Michael Peregrine authored this bylined article on the unique challenges heath system boards will face this year, including conflicts of interest and oversight of culture.
This article was orginally published on Law360, January 11, 2019.
Health system boards should be prepared to address an exceptional number of significant, enterprise-level challenges that are expected to arise in 2019. Rapid industry consolidation, changing payment models, foreboding economic projections and continued business disruption in health care are but a few of the many challenges that will serve to expand board agendas.
And these more expansive agendas will complicate the role of the governing board, in a variety of new and possibly unexpected ways. They may place increased pressure on the effectiveness of traditional governance mechanisms, strain the system’s existing governance structure, and affect the ways in which individual board members exercise their duties of care and loyalty. Oversight will need to become more vigorous; decision-making more precise and informed; and expectations of conduct more demanding.
Particular governance manifestations of these challenges, that health system boards should anticipate in the coming year, include but are not limited to the following.
The incredible pace of industry change will continue to test the capacity and effectiveness of the governing board. Individual directors will be expected to commit to increasing demands of health system board service in terms of preparation, meeting attendance and active participation in board activities and oversight. Boards may apply limits on other board service for their directors, and reduce the number of board and committee assignments within the system, in order to increase director concentration levels. Education mechanisms will need to be increased. Over-subscribed directors may need to leave the board.
Closely associated with issues of fiduciary engagement is the potential need for enhanced decision-making by the health system board. The seismic forces currently roiling health care present boards with a new set of profoundly consequential strategic options. These often involve significant risk, major mission shifts and challengingly short windows of opportunity. In this environment, the board’s traditional approach to major decisions increasingly falls short. A more aggressive process, but still grounded in duty of care principles and satisfaction of the business judgment rule, merits serious consideration.
The board, in the exercise of oversight of the strategic direction of the health system, will need to be alert to suggestions of “mission drift.” This term refers to the circumstances when the business affairs of a nonprofit corporation begin to shift from its stated purposes, to some alteration or derivative thereof, without proper regulatory/judicial approval. The potential for such “drift” is increasing as health systems adjust their operational portfolio away from the “inpatient bed tower” model to a more diversified platform of care, focusing on ambulatory and technology-based patient care solutions and innovative venture activities.
It will be increasingly incumbent on governance, for purposes of performance effectiveness, to assure some basic level of comity and cooperation in boardroom functions. The goal would be to enhance the potential for open discussion between directors, the exercise of constructive skepticism and the exercise of self-reflection. These attributes are likely to support efforts of the board to achieve informed decision-making and vigorous oversight, while discouraging director complacency and excessive deference, and rejecting disruptive director behavior. An expectation of civility may also encourage directors to increase their participation in boardroom discourse.
Oversight of Culture
The board should expand its oversight of workforce culture beyond core sexual harassment and intimidation concerns, to include those associated with gender equity; i.e., the need to advance women and improve gender diversity within the organization. The recent McKinsey/LeanIn.Org report identifies a dramatic power imbalance in the workplace that requires resolution, given its potential impact on organizational performance and reputation. The fundamental message to corporate boards is that issues associated with sexual discrimination and harassment, and with gender parity, are completely intertwined.
Conflicts of Interest
The seismic evolution in health care, and the new transactions and business relationships it is generating, raise significant new conflicts concerns that will require greater board-level attention over the long term. Complicating factors include the significant diversification of health system portfolios; the increasing interest of officers and directors in investing along with the health system; the rapid consolidation of the inpatient health care market; and the evolving determination of who is a “competitor.” These and similar factors have the potential to render the health system’s existing conflicts identification and resolution process obsolete.
Health system boards will be expected to address a series of material concerns arising from the recently released revisions to what has been referred to as the “Yates memorandum” on individual accountability for corporate wrongdoing. The audit and compliance committee will need to communicate both an unchanged emphasis on accountability, and the government’s focus on managerial levels of the corporate hierarchy. Board leadership will want to address with management the tension between the benefits of pursuing cooperation credit, and the requirements for obtaining such credit. The board will want to have an internal discussion about how the conduct of individual members of the board of directors may be evaluated for possible accountability.
Expanded Focus on Diversity
New state laws, other legislative initiatives and emerging governance best practices will prompt the board and its nominating committee to expand efforts to diversify board and committee composition. The focus will move beyond matters of gender to also focus on matters of race, age, experience and thought in the nomination process, and the need to consider diverse candidates for each open board seat. In this regard, boards should continue to embrace the perspective that diversity across all dimensions is fundamental to well-performing governance and contributes to long-term economic value.
Increased fiduciary expectations of health system governance will incentivize boards to adopt more rigorous director refreshment protocols. The goal of such protocols is to support board effectiveness through measures that assure that membership turnover is managed in an efficient, thoughtful process. Specific focus will be on the use of vigorous annual board and director evaluations; application of director recruitment goals intended to assure consistency with long-term corporate needs and the evolution of the competitive environment; and the judicious application of board renewal tools (e.g., term limits, retirement age and fitness to serve requirements).
Preservation of Tax-Exempt Status
Underlying themes arising from the Tax Cuts and Jobs Act, as well as the decision of Sen. Chuck Grassley. R-Iowa, to reassume chairmanship of the Senate Finance Committee, are likely to increase the scrutiny on whether health care systems deserve the benefits of tax-exempt status. The board, particularly through its strategic planning committee, will be called to extend greater effort in preserving charitable status, and promoting — for public consumption — how the delivery of health care services through the nonprofit corporate model is distinguishable from the delivery of such services through a for-profit model.
Each one of these challenges is well within the capacity of the board of directors to address. While they are all grounded in elements of the disruptive environment in which health care is currently situated, there exist recognized solutions for each of them. Some of solutions may require an accelerated refreshment of the current board composition, or the reconfiguration of the board’s governance structure. The general counsel, as a key governance adviser, can play an important role in supporting the ability of the board and management to anticipate and address these complications, in support of achievement of the board’s agenda.