AHLA's Speaking of Health Law
AHLA's Speaking of Health Law
Health Care Corporate Governance: Implications of Corporate Officerships
Rob Gerberry, Senior Vice President and Chief Legal Officer, Summa Health, speaks with Michael Peregrine, Partner, McDermott Will & Emery, about the nature, role, and purpose of corporate officerships. They discuss general principles related to the roles and fiduciary duties of officers and the specific duties of the Chairman of the Board, CEO, secretary, treasurer, and Executive Chair.
To learn more about AHLA and the educational resources available to the health law community, visit americanhealthlaw.org.
<silence>
Speaker 2:This episode of A HLA speaking of health law is brought to you by a HLA members and donors like you. For more information, visit american health law.org.
Speaker 3:Well, hello everyone. This is Rob Berry. I'm the Chief legal Officer of Summa Health , and I'm a member of the American Health Law Board of Directors. I'd like to welcome you to our latest and our continuing series of key corporate governance issues affecting healthcare organizations. Today's topic is something of a fundamental but critical one, the implications of corporate officerships. And as always, I'm joined by my colleague and friend, Michael Peregrine of McDermott, will and Emory, who's also an HLA fellow. Michael. Hello,
Speaker 4:Rob. How are you?
Speaker 3:So, Michael, this topic may seem a little basic to some of our loyal listeners. Why would you say we're devoting an entire episode today to something that a first glance may , uh, appear pretty simplistic?
Speaker 4:Well, I think it's a good question, Rob. I , I must say that I'm always drawn to simplistic matters . It's a little bit easier for me to comprehend, but I would also say that when things look simplistic, it's not always the case when you peel it back. I think as many of our listeners will agree, familiarity with corporate officerships can be a really useful element. When we advise our clients on corporate governance, the ability to figure out the nature and the role and the purpose of specific officer positions, I think, comes in handy a lot when questions arise for management and the board regarding the authority to take action , the sustainability of , uh, corporate and board decisions, and most of all, now these days, the board management dynamics . So , I , I think it's worth kicking the tires in this a little bit .
Speaker 3:So , Mike , we have listeners from all over the country. Are we talking about a one size fits all approach here?
Speaker 4:I , I wish, but not. It , it's never that easy. Um, uh, we're gonna be reflecting observations that , that , uh, uh, suggest experience , uh, the model acts and things of that nature. But I think the bottom line lesson, as all of our listeners know, is when in doubt, check the statute. I , I have found over the years , uh, that there is enough of a difference between state statutory schemes, whether it's not-for-profit or for-profit , uh, to , to, that makes one careful about making big assumptions on things like this, the roles of officerships. So, I , I think one of the first lessons we wanna send is , uh, after listening to the podcast, go back and spend an , I'm sure would've be an illuminating hour or so, kind of , uh, reviewing what your state statute says about corporate officers and their roles and responsibilities. Uh, that's the starting point.
Speaker 3:So, Michael , as we start at that ground level, ground level , maybe for the audience, just who do you view as the officers?
Speaker 4:Well, I think that the officers are , I like that question. The officers are anybody the board designates in the bylaws. Uh, and I think that's a , a , a key point. If you look at most statutes , um, the , the law usually only requires someone who is officially designated as the , uh, record keeper , uh, of the organization. Otherwise, the officers are going to be those that are set forth in the articles and bylaws. I wanna make a point here too, is , or a plug. And that is why it's always so important to , uh, keep the articles and bylaws current. Uh , there's so many reasons, but, but one, and I've had a situation this week with a client where , uh, the discussion of who the officers were , uh, and their titles was not in sync with organizational reality. And that could have caused a problem had it not been recognized by all parties. So I think the concept is , uh, first and foremost that officers are who, who is listed in the bylaws. We keep the bylaws current. And then I think generally speaking, we stick to traditional officers. Uh , as I've said before , uh, grand, high exalted mystic ruler , uh, works great for the loyal order of raccoons, and you have to be of a certain age , uh, to, to understand that. But I think it's best to stick with the traditional roles . You're gonna confuse fewer people that way,
Speaker 3:But not all officers have to be members of the board. Correct. Members management and serve . That's ,
Speaker 4:Yeah, I think, and I think you're gonna find this , we talked about this in a few minutes. Uh, the treasurer and secretaries sometimes aren't, most often , uh, the , at least the assistant secretaries and assistant treasurers are , uh, are , uh, executive of executives of the organization.
Speaker 3:So can someone be both an officer and a director?
Speaker 4:Oh , sure. Absolutely. You know, I , I think the key is that the , uh, the person is , uh, you know, what , what , what hat are we wearing? Um, as a director, the person's responsible for supervising the entirety of corporate operations. And as an officer, the person is usually , uh, as an employee officer, the person is usually implementing tasks authorized by the board and then has to report to the board. So, again, I think it's a question of what hat that person is wearing. But as I said, you'll often see dual roles, sometimes a CEO slash board chair , sometimes , uh, CFO slash treasurer, sometimes the general counsel slash secretary or assistant secretary.
Speaker 3:So if those individuals were to reach out to you for advice on some general principles to navigate those , uh, roles, how would you advise?
Speaker 4:Well, I , I think most corporate statutes provide some general direction in this regard. Um, I think, again, that the key issue is to look at the , uh, responsibilities of the officers. What , in what role am I serving in , in at this point? Uh, most state statutes common law will specify specific authority or recognize the authorities of an officer that's set forth in the , uh, in the bylaws, typically. But I think it's also important to note that a lot of the state statutes in common law will recognize the implied authority of certain officers like the CEO to take action on behalf of the company, you know, transactions in the ordinary course and transactions relating to , uh, business transactions and things of this nature . I think one point here is , uh, because again, that there's usually no specific all-encompassing statute that says the role of Officer X must be, but I think it's useful to sit down with management and , and for the board and have a , a situation, what I call , uh, uh, agreement on the lines of authority. You can't , you do this, and we do this, I, I, it's hard to, to sit down and designate every specific difference or duty between the board management, but you can outline basic themes. So there's an understanding of this particular task really respon , uh, falls into the category of executive management. This other specific , specific task really , uh, falls in the area of the authority of the board. That's a good discussion to have.
Speaker 3:We've been entertained that discussion in my organization and come up with a pretty robust authority matrix. But you're right, it does take a lot of , uh, intention . So, Michael, as you look at officers, do you believe they have a different or higher level of fiduciary duty than other executives or directors?
Speaker 4:No, not ordinarily. My impression has always been that the, the reasonably prudent man standard that applies in most states to both business and nonprofit directors, is applicable to officers in the performance of their duties. You do see in some states , uh, where an officer is , is specified that the officer has , uh, duties upstream to a superior officer , uh, whoever that might be, a vice president to an executive vice president, a assistant secretary, to a full secretary . With respect to information reporting. Uh , it , it's very similar, Rob to , uh, the duties of corporate counsel under Rules of professional responsibility. There's a , there's the concept essentially, that officers, whether they are members of the board or whether they are employees, have a fundamental duty to , to report up the ladder , um, potential violations of the law, material breaches , uh, of duties over the corporation. This concept of you can't sit on inform if you're an officer, you can't sit on information that's relevant to the organization that you know, would be of importance to your superior. So you've gotta move that along through. And I will also note that we have seen , um, an expansion of the Caremark standard , uh, in the , uh, McDonald's case of a few years ago, not only to corporate directors, but also to corporate executives. So, again, good to check the law on your state there, but, but think in terms of this duty to report up , uh, just like lawyers have.
Speaker 3:So, Mike, let's turn to some specific positions and their responsibilities. Let's start with the chair of the board, your thoughts there.
Speaker 4:I I think if, you know, if I was to take one action , uh, as a result of our conversation today, it would be just to make sure that there's agreement across the board and the role of the chair. This is the one where, in my experience, despite all sorts of good intentions, it's sometimes of a , uh, of a slippery slope that the duties of the chair seem to expand and expand and expand sometimes beyond the expectations of, of the other members of the board or the CEO . Um, from a very simple perspective, the chair's responsibility is usually, you know, what chair meetings of the board, and perhaps some key committees as well, maybe to , uh, nominate or appoint committee chairs. Uh, sometimes the chair has signature authority as well. Maybe the chair is the chief spokesperson for the organization. But at a deeper level, that's where we need to look at, because the chair often will take on additional duties. Uh, I, I believe the chair has a responsibility and should be involved in the establishment of the near term and longer term agenda for the company along with the CEO . In other words, that's a dual effort. I think the Chair is responsible for supporting the board management dynamic. This , the culture thing is articulated , uh, most recently by the NACD. I think the chair has a particular responsibility of encouraging collegiality, not only between board members, but also between the board and management and being a sounding board , uh, not to use that word too much, a a sounding person for board members and maybe senior executives as well. So I think there are these two tiers of , uh, they're the traditional duties, but I think we have these expanding what I would call cultural responsibilities of the board of the chair, to make sure that things are going along smoothly. And as culture and collegiality and communication , uh, become more important in the operation of a board, and more important in the relationship with management, I think the chair people need to be clear, that's part of the chair's responsibility. But again, just like rob your lines of authority, I think it's very important that there's a clear understanding between the chair and the CEO and the board that these tasks are being assumed by the chair. If you don't have that understanding, I think the chair assumes the risk of exerting too much authority in the eyes of his fellow board members. And that can be a real big problem. Now there , you know, let's , uh, not forget the vice chair , and I don't think there's a lot of mystery there , uh, uh, but the key in my mind is to always empower the vice chair to know enough about what's going on so that it's relatively seamless for that person to step in. If the chair is unable to, to conduct a meeting, we, we don't meet enough as a board to be in a situation where if the chair's absent, the vice chair says, well, I don't really know what the hell's going on here. Anybody else? Can you help me out? So again , uh, let's not ignore the vice chair.
Speaker 3:Great. Well , how about the CEO ?
Speaker 4:You know , that's another one that at surface level is pretty simple. And that emanates from the , the basic corporate governance principle that, that while the board has the core obligation for the operation of the business , uh, it's entitled to and, and should delegate day-to-day responsibility , uh, uh, to a qualified CEO , and then sit back and supervise , uh, uh, the duties and the performance of that CEO . The CEO will then in turn , uh, hire , uh, qualified staff members to support him or her. So I think that that's the traditional , uh, chain of command that we'd like to follow. Uh, and , and so from a big picture perspective, obviously the , the CEO's normal charge is to be responsible for day-to-Day operations, importantly, in a manner consistent with the mission and vision and values of the organization. So the , the CEO is expected to carry out the decisions and directions, policies and procedures adopted by the board. I concern arises, and you and I have talked about this before, when there's a fundamental difference between , um, the board's view of its oversight monitoring responsibilities, especially as regulatory scrutiny and case law pressure comes on and management's responsibility. So I recognize that it's not often enough to say, Hey, the CEO's job is simple Day-to-Day operations. They're gonna be times where the board's gonna have to lean in. Um, and the CEO's not gonna appreciate that. Uh, so I, again, I think communication is key, that the CEO understands that, yeah, that you are our person. You run the day-to-Day operations, but on these four or five major themes, the board is gonna be obligated to lean a little more closely on its monitoring because it's expected to do so. Absent that kind of communication, I think there are a risk of some real cultural issues. Um, and , and the other thing that I would point out is something with the CEO and the chain of command , um, that's important. And I think a lot of those who are listening today have seen this. Um, the board is line of communication. The board typically communicates to the CEO through the board chair, not other members of the board. The CEO passes along those communications to his or her management team, and of course, the management team is expected to provide information to the board through the CEO All too often. Now , uh, these days, I see situations where that chain of communication, it gets disrupted. And I think it's important periodically for boards and management to understand, again, there are reasons why there's a chain of command, and when you get off some , you , you start to go around that chain of command or you forget about it, it bad things happen.
Speaker 3:So, Michael, in , in light of those principles that you just outlined, do you think it's a good practice for the CEO to also serve as the board chair if they're a member of the board?
Speaker 4:Uh , hey , a good, you know, that's interesting. I , I, that's a , as you know, for a number of years, that's been a highly divisive topic. Generally in corporate governance law. There's certainly no best practice on it. Um, I would say that it , it's a practice that is far more , uh, prevalent in the for , for-profit world than it is for the not-for-profit world. Um, generally speaking, if you're gonna do it, if that's going to be the case , um, I , it's, it's imperative that the board appoint a lead independent director or someone with title similar to that, to exercise the powers that would otherwise create a real , uh, conflict of interest for the person serving both as CEO or chair. Uh , there's, I think, an exceptional danger that arises in terms of effective board operations. If the CEO chair is, is allowed to all , uh, exercise all duties and responsibilities without a an LID involved in some point. So, you know, the , the question is then what does a lead independent director do? What are his or her responsibilities? And they're pretty significant presiding at board meetings when the chair isn't there. Uh , calling meetings of the independent directors when necessary, participating in executive sessions , uh, serving as a liaison between the chair and independent directors approving all information that gets sent to the board , uh, approving the meeting agenda and frequency, meeting of meetings and meeting schedules, recommending committee chairs along, maybe along with the , the chair of the nominating committee and, and recommending new board member candidates. It's a pretty significant list, Robin . So this is where I see that , um, when oftentimes this issue arises in the nonprofit sector, when a CCE CEO comes in from the public company world, says, this is the way we did it at my former company. I want it here at , at my nonprofit health system, and , and it shouldn't be any problem with it . And the answer is, well, yeah, there is a problem with it. And even if , uh, there's an understanding that, that a lead independent director is required , um, uh, the , the general counsel was sent on hazardous duty when he or she describes to the new CEO , um, here, the duties of the lead independent director. So you're not as strong of you , you know, you don't get to be as strong of a chair as you think you are . Again, that's not a message I wanna send, but , uh, nor nor to think it's any general counsel
Speaker 3:Not a role . I'm raising my hand for either. So let's move to something a little more straightforward. How do you see the role of the corporate secretary being effectively executed on?
Speaker 4:I, you know, this is one of the , uh, uh, other takeaways I would highlight , um, here in , in addition to our lines of authority comment, you know, the , the secretary is usually kind of like a derelict position in most organizations. Uh, is is that the person who sent is responsible for sending out the invitations in the annual meeting and the reception that follows, what do you do if you're a secretary? I think it's important to kind of upgrade the, the awareness of that job. You know , first and foremost, I think the secretary has a real responsibility to make, to , to exercise oversight of the administration of corporate records , uh, of, of the business, including board and committee minutes resolutions and other governance records. And, and that's not that , um, insignificant of a task , uh, because I , as I said at the top of our conversation, state law is gonna , you know, if there's any designated officer, there's, this is gonna be the one they wanna know that somebody at the board level has a finger on accessibility and, and , uh, sufficiency of corporate records , um, records , secretaries sometimes ha have responsibilities for attestations of , uh, government filings, banking resolutions, you know, and for example, Rob, as you probably , as you know from your business deals, reps and warranties that are, and schedules submitted in deals. Um, so again, I , I think the traditional role of secretary is a little bit more important than we think about it, and it's probably worth the refresher conversation at the board level. And then in some companies, the corporate secretary assumes additional roles with respect to governance itself. Uh, roles somewhat often akin to that of a chief governance officer, and sometimes the chief governance officer is the assistant secretary. But the, the general stuff is, you know, providing information on governance best practices, helping support the board's governance framework , uh, and , and to support the board generally in carrying on its fiduciary duty . So there's this CGO type duty, a responsibility that's also attributed to the secretary. Again, that principally comes from the for-profit sector, but it's a , if you're gonna have the title, you're gonna have a board member fill with title. I think it's important to make sure that the , that the, the , uh, person holding title knows that these are some specific responsibilities. Um , and if there is a CGO that, that CGO can carry many of them out in , in , in the role as the assistant secretary or the general counsel as well. Either one.
Speaker 3:And I'm finding more and more from my peers that were being asked to serve the role of chief recruiter to fill board and board committee positions as well as corporate secretaries.
Speaker 4:Keep that in mind when you go for your copy evaluation , Rob .
Speaker 3:Thank you. Uh , and to wrap up, let's move to the good old treasurer position. What would you say there, Michael?
Speaker 4:Yeah , that's one that , that I think probably differs in many of the people organizations who , whose lawyers are listening in today. You know, I would say the treasurer's position involves what would appear in print to be really heavy responsibilities maintaining the funds and investment of the company, you know, maintaining financial records and making or authorizing deposits. It's the, the position of corporate treasurers is unique because it is so incredibly tied to all the duties that the chief financial officer actually does. Um, so in many situations, you see , um, the CFO actually serving as treasurer or preferably assistant treasurer. The reason I say preferably Rob, is I, I like the treasurer to be a board member who, with a financial background, who is able to exercise unique oversight , uh, over the CFO's duties. You know, you , you obviously have a finance committee that does that on a general basis, but at the board level, hopefully the, the treasurer as a board member is also on that committee. But it's an , uh, eyes and ears on the numbers type of oversight role , um, where the , and again, the CFO functioning as assistant treasurer , uh, in order to perform , uh, the other responsibilities of that position.
Speaker 3:Great. Well, one title that we're hearing evolve in the industry is the title of executive chair. Michael, how would you describe exactly what that role is?
Speaker 4:Y you know, I would be honest with you, I think, I don't know, I , I , it's, it's used in so many , um, terms, it's not a ter it's not something that's recognized. It's kind of like managing director that the investment banks used to use it . What does it mean? It's, you know, it's not a ex executive chair. I is not something that's thoroughly recognized and has a specific definition under law to the best of my knowledge. But you're right, it is used quite a bit from my perspective, it's has been traditionally used as a CEO transition mechanism. When a new CEO takes office, the retiring C-E-O-C-E-O chair assumes this executive chair position. Uh, in that role, the retiring CEO is in transit , is still an employee, is in a transition period and is still getting paid, but is providing some kind of , uh, senior advisor counselor , uh, role that , that's actually , uh, fairly , uh, substantive providing insight on operations and business and the institutional knowledge as the new CEO becomes adjusted to the position, I'm aware that other companies view this role differently. So my recommendation is always , um, look around, do your research. Don't assume that ex the position of executive chair and what what it is in your mind is what it may be in the mind of the CEO , uh, or the recruitment committee.
Speaker 3:Well , Michael, thank you very much for today's discussion. I think we've armed our members with the information needed to tackle their next governance committee meeting. We'll look forward to having you back on our next episode where we intend to discuss the latest duty of loyalty trends , including conflicts, confidentiality, and the always exciting appropriation of corporate opportunity standards. So, Michael, thanks for being with us, Rob .
Speaker 4:I , I appreciate it very much. And I , I would tell our listeners that, I think, again, it is , is it kind of dull and non exciting as these issues are? I think they will all agree that it's, it's useful at some point, and maybe it's a kind of a , uh, uh, through , uh, online board service or , uh, through a , a recording or something to the board members that, that that discussion has had at some level, maybe the governance committee on these issues, better to tackle them now than to have an issue later on where there's a dispute as to the role of an officer. And as I said, you aren't always gonna find the answer to the bylaws, but the biggest problem arises when the bylaws aren't consistent with the corporate practice. Uh , we'll , uh, look forward to talking to you again on our next podcast.
Speaker 3:Great . Thank you very much.
Speaker 4:Thank you, rah .
Speaker 2:Thank you for listening . If you enjoyed this episode, be sure to subscribe to a HLA speaking of health law wherever you get your podcasts. To learn more about a HLA and the educational resources available to the health law community, visit American health law.org.