iThe following developments from the past month offer guidance on corporate law and governance law as they may be applied to nonprofit health care organizations:
1. INVESTMENT MANAGEMENT OVERSIGHT
The recent stock market turbulence provides an excellent opportunity to review the ways in which the general counsel supports the board's investment committee. Primarily, the general counsel advises on the prudent investor standards and fiduciary duties applicable to the committee under state law. In most states, this is likely to be a version of the Uniform Prudent Management of Institutional Funds Act (“UPMIFA”). This statute addresses a broad variety of committee--critical topics, including the fiduciary standard applicable to investment decisions (e.g., the factors to be considered when making investment decisions); delegation of investment authority to third party managers; endowment spending rules and the modification of gift restrictions. The general counsel will also be active in advising the committee on the scope of its authority pursuant to board delegation (i.e., the terms of its charter); the organization’s investment policy; the format and terms of its arrangements with investment advisors; the composition of investment committee membership (e.g., specific competencies); and potential conflicts of interest involving committee members, outside advisors and investment opportunities. These are all issues of interest to the state attorney general, which has jurisdiction to enforce UPMIFA and similar statutes and common law provisions.
2. THE GENERAL COUNSEL AS BUSINESS ADVISOR
An August 27 decision of the Delaware Chancery Court offers cautionary guidance to the general counsel as he/she increasingly assumes a dual role as valued business advisor to management. In re Dole Food Co., Inc. held the CEO/controlling shareholder and its then general counsel personally liable for $148 million in damages for manipulating the company's value to allow the CEO to purchase the company at a reduced stock price. The ruling was styled as a breach of the duty of loyalty by the two officers (who had a long history of working together). The Court was highly critical of the role of the General Counsel (who also assumed the role of COO) in creating an "information deficit" for, and otherwise misleading and obstructing the process of the board's special committee that had been appointed to evaluate the buy-out transaction. The Court perceived the CEO and the General Counsel as working in tandem to undermine the buyout review process; that while the General Counsel owed a fiduciary duty to the corporation, its board and its stockholders, his actions created the appearance of conflict. The Dole decision should not be interpreted as prohibiting general counsel from serving in dual executive positions for a company. It does, however, highlight in dramatic fashion the risk of conflict that may arise from such dual positions.
3. INCREASING BOARD "IT" FOCUS
Two recent The Wall Street Journal features speak to the focus of corporate boards on matters of information technology. On September 1, the Journal addressed the increasing willingness of companies to recruit CIOs to serve as voting members of their governing boards. This is seen as a direct response to the interplay of technology and business, and the benefits of adding board- level information technology competency as companies address the connection between strategic business and cybersecurity challenges. A separate September 3 article addressed the growing board-level focus on the development of technology talent within the organization. This focus includes assuring regular board access by CIOs to report on training, staffing depth and diversity initiatives as they relate to IT, as well as other important IT issues and developments. Greater board level involvement in staffing issues is perceived as both a matter of effective oversight, and a demonstration of support for the company's IT function. It is also consistent with a growing expectation that the board will exercise greater oversight of executive level talent development generally. Collectively, these features underscore the importance attributed to board awareness of the interdependence of IT capabilities and corporate strategy.
4. ATTORNEY GENERAL SETTLEMENT OF NONPROFIT DISPUTE
The willingness of the state attorney general to broker a dispute involving a prestigious nonprofit organization and its mission was again demonstrated recently. On September 3, the New York Attorney General facilitated the settlement of a dispute between The Cooper Union for the Advancement of Science and Art, a well-known New York college, and an alumni group that filed litigation seeking to reinstate the school's long standing free-tuition policy. The settlement agreement is intended to resolve the Attorney General's confidential investigation into Cooper Union's financial troubles. That investigation had prompted a series of allegations by the Attorney General that prior actions of college leadership, including its decision making and financial stewardship, contributed to the declining financial condition of the college. These also included claims of excessive executive compensation, distortion of the college's financial condition, and flawed executive succession process. In many respects, the Attorney General’s “Cooper Union” intervention is similar to the involvement of the Virginia Attorney General and the Amherst (Va.) County attorney in the recent Sweet Briar College financial distress controversy.
5. DIRECTOR RECRUITMENT
Several published articles over the last month provide useful observations on the process by which director candidates are identified, and how the nomination process may "pivot" towards a more focused approach. One article, published on August 19, challenges boards to evolve from traditional methods of director candidate recommendations (i.e., the suggestions of current board members; a bias towards experienced corporate executives). Rather, the authors encourage greater use of search firms in order to assure candidates with greater diversity of experience, and a resulting ability to provide enhanced oversight of executive management. Another article, published on August 26, comments on a recent Spencer Stuart survey of public companies that concludes, among other things, that 40% of directors of leading public companies are 64 years old, or older (up from 33% in 2010 and 18% in 2005). This conclusion might serve as the basis of a useful debate at the nominating committee on the "aging" of corporate boards and the related benefits of director refreshment practices (e.g., term limits, retirement requirements). A related question is the impact on an “aging board” on the infusion of new ideas, and on opportunities for gender diversity.
6. CYBERSECURITY OVERSIGHT UPDATE
The health system general counsel (perhaps in tandem with the system CIO) may wish to brief the board and key committees on several new developments affecting oversight of corporate cybersecurity protocols. For example, a new survey from the consulting firm KPMG concludes that (a) 81% of health care executives report that their organizations have been affected by at least one cyberattack over the past two years, and barely 50% of those executives have confidence in the ability of their organizations to prevent such attacks. The data suggests that while cybersecurity measures are regularly being addressed at the board level, there are significant remaining governance concerns with damage to reputation, regulatory enforcement and litigation. To that end, there is also value in briefing the board on the recent Court of Appeals decision that affirmed the authority of the FTC to pursue an enforcement action against an international hospitality corporation (alleging a failure to make reasonable effort to protect the private information of consumers). In particular, the Court held that the FTC has jurisdiction to pursue data security breach related actions under the provision of Section 5 of the FTC Act that prohibits unfair acts or practices in or affecting consumers. The health system board should be aware, consistent with its cybersecurity oversight obligations, of the ability (and willingness) of the FTC to take action on behalf of consumers when companies allegedly fail to take reasonable steps to protect sensitive consumer information.
7. OVERBOARDING
As focus on the appropriate extent of director engagement increases, the governance committee may wish to maintain closer review of the other board commitments of the directors. Originally a Sarbanes-Oxley related concern, the focus on "overboarding" has returned as a governance issue with new pressures on directors to increase the level of their engagement with the board(s) they serve. Indeed, a new survey of S&P 500 companies suggests that corporate directors now serve on the average of only two public company boards. This is a notable statistic for health system boards, for which the board agenda and required level of governance commitment has dramatically increased with the consolidation and diversification of the nonprofit health care sector. Thus, depending upon the governance traditions of the board, there may be value in considering limitations on outside board and committee service (especially if the health system board compensates its members). This may include board pre-approval requirements for any new outside board position being offered to a standing board or committee member.
8. UNFAIR COMPETITION
The Audit/Compliance and Strategic Planning committees of the health system board may benefit from a general counsel briefing on the implications of the new (August 12) FTC guidelines defining what constitutes 'unfair methods of competition' prohibited under Section 5 of the FTC Act. The new enforcement guidelines were intended to provide greater clarity as to the kinds of conduct that might be subject to "unfair competition" enforcement action. The guidance focuses on the promotion of consumer welfare, as the guiding principle behind Section 5 enforcement, the “rule of reason” – a balancing of anti-competitive effects and pro-competitive benefits – as the standard for evaluating conduct under Section 5, and a basic deference generally to the Sherman and Clayton antitrust laws. The new FTC guidelines provide the general counsel with the opportunity to discuss with the board antitrust enforcement activities outside of the merger area, such as in agreements or collaborations with competitors.
