Health care boards should be prepared to address challenging situations in which the continuing reputation of the board, or of the company, requires the immediate separation of a director.
“Reputation” is generally recognized as an intangible asset of a company, to be monitored by the board of directors. Degrees of reputation can be generated by perceptions of the quality of a company’s goods and services, the success of its corporate strategies, and its overall public image – including the integrity of its leadership.
Specific challenges to leadership integrity can arise from a wide range of actions, omissions, relationships and/or associations. They share a common thread – their public disclosure could have deeply negative corporate consequences. And, as recent highly public examples suggest, these situations aren’t uncommon; indeed, they may be on the rise given the speed and capabilities of media and social messaging. Certainly, the health care sector is not immune from them.
When time is of the essence in terms of limiting reputational exposure, traditional director separation options can be maddeningly inefficient. This is especially the case when the bylaws or board policies create procedural barriers to simple removal; there’s a reluctance to delegate removal authority to the executive committee; a vocal minority of the board opposes action; or the director is unwilling to leave on his or her own. Any related delay in separating a problematic director from the board can lead to questions as to the board’s judgment and perhaps even to regulatory scrutiny.
So there’s value in considering several discreet governance tools that may, in certain circumstances, facilitate separation of a problematic director before his/her term has concluded. While both are ultimately grounded in the right of removal, they are designed to expedite the process and avoid the distraction of a contentious internal debate. One approach would be more aggressive and self-executing, while the other would be more discreet and outwardly respectful. Both implicate a director’s continuing “fitness to serve” on the board, and neither should be adopted without extensive board consideration and advice of counsel.
Concepts of “fitness to serve” can arise from both circumstances of the director’s own doing, and from those over which the director may not have had direct responsibility (e.g., is associated with the circumstances by virtue of role, title or otherwise). Examples of the latter could include a director’s association with a business that has declared bankruptcy, is under government investigation, or has committed serious breaches of corporate ethics. Examples of the former could include allegations or findings of serious personal misconduct or violations of law. They all can raise questions about the director’s qualifications for board service.
The self-executing option is a board policy that may require a director’s resignation upon occurrence of a specific “fitness to serve” event. The policy would: (i) define such triggering events; (ii) be agreed to by each director at the beginning of his/her term; (iii) require voluntarily disclosure to the board of a director’s possible involvement in a “fitness to serve” event; (iv) establish a review process for the disclosure in the context of its impact on the company, and determine whether, under the circumstances, resignation is necessary. The process could also be prompted by verified information coming to the board in the absence of voluntary director disclosure. In other words, by agreeing to the policy, the director is consenting in advance to resign should it be determined that a “fitness to serve” event has arisen.
The more discreet option is the governance practice of “off-boarding,” which facilitates a structured, respectful and timely separation for underperforming or controversial directors before the conclusion of their term. As described by the National Association of Corporate Directors, “off-boarding” reflects the basic principle that “[T]he concept of directorship is not to serve as long as you want to; it is to serve as long as you’re needed.” As such, off-boarding processes reflect an explicit understanding between the board as a whole and each individual director on the board’s expectations of director performance. Those expectations would logically include avoiding “fitness to serve” situations.
Thus, from the beginning of their board service, directors are aware that they could be asked to leave the board before their term has formally concluded. “Off-boarding” does not typically incorporate a specific threat of removal but rather achieves the desired separation demand through a discreet, respectful process that recognizes the director for his or her service to the organization.
Neither of these two options is perfect. Neither could prove more efficient than traditional removal options. Their perceived severity could negatively impact director recruitment and retention. Defining specific “fitness to serve” triggering events could be challenging. Particular problems could arise when dealing with allegations or claims, as opposed to conclusions of fact or law. The proposed adoption of these options could prompt heated board debate on matters of specificity, principle, fairness and/or due process. This is especially the case when the director in question has been a valued and effective board member and is well-respected within the community. It is conceivable that in some situations, one or both options could be vulnerable to legal challenge.
Yet it must be remembered that when presented with director “fitness to serve” challenges, the board is to act in what it reasonably believes to be in the best interests of the organization, its mission and its stakeholders. In such situations, the board’s obligation to protect the reputation of the organization may take precedence over personal loyalties to the implicated director.
Highly publicized current events demonstrate the potential for a director’s continued presence on the board to become problematic, for reasons that may or may not be his or her own fault. In those situations, time may be of the essence in terms of protecting the reputation of the company. The press of circumstances may preclude a comprehensive board-level debate on the particular equities. Thus, the value of a governance mechanism, short of a contentious removal process, that can facilitate the director’s separation from the board in a timely process.
Because sometimes “optics” really matter to customers/patients, constituents and regulators.
Mr. Peregrine is a retired attorney and Fellow of both the American Health Law Association and the American College of Governance Counsel.
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