boring. They'll just say, you know, to the lawyer, Rob, you do it and come back to us. And so it kind of gets it's a can that gets kicked down the road. Um, you know, the problems that will you have when there's no absolute here is uh you can have, well, one problem is too many committees, especially when they meet frequently. And that can be an incredible drag on the members of the management team who are required to staff those committees. And you know, we've heard the criticism all the time. But the flip side of that is that some management team complaining has to be taken with a grain of salt because a lot of uh of executive level officers don't really recognize the relationship between committee practice and the role of governance and and that staffing of these meetings is part of their job. But it's got to be a balanced thing. We there are arguments on both sides, and and you have to find the balance of making sure that executive leadership is appropriately staffing key board committees, but making sure that in doing so we're not abusing their time frame. A related problem, I think, in having a flexible process is that having enough board members to serve on the committees. It's like with management team members. When you saddle board members with the obligation to serve on you know, like three or more committees in addition to their regular board obligations, you really risk, in my view, degrading the effectiveness of those committees. And I've seen that happen a lot. Uh, the board chair will focus on reducing the number of committees of the board uh and and offsetting that with increasing uh the number of uh committees that board members must serve. So you could have like a 10-person board and every board member is serving on four committees, and that's just not gonna work. Um, but then again, there's a flip side. With too few committees comes the challenge of effectively handling all the duties assigned to the committee in the charter. And if you couple that, and I think the example is the compliance committee. Uh oftentimes you have an audit and compliance committee, uh, the charter is seven-eighths uh audit and one-eighth compliance. Uh, and if you add that with infrequent meetings, again, you re risk decreating the quality of the committee function. I think the big picture here, and again, going back to having this flexible process of how we set up committees, uh is that we have to come to grips with the basic responsibilities of the board and its oversight and decision-making responsibilities. What do they need from a committee to to be effective? And for how often and for how long should a committee meet? Um I I'm not always sympathetic to CEOs complaining about working board members too hard, especially when they serve on other boards as well. Board service is a really big deal, as we talk about on this podcast all the time. And if you're you're you're not prepared to put in the time as a board member, just step away. Uh, you know, we'll find people who can. At the same time, the committee process shouldn't be unnecessarily burdensome for directors. And again, this is where taking advantage of state laws that allow committees to include non-board members can be very helpful. Just a roundabout way of answering your question, which is the fact that the committee process in and uh in many elements is flexible and doesn't have clear statutory or governance principle guidelines, means there's a lot of room for mischief, there's a lot of room for mistake, there's a lot of uh room for uh making life uh harder or too easy for board members. And so it really requires attention. And and I think this again goes back to the very beginning. What are we asking of the our uh uh what is the board asking of committees? And is the board willing to do that to make committees work?

SPEAKER_02 15:36

So, Michael, as we think about the next super exciting part of all this work, especially as non-lawyers look at us lawyers about drafting our committee charters, you know, what's included, what's in the content, what's in the detail to it, are there best practices that you would point our members to, or is it kind of like minute taking? Everybody needs to tailor it to their own style.

SPEAKER_01 15:55

Well, you know, there's always a little bit of OCD in any kind of governance layer because you just love to see charters that look exactly the same in format, but all too often, you know, like one charter is 10 pages long, another is half a page. Um, you know, you're right. The length, the format, the detail, it is a lot like a board minute taking. It's it's not a bad comparison. You know, with minutes, the best thinking that you and I have discussed in this podcast is it's not so much long versus short. It's kind of like, well, pick a lane and stick with it. Uh but there are certain points and items you always want to see reflected minutes, like decisions and stuff that reflects good faith. It's the same way with charters. They can be either long or short, but consistency is critical. And there's certain points that you know I like to see reflected in charters when I'm asked to review them. What does that mean? You know, you know, what's on my list? A scope that succinctly but accurately describes the purpose of the committee and lines up with actually the stuff that the committee is doing. That's always helpful. Um, it doesn't always happen. Uh, but you also one thing that I think gets missed sometimes, we want to make sure that the purpose of a particular committee in the charter doesn't overlap with that in another uh committee charter. You you could have different people drafting them and they're, you know, uh uh uh right-hand, left-hand stuff. I think it's also important to make sure in the charter, you know, state, is this a standing committee or is it a special committee? Does it operate with board delegated powers or is it advisory? Um and I think you want to know, I I don't like to see uh uh a repetition of whatever is in the bylaws about committees, composition, uh appointment, removal, chair, stuff like that. But if there's something unusual about the composition of a particular committee, uh, you know, we we want uh uh uh financial experts, we want compliance experts, we want some more, it's something of that nature. I think that should be in the charter. Um oftentimes uh I I won't will it's useful to put in minimum meeting frequency uh requirements and and whether or not they can uh you know, compliance with state law on on um meeting on by uh Zoom and things of that nature. I also, Rob, like to remind uh committee members in the charter about their vertical and horizontal reporting expectations to the full board, but also sometimes coordination with other boards again, so there's right-hand, left-hand coordination. Um then I think it's important for a variety of reasons to say to identify what staff members are invited to participate in uh committee meetings. Uh, I think it looks good to have the, you know, for example, for purposes of if we ever get involved with a uh government investigation to make it clear that these people are staffing, you know, whether it's the CLO, the chief compliance officer, whomever, these people are expected to be present at each committee meeting and provide their expertise. So, you know, and other people may have their own lists. Uh, I think again, the key thing is consistency and format of charters across the whole committee structure.

SPEAKER_02 19:08

So, Michael, you touched on the committee's decision-making authority uh vis-a-vis the entire board. How have you uh best addressed with your clients, you know, that topic so they understand exactly what their role is? Is it advisory? Do they have an ability to vote on something and approve it on their own? Are they recommending something to the full board? How do you best see delineating those areas of power?

SPEAKER_01 19:28

Well, I don't think there's any particular best practice here, and I think the answer is actually a little nuanced, but it's a very important question. Um, and all committees, in all committee members must be clear in the answer. And the CLO or the outside governance council can can and should weigh in here. What works for the board and what works under state law. You know, there's a tendency, I think, uh, and some of the surveys reflect this to delegate full authority, uh, especially to those committees that you've taken the effort to compose with particularly qualified people. Uh, but that sometimes doesn't work when, like with the Executive Compensation Committee, there are statutory and regulatory and administrative reasons while the board still needs to ratify the committee's effort. So you can have a charter that says the XYZ committee uh must has acts with board delegated powers, yet the a policy of the state attorney general or the secretary of state or a case in the state says we need the full board to ratify all the decisions of committees. So you know you can get whipsawed there, this whipsaw there. And I've seen some surveys that uh suggest that full delegation is more prevalent than advisory authority, but I'm not really sure I buy that, Rob. From my vantage point, I see frankly see more boards wanting to exercise more amounts of governance authority and not less. Uh they they look to their committees as advisory because they still want the board, full board for liability or oversight perspectives, want that final bite at the apple. And I do think there's always the risk of delegating so much authority to the committees that the board sometimes becomes something of an empty uh shell. In any event, I like to see decisions on committee authority, whether it's delegated or advisory, subject to some kind of sunset provision. So you're you're re-evaluating whether it works or not on at say in every three-year period.

SPEAKER_02 21:34

So, Michael, if a committee is only advisory in nature, does that change the board's ability to rely on their recommendations or uh suggestions that they're bringing forward to the full board?

SPEAKER_01 21:43

Well, I think this is where the chief legal officer can provide real value because uh I do think by uh uh good faith is demonstrated well by a process that reflects the committee's seriousness and commitment to diligence and really. Supports the board's ability to rely on the recommendations of the committee. If you're going to have a major transaction or a major decision about a variety of operational issues, and the board is going to rely principally on the work of a committee, the more the committee demonstrates its diligence will help the board support its own judgment. I mean, that's why we have committees. And indeed, many state corporate laws, for-profit and not-for-profit, provide specific protection of directors and committee members in relying on corporate records and information presented by companies' officers or advisors. The principal caveat to reliance protection kind of fall in the area of does the committee member reasonably believe the information that's been given to the committee members is within the person's professional expert competence? And that person must have been selected with reasonable care on behalf of the company. And that means, for my mind, you don't want a real estate lawyer providing advice on corporate compliance matters, and a committee or a board can't rely on that. So we have to be careful there. But I think going back to your question, is there a list of factors that is helpful in establishing and supporting the board's ability to rely on a committee recommendation? Number one, the delegation is clearly set, whatever it is, is set forth in the minutes. The committee strictly adheres to the charter. The board periodically evaluates the effectiveness of the committee and its members. And I think that sometimes falls through the cracks. We may have full board evaluations, but do we evaluate committee members? The extent to which the committee deliberates on its uh uh decisions and recommendations is covered pretty clearly in the minutes. Um the board's able to independently evaluate the details of the committee's report. In other words, the board can come back to the committee and ask questions. It just doesn't accept the committee's report pervaded. It can go back, and and I see sometimes board committee uh um joint meetings talk about things of this nature. Um you know, we we've talked about conflicts of interest on this podcast multiple times over the year, but I do believe another factor is to make sure uh that the committee's actions were disinterested, that we've been vetted by conflicts of interest. Um we've confirmed the qualifications that the committee hires in terms of experts. And then um we've the extent to which the board has followed the advice or recommendations of the committees is documented, as well as a decision to disregard the recommendations of the committee. We don't spend enough time on the latter, and I'm sure you've seen situations as well as I where the board says, thank you very much, committee. We don't like what you say, we're going to disregard it, and and then you know that that takes us down a separate road. But the whole reliance thing is important to get right. If we don't incorporate the proper structural steps into the process, we could end up with undesirable consequences should the full board take and rely on committee efforts, and if that reliance is challenged, we got to put in the time.

SPEAKER_02 25:32

That's great. So, Michael, as we think about uh board committee composition, how critical do you think the issue is of having independent committee members versus any potential interested parties on those committees is under current governance uh best practices?

SPEAKER_01 25:47

This is a hot button for me, Rob. I think it's you know, the the the longer we get away from the star based area, we we kind of see um director and officer independence kind of erode the concerns and and I think that that's a mistake because in my experience, I still see the value of preserving board control uh in the in a majority of independent directors, and as well as for at least certain key committees like audit, compliance, governance, and executive compensation. Uh, I've seen the harm that can come from interested directors uh taking charge of a committee by virtue of the sheer power of their personality and driving the committee's decision in a way that creates at least optical issues of conflict. So um I think the reasons for protecting against board members becoming and beholden to management still exist. I think the reasons for assuring independent control of certain key committees also still exist.

SPEAKER_02 26:47

So, Michael, as we started today's podcast, you challenge us to look at committee practices uh under an automobile model. So as we look at doing the full 10-point inspection or checking everything about that cars that's up on the rack, anything we're missing as we evaluate the chassis?

SPEAKER_01 27:01

Yeah, there are a few, and I and I really think I don't know what category we put them under, but I think it's the collectively they speak to the complexity of maintaining an effective committee practice. And before Rob I go through these, I think again as a reminder, committee practice is uh a big deal, and it's not something that can be disposed of in a short period of time, and it's worth asking the corporate secretary and the chief legal officer to help work with the governance committee to make sure we get it right. So, what are the things, other things that I'd kind of throw in the uh uh on the checklist? Um, again, as we talked about before, confirm that the charter accurately reflects the nature of the delegation to the committee from the board, making sure we review how the committee chair is appointed and whether the chair has any unusual powers or authority. Now, I'm sure all of our listeners listened to our last podcast about the uh duties of the board chair, and they'll remember that sometimes the board chair or a committee chair has a lot less power than he or she may think they have. Another thing, uh, Rob, is looking at turnover, refreshment of committee members. This is an issue that is there's not a lot of uh real best practice on this, but you know, you it's a hot issue. We want to keep our audit committee members serving a long time because they've had so much institutional experience and they've learned the ropes. But without effective turnover, you know, you have the downside. Those people becoming uh institutionalized, do they lose their independence? Uh, do they become uh uh blind to some of the issues? The whole question of turnover and refreshment of committee officers and members is an issue that should be addressed. Um, you know, I uh we've talked about a lot of us have dealt with in our careers the executive comp issues and the rebuttal presumption of reasonableness. That's a tricky, tricky uh safe harbor to navigate. And I think you always want the tax lawyers to weigh in on that. Um kick the tires on how effective our committee minute taking is because the greater responsibility we place on the role of the committee, the better those committee minutes must be. Um, I think, and finally, I think uh our favorite issue, quorum. Uh uh we we need to make sure that we track statute and bylaws on the process for quorum and how we hold meetings of the of committees. We want to make sure that we haven't blown it there. You know, we talk about little landmines. It's an area where I've seen more committees screw up because they've blown the quorum or they've uh or they haven't noticed the committee meetings effectively, things of that nature. So uh again, I think the real message is the checklist, the 10-point uh plan or whatever for effective committee maintenance is a whole lot longer than some folks, certainly executives, might think.

SPEAKER_02 29:58

So, Michael, thanks so much today for sharing all your thoughts around board committee practice. I think we've proven that you don't have to be a governance geek to be thinking about board committees and the importance that they bring to best practices and governance. I mentioned the American Health Law annual meeting we just had in New York City. I had the privilege of being with a lot of our members and they expressed their appreciation for this podcast. And that appreciation goes out to Matt Oslos. Matt, we really appreciate you coordinating these for us, and then Michael, for all the great perspective that you've brought and to our listeners.

SPEAKER_01 30:29

Absolutely.

SPEAKER_02 30:30

To those faithful listeners, we look forward to being back with you again next month. Next month, we're gonna dive into the exciting intersection of board agendas, board minute taping, uh taking, and then that disturbing trend we're seeing in the rise of books and records requests related to our governance uh meeting minutes. So until then, we look forward to seeing everybody next month.

SPEAKER_01 30:51

Thanks, Brad. Thanks, Megan.

SPEAKER_00 30:57

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