May 6, 2025 • 21 mins
Rob Gerberry, Senior Vice President and Chief Legal Officer, Summa Health, speaks with Michael Peregrine, Partner, McDermott Will & Emery, about the concept of “refreshment” and how health care systems can use this concept to effectively address board turnover. They discuss various refreshment tools such as director removal, term limits, mandatory retirement, evaluation mechanisms, director offboarding, and fitness to serve, as well as when to use exceptions in a board refreshment policy.
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Speaker 1 (00:00):
Speaker 2 (00:04):
ALA's, popular Health Law Daily email
newsletter is now a dailypodcast exclusively for a HLA
premium members. Get all yourhealth law news from the major
media outlets on this newpodcast. To subscribe and add
this private podcast, feed toyour podcast app, go to
American health law.org/dailypodcast .
Speaker 3 (00:27):
Hello everyone, this is Rob Berry. I'm the Chief
legal Officer of Summa Healthand a member of the HLA Board
of Directors. I'd like towelcome you to the latest in
our continuing series ofpodcast on corporate governance
issues affecting healthcareorganizations. Today's topic is
one of continuing interest toour membership and their
clients refreshment practicesof the Board of directors. By
(00:49):
refreshment, we're notreferring to physical and
emotional ability of directorsto serve their companies in a
fully engaged manner. Whilethat's becoming increasingly
important , uh, as a governanceconcern as well, given the
volatility of today'sregulatory, financial, and
operating environments and therelated pressures on board
members, rather, we'rereferring to the various
practices available to theboard to periodically refresh
(01:11):
their board membership and amanner that balances the value
of organizational familiarityand experience with new
perspectives and observations.
It's more than traditionalpractices of removal, term
limits and the rest. And ourrecommendation is that
healthcare boards give thoughtsto preparing a me menu of
refreshment practices thatmight be available to them as
(01:33):
they address the continuedservice of their members. And
of course, as the leadinggovernance advisor to the
board, the general counsel orchief legal officer is a likely
resource of guidance oneffective refreshment
practices, especially given thefact that they can implicate
state corporation law and thecommon law. So today's podcast
seeks to position our membersto have a useful and informed
(01:55):
conversation with their clientleadership teams, including the
chair of the nominations andgovernance committees, and how
best to approach this issue ofDirector refreshment. And as
always, for theseconversations, I'm joined by
our HLA colleague, my friendMichael Peregrine of McDermott,
will and Emery, who's an HLAfellow and a fellow of the
American College of GovernanceCouncil . So, Michael, before
(02:17):
we get too deep into thistopic, isn't refreshment just
consultants speak for how canwe get rid of a director?
Speaker 4 (02:24):
It , it's a good question, Rob . In a sense, it
really is. Uh, it's consultantsspeak for sure, but it's really
much more than how to get ridof a director. I use the term
refreshment to, to reflect.
What I think we see is the realsophistication of the broader
governance question. How do weassure a useful and productive
level of board turnover? And,and I'm not referring to any of
(02:48):
the taboo topics here. We'retalking about an organized
approach to making room for newdirectors with fresh ideas and
fresh perspectives whilemaintaining where appropriate
directors with unique skillsand experience. So it's a big
picture process,
Speaker 3 (03:07):
So fair enough. But even given that, aren't we ,
were talking about directorremoval and term limits, aren't
those the two biggies we'rereally concerned about in this
space?
Speaker 4 (03:16):
Perhaps they may be the ones that are most well
known within the boardroom, butI think they're really far from
the primary refreshmentoptions, for example. Uh ,
while I think every set ofbylaws should provide the board
with the right to remove adirector without cause, that's
a mechanism that in myexperience, is rarely used
because it's such a pain. It'scontroversial by nature, and,
(03:38):
you know, you know, it's, it'slikely to involve a lot of
boardroom drama, maybe evenlitigation or certainly the
threats of litigation in anextreme situation. Uh, but at
the very least, it's aneffective lever , uh, to induce
resignation or or otherdeparture from the board. But
the process by which removal isaffected should be locked down
(03:58):
under state law. I , it , I , Ithink you, you , uh, really,
really wanna make sure that ifyou have to use removal, it's
consistent with what thestatute might say and what
common law might say in yourstate about how to affect a
removal process. It's not a ,uh, weapon to be used , uh,
without ammunition, withoutknowing that you've got that
(04:19):
process down. Right. Termlimits are also an absolutely a
recognized refreshmentpractice. Uh, but you know, the
surveys that I see show that's, it's not as widely adopted as
we might think. I mean, sure.
We in a 25 to 30% level, yeah,if you believe surveys from the
consultants, it's a refreshmenttool to be sure. But I, I
wouldn't say it's as ubiquitousenough to meet the definition
(04:41):
of best practice. And , and,you know, best practice, I
think is such a loosey gooseyterm, and we're really, well ,
if we use the term as it'smeant to be used, we're talking
about not , uh, aspirationalgoals that are above that, that
are required by law. Um, termlimits are out there, they're
recognized, they'reappropriate. I just don't think
they're the one , uh, uh, oneall be all .
Speaker 3 (05:05):
So I thought for my practice term limits were
pretty clearly a best practice.
In your opinion, they're not.
Speaker 4 (05:11):
Well, no. I think they're, again, but I just
wanna say I , I think thesurvey showed that they're just
not widely as adopted as onemight think. Um, the, you know,
and I think that it's not, it,it's a tool in the tool , uh,
box of refreshment, but it'sjust not the primary or sole or
gotta have , uh, vehicle. And Ithink the same goes for , uh,
for mandatory retirementpolicies. They, they go hand in
(05:33):
hand . I see nominatingcommittees considering one or
the other. Sometimes if they'repretty tough, they have both ,
uh, you know, mandatoryretirement policies can be very
effective. Um, again, I don'tthink their , their usage is,
is broad as some folks , uh,would expect. It's, it's kind
of like , uh, term limits.
They're both major pieces inthe refreshment toolbox. They
(05:55):
just aren't the only ones. Uh,governance and nominating
committees like to haveoptions. They don't wanna be
boxed into something that'smandatory if they can avoid it.
And I think that's one of thethings that our members should
be aware of, that , that , uh,the extent that there are other
options that are available,some of which are, are , uh,
not mandatory, but are optional, uh, or, or give , uh,
(06:19):
exceptions to , uh, hard andfast rules are becoming more
and more popular.
Speaker 3 (06:24):
So now , Mike, we've had a lot of discussion with
our board. Is a six yeartimeframe the right , uh, term
limit for board members is anine year , uh, term better as
we look across the industry.
Anything from your experiencethat you chair as far as
timeframes for director termlimits or mandatory retirement?
Speaker 4 (06:40):
Uh, y you know , uh, uh, I usually see nine years is
what I recommend. Is there anyscientific , uh, analysis that
that's the right time? No, Ithink what you're looking at,
Rob, is at what point does adirector become entrenched, and
that is the key word , uh,again, is , is by entrenchment,
I mean, so involved, soingrained with the board
(07:03):
process and with theorganization , uh, that there's
a sense of loss ofindependence, that it's
impossible for the, the, in thedirector to view himself as
other than part of theorganization. And, and whenever
that happens, is it six years?
Uh , I don't know. I mean,certainly you could do that ,
uh, nine years, 12 years. Uh ,you're pushing it a little bit,
(07:25):
but I think we all come back.
It all comes back to the keypoint. We're trying to affect a
level of turnover , uh,appropriate turnover at the
board level. So we keep thingsfresh, we keep new ideas
coming. Uh, we, we're notthrowing out really skilled
board members unnecessarily,but, but we keep the , uh, pot
boiling, so to speak.
Speaker 3 (07:48):
So, Michael, apart from term limits and removal,
you know, what are other bigrefreshment tools that you see?
Speaker 4 (07:52):
Well, I think first and foremost , uh, the one that
I think is really, really,really critical these days is ,
uh, uh, full board andindividual director evaluation
mechanisms. I think those arereally key in terms of
facilitating board turnover. Uh, you know, if you do them
right, and there are a lot ofdifferent ways to do it. And
certainly I always like to sayyou do it in , uh, in a manner
(08:13):
consistent with theattorney-client privilege as
possible, because sometimes youask questions and you get
surprising answers. But if youdo it effectively, evaluation
processes will provide thenominating governance committee
with really useful snapshots ofperformance and reliability.
They can inform committeedecisions about renomination
and compensation. Rob, I wannaunderscore that. You know, I
(08:36):
think that , um, I, I am seeingincreasing situations where
board members are challenging ,uh, their , uh, their failure
to be renominated for anotherboard term. And in that
situation, a file that, youknow, like it's a property,
right? Or something which iscrazy, but you see it , um,
and, and a file at thenominating governance committee
(09:00):
level that shows that thisboard member is viewed poorly
by , uh, his or her peers canbe very effective. I also think
that if you're going to enterinto a director compensation
program, which , uh, as youknow, you and I have talked on
this program, I'm a hugesupporter, you really need to
link it with , uh, anevaluation process. Very
difficult, I think, to be ableto stain under, if scrutinized
(09:24):
a director compensation , uh,program, if you don't have it
tied to some type ofperformance evaluation.
Otherwise, it's, it just, itlooks like there's no
protection , uh, or no quality, uh, associated with it. So ,
uh, I , again, I think we startwith , um, d uh , full board
and individual directorevaluation , uh, mechanisms.
(09:47):
But then I think we have thewhole concept of offboarding.
Uh, now I wanna say thatdirector offboarding is a
focused board process. It'sreally a concentrated
commitment to achieve astructured separation. In other
words, we're gonna negotiateand work out a separation of
from certain directors and theboard without prompting
(10:10):
controversy, or ill will. Inother words, you're kind of,
it's a process that greases theskids for a director and the ,
uh, the board to kind of partways it's intended to allow the
board to achieve the necessaryturnover more quickly and
expansively than through termlimits or mandatory retirement
(10:32):
ages. And more gently thanthrough removal doesn't always
work, but it's, it'sincreasingly popular as a kind
of environmental process toapproach turnover.
Speaker 3 (10:46):
So, Michael, as we think about the concept of
offboarding, could you expandon that concept a little more?
Speaker 4 (10:50):
Yeah. As we talked about a second ago, offboarding
is , is all about facilitatinga director's departure from the
board in , in a, I guess, quasifriendly manner. You know,
OVERBOARDING is all aboutaddressing director
attentiveness. Onboarding isall about facilitating a
director's entrance to theboard. Uh, NACD, for example,
has been a strong advocate ofoffboarding. And , and it's, if
(11:14):
you, and in some of thismaterial, it says that the
concept of directorship isn'tto serve as long as you want
to, is to serve as long asyou're needed. And I think
that's the essence of, ofoffboarding. It , it's a
process that's grounded in ashared understanding amongst
all directors of why someonewas appointed as a director and
(11:35):
of the board's expectations ofperformance. So from the
beginning of board servicedirectors are ideally made
aware of the potential thatthey may be asked to leave the
board before their term isformally concluded. It's a
performance based concept, Rob. It's not part of the
traditional, voluntary,not-for-profit board
(11:57):
experience, for example. It'smuch more part of the
for-profit board experience.
Uh, but I think you're seeingoff-boarding becoming more
popular because as we, youmentioned before , uh, uh,
healthcare boards just can'tafford to carry people who are
not performing their jobs well.
Speaker 3 (12:16):
So Michael, the concept of fitness to serve,
can you expand upon that?
Speaker 4 (12:20):
Well, that's a , uh, it really, it's, it's one of my
favorites from one sense,because, you know, we always
see in , in newspaper storiesabout people who get into
controversial situations and ,um, uh, have moved on from the
board to pursue other interestsor something like that. And
that really, in , in my mind,that suggests that there's been
a fitness to serve trigger .
(12:40):
Uh, I have been involved in toomany situations with clients
where something unfortunate hasoccurred with the director's
personal or professional life.
Uh, in the, in the question is,hmm , is this person, do we
still, from a reputationalperspective , uh, uh, from a,
from an immediate attentionperspective, is it still a good
thing for this person to sit onthe board? Um, it's a tough
(13:03):
policy to draft, but it canalso be brutally effective. And
it works kind of like anadvanced resignation that the
chair will just keep in his orher drawer. Uh, the, the
triggers can range fromsomething basic, like a change
in job status, where the oldposition was advantageous in
terms of exposure or experienceor prominence. You know, kinda
(13:25):
like we as a company alwayswant a representative of X
serving on our board, and ifyou're not on X, then we don't
need you. Then there's theextreme, A director's indicted
, uh, is an officer, a directorof a company, then there's
bankruptcy is accused of someform of moral turpitude. You
know, there's a whole list ofsituations that if they occur,
(13:46):
allow the chair to accept thepreviously signed resignation
letter that he holds in hisdesk drawer. Uh , now the , the
problem is, I shouldn't sayit's a problem, but the
challenge is that there are alot of boards who wanna be in a
position to move quickly beyonda director who sudden notoriety
is probably the best word,becomes a reputational concern
(14:06):
for the board. But a lot ofboards, you know, decent
people, they also wanna be fairand loyal to a director who
served the company well. Andyou get into the whole presumed
innocent , uh, argument. Andthat can make for a pretty
contentious boardroom meeting.
All , all I'm saying, Rob, is Ithink that that needs to be
considered at the nominatinggovernance committee level.
(14:28):
When you're talking aboutrefreshment options, again, is
it pretty much out there? Youbet. Is it easy to draft? No.
Uh, are , are you happy it'sthere when you need it? Yeah.
Uh, so again, fitness to serve, uh, deserves to be in , in
the tool , uh, box ofrefreshment options.
Speaker 3 (14:49):
So these concepts seem severe, this , uh, fitness
to serve , uh, the offboardingconcept, just how do you see
those practically playing out?
Are are boards adverse to themor embracing them?
Speaker 4 (15:00):
Oh , I think that boards are becoming
increasingly aware that , uh,that that performance has to be
a such a level that they needto have something policy-wise
in writing to affect turnover.
Uh, we're in an environment nowwhere, you know, we're talking
about health systems in thenine, 10 , uh, 11 figure , uh,
(15:25):
annual revenue numbers. Andthere's just simply , uh, you,
you can't have a low performeron the board for very long.
Everybody has to hold their ownweight, especially in
situations where you don't havea large board. You , you need
to have a more formal processfor removing board members. And
(15:46):
again, as I said before, Ithink that we're , uh, we're,
we're seeing situations whereboard members don't want to
leave the board, or theycomplain that they have some
type of legal right, or equityand board service, which is
crazy, but it just, you know,they hire some , uh, uh, an
(16:06):
attorney who's willing to takeit on. And all of a sudden you
just have a terrificcontroversy , uh, books and
records requests and things of, you know, you , you just
simply don't want a battle overmoving somebody off the board.
So that's a long way of saying,yeah, I think boards are
looking much more closely to ,uh, how effective their
refreshment policies arebecause they just can't afford
to have a controversy. Uh , youknow, and the controversy, Rob,
(16:30):
could be a situation you'regonna have a little battle of,
of , and we may talk about thisin a few minutes, more about
when's the when, if you'regonna have a mandatory
retirement, when does thatoccur ? 72, 75, 80? You know ,
I don't as , as someonewho's approaching the , the
70-year-old barrier , boy, boy, uh, that's, that's , uh,
that's kind of frightening.
(16:50):
And, and so I think there needsto be conversations about,
within the board, about whatworks best if we're gonna have
a mandatory term, if we'regonna have a mandatory
retirement age, what isappropriate under the
circumstances.
Speaker 3 (17:04):
So it sounds like you're advocating to our
membership that we should havea written board refreshment
policy with standards andreally making this more
objective , uh, as we look atpotential challenges versus
subjective at the governance ornominations committee level as
far as , uh, board memberscontinuing. Am I hearing you
correct on that?
Speaker 4 (17:20):
Yeah, and I think you see that , uh, a lot of the
, uh, statements of governanceprinciples, Rob will say, well
, for example , uh, we're notadvocating , uh, best practices
or retirement , uh, limit , uh,levels as mandatory. We're not
saying that they're bestpractice that you should have
them or that you shouldn't havethem, but we're saying is that
(17:41):
you should have a policy thatdiscusses your approach to
refreshment, which is , I thinkis interesting. Uh , in other
words, they're , they're ,they're not safe . Whether ,
let's just take for example ,uh, the business roundtable or
common sense principles ofcorporate governance. They're
not saying you need to have oneor the other, or both. They're
saying whatever you do, youshould have a policy that
describes your approach toturnover. Because I think,
(18:03):
again, more than the , the realkey we keep coming back to and
refreshment is , uh, do we havea process that's effective
enough to pursue directorturnover without causing great
damage to the fiber of theboard? And a policy will lay
that out.
Speaker 3 (18:20):
So as we think about potential exceptions in that
policy, how do you feel aboutboards , uh, adopting
exceptions to those policiesand putting those in place?
Speaker 4 (18:29):
Yeah, I, I , I'm not the most flexible person in
the, the world, simple people,you know, like rules and no
exceptions and things of thatnature. But I, I do believe
that we're, we're seeing moreand more , uh, uh, situations
where exceptions are beingrecognized , uh, for , in
unusual circumstances forexceptions from mandatory
(18:50):
policies. The , the most oftenI am seeing is , uh, for term
limits where you say it is justcritical to our company that we
retain the chair of the auditcommittee for another couple of
years because of the nat , youknow, the str strategic
situation we're in as acorporation, we, we just, it
would be disabling to us tolose a , this person at , at
(19:12):
this time. Same would go, forexample, if someone's the , the
head of a strategic or m and acommittee or something like
that, and you're in the middleof a transaction where it's
just really clear that , uh,losing this person from the
board because of some mandatoryprovision , uh, could be , uh,
critical. So I think that's,those are situations where
acceptions work in the sameway. Uh, you know, the , the ,
(19:33):
uh, age limitation, agemandatory retirement thing,
it's just so subjective. But ,uh, you know, that we see , uh,
you know , uh, when , whenpeople are performing at , at a
very high level , uh, uh, wellinto their seventies, it , it
is very, you , you can say,look, we're, we're gonna lift
the requirement because thisperson has, you know, more
(19:54):
years to go into it withoutbefore terming out, and they're
just an extremely effectiveboard member. At the same time,
we see examples of, of peoplein the public world where , uh,
their ability to function at ahigh level dramatically
declines after a certain age.
So that has to be handled, Ithink, with the real
discretion. But policies thatsay, we'll consider exceptions
(20:15):
to the general rule, I thinkare just smart. People are
different experiences ordifferent circumstances are
different. You don't wanna belocked into a black and white
situation.
Speaker 3 (20:25):
How about exceptions, Michael, for board
leadership? If you become aboard officer, does that grant
you an exception to , uh,
Speaker 4 (20:31):
? Oh,
yeah. I , I , I think so. I
think many , uh, of our, myclients Rob , uh, do have a
situ , an exception or carveout if, for example, the vice
chair would otherwise term outif you didn't give an
extension. So I think that'sincreasingly normal practice.
Speaker 3 (20:47):
Great. Well, Michael, thanks as always for
adding another level ofcomplexity to the world of
healthcare corporategovernance. Refreshment seems a
little complicated and a lotmore sensitive as it relates to
board members than maybe ourmembership or I initially
would've thought. Uh, but inall seriousness, thanks as
always for sharing yourthoughts with us. We'll look
forward to being back nextmonth for our next governance
podcast discussion, where we'lldig into the distinction
(21:09):
between recusal and abstentionwhen they're appropriately
applied and when they'remisapplied. So, Michael, as we
begin baseball season, all thebest of your socks, and I look
forward to being with you nextmonth.
Speaker 4 (21:20):
Thank you, Rob .
Worst team in baseball. Let'snot forget that.
Speaker 2 (21:25):
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(21:46):
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Speaker 2 (00:04):
ALA's, popular Health Law Daily email
newsletter is now a dailypodcast exclusively for a HLA
premium members. Get all yourhealth law news from the major
media outlets on this newpodcast. To subscribe and add
this private podcast, feed toyour podcast app, go to
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Speaker 3 (00:27):
Hello everyone, this is Rob Berry. I'm the Chief
legal Officer of Summa Healthand a member of the HLA Board
of Directors. I'd like towelcome you to the latest in
our continuing series ofpodcast on corporate governance
issues affecting healthcareorganizations. Today's topic is
one of continuing interest toour membership and their
clients refreshment practicesof the Board of directors. By
(00:49):
refreshment, we're notreferring to physical and
emotional ability of directorsto serve their companies in a
fully engaged manner. Whilethat's becoming increasingly
important , uh, as a governanceconcern as well, given the
volatility of today'sregulatory, financial, and
operating environments and therelated pressures on board
members, rather, we'rereferring to the various
practices available to theboard to periodically refresh
(01:11):
their board membership and amanner that balances the value
of organizational familiarityand experience with new
perspectives and observations.
It's more than traditionalpractices of removal, term
limits and the rest. And ourrecommendation is that
healthcare boards give thoughtsto preparing a me menu of
refreshment practices thatmight be available to them as
(01:33):
they address the continuedservice of their members. And
of course, as the leadinggovernance advisor to the
board, the general counsel orchief legal officer is a likely
resource of guidance oneffective refreshment
practices, especially given thefact that they can implicate
state corporation law and thecommon law. So today's podcast
seeks to position our membersto have a useful and informed
(01:55):
conversation with their clientleadership teams, including the
chair of the nominations andgovernance committees, and how
best to approach this issue ofDirector refreshment. And as
always, for theseconversations, I'm joined by
our HLA colleague, my friendMichael Peregrine of McDermott,
will and Emery, who's an HLAfellow and a fellow of the
American College of GovernanceCouncil . So, Michael, before
(02:17):
we get too deep into thistopic, isn't refreshment just
consultants speak for how canwe get rid of a director?
Speaker 4 (02:24):
It , it's a good question, Rob . In a sense, it
really is. Uh, it's consultantsspeak for sure, but it's really
much more than how to get ridof a director. I use the term
refreshment to, to reflect.
What I think we see is the realsophistication of the broader
governance question. How do weassure a useful and productive
level of board turnover? And,and I'm not referring to any of
(02:48):
the taboo topics here. We'retalking about an organized
approach to making room for newdirectors with fresh ideas and
fresh perspectives whilemaintaining where appropriate
directors with unique skillsand experience. So it's a big
picture process,
Speaker 3 (03:07):
So fair enough. But even given that, aren't we ,
were talking about directorremoval and term limits, aren't
those the two biggies we'rereally concerned about in this
space?
Speaker 4 (03:16):
Perhaps they may be the ones that are most well
known within the boardroom, butI think they're really far from
the primary refreshmentoptions, for example. Uh ,
while I think every set ofbylaws should provide the board
with the right to remove adirector without cause, that's
a mechanism that in myexperience, is rarely used
because it's such a pain. It'scontroversial by nature, and,
(03:38):
you know, you know, it's, it'slikely to involve a lot of
boardroom drama, maybe evenlitigation or certainly the
threats of litigation in anextreme situation. Uh, but at
the very least, it's aneffective lever , uh, to induce
resignation or or otherdeparture from the board. But
the process by which removal isaffected should be locked down
(03:58):
under state law. I , it , I , Ithink you, you , uh, really,
really wanna make sure that ifyou have to use removal, it's
consistent with what thestatute might say and what
common law might say in yourstate about how to affect a
removal process. It's not a ,uh, weapon to be used , uh,
without ammunition, withoutknowing that you've got that
(04:19):
process down. Right. Termlimits are also an absolutely a
recognized refreshmentpractice. Uh, but you know, the
surveys that I see show that's, it's not as widely adopted as
we might think. I mean, sure.
We in a 25 to 30% level, yeah,if you believe surveys from the
consultants, it's a refreshmenttool to be sure. But I, I
wouldn't say it's as ubiquitousenough to meet the definition
(04:41):
of best practice. And , and,you know, best practice, I
think is such a loosey gooseyterm, and we're really, well ,
if we use the term as it'smeant to be used, we're talking
about not , uh, aspirationalgoals that are above that, that
are required by law. Um, termlimits are out there, they're
recognized, they'reappropriate. I just don't think
they're the one , uh, uh, oneall be all .
Speaker 3 (05:05):
So I thought for my practice term limits were
pretty clearly a best practice.
In your opinion, they're not.
Speaker 4 (05:11):
Well, no. I think they're, again, but I just
wanna say I , I think thesurvey showed that they're just
not widely as adopted as onemight think. Um, the, you know,
and I think that it's not, it,it's a tool in the tool , uh,
box of refreshment, but it'sjust not the primary or sole or
gotta have , uh, vehicle. And Ithink the same goes for , uh,
for mandatory retirementpolicies. They, they go hand in
(05:33):
hand . I see nominatingcommittees considering one or
the other. Sometimes if they'repretty tough, they have both ,
uh, you know, mandatoryretirement policies can be very
effective. Um, again, I don'tthink their , their usage is,
is broad as some folks , uh,would expect. It's, it's kind
of like , uh, term limits.
They're both major pieces inthe refreshment toolbox. They
(05:55):
just aren't the only ones. Uh,governance and nominating
committees like to haveoptions. They don't wanna be
boxed into something that'smandatory if they can avoid it.
And I think that's one of thethings that our members should
be aware of, that , that , uh,the extent that there are other
options that are available,some of which are, are , uh,
not mandatory, but are optional, uh, or, or give , uh,
(06:19):
exceptions to , uh, hard andfast rules are becoming more
and more popular.
Speaker 3 (06:24):
So now , Mike, we've had a lot of discussion with
our board. Is a six yeartimeframe the right , uh, term
limit for board members is anine year , uh, term better as
we look across the industry.
Anything from your experiencethat you chair as far as
timeframes for director termlimits or mandatory retirement?
Speaker 4 (06:40):
Uh, y you know , uh, uh, I usually see nine years is
what I recommend. Is there anyscientific , uh, analysis that
that's the right time? No, Ithink what you're looking at,
Rob, is at what point does adirector become entrenched, and
that is the key word , uh,again, is , is by entrenchment,
I mean, so involved, soingrained with the board
(07:03):
process and with theorganization , uh, that there's
a sense of loss ofindependence, that it's
impossible for the, the, in thedirector to view himself as
other than part of theorganization. And, and whenever
that happens, is it six years?
Uh , I don't know. I mean,certainly you could do that ,
uh, nine years, 12 years. Uh ,you're pushing it a little bit,
(07:25):
but I think we all come back.
It all comes back to the keypoint. We're trying to affect a
level of turnover , uh,appropriate turnover at the
board level. So we keep thingsfresh, we keep new ideas
coming. Uh, we, we're notthrowing out really skilled
board members unnecessarily,but, but we keep the , uh, pot
boiling, so to speak.
Speaker 3 (07:48):
So, Michael, apart from term limits and removal,
you know, what are other bigrefreshment tools that you see?
Speaker 4 (07:52):
Well, I think first and foremost , uh, the one that
I think is really, really,really critical these days is ,
uh, uh, full board andindividual director evaluation
mechanisms. I think those arereally key in terms of
facilitating board turnover. Uh, you know, if you do them
right, and there are a lot ofdifferent ways to do it. And
certainly I always like to sayyou do it in , uh, in a manner
(08:13):
consistent with theattorney-client privilege as
possible, because sometimes youask questions and you get
surprising answers. But if youdo it effectively, evaluation
processes will provide thenominating governance committee
with really useful snapshots ofperformance and reliability.
They can inform committeedecisions about renomination
and compensation. Rob, I wannaunderscore that. You know, I
(08:36):
think that , um, I, I am seeingincreasing situations where
board members are challenging ,uh, their , uh, their failure
to be renominated for anotherboard term. And in that
situation, a file that, youknow, like it's a property,
right? Or something which iscrazy, but you see it , um,
and, and a file at thenominating governance committee
(09:00):
level that shows that thisboard member is viewed poorly
by , uh, his or her peers canbe very effective. I also think
that if you're going to enterinto a director compensation
program, which , uh, as youknow, you and I have talked on
this program, I'm a hugesupporter, you really need to
link it with , uh, anevaluation process. Very
difficult, I think, to be ableto stain under, if scrutinized
(09:24):
a director compensation , uh,program, if you don't have it
tied to some type ofperformance evaluation.
Otherwise, it's, it just, itlooks like there's no
protection , uh, or no quality, uh, associated with it. So ,
uh, I , again, I think we startwith , um, d uh , full board
and individual directorevaluation , uh, mechanisms.
(09:47):
But then I think we have thewhole concept of offboarding.
Uh, now I wanna say thatdirector offboarding is a
focused board process. It'sreally a concentrated
commitment to achieve astructured separation. In other
words, we're gonna negotiateand work out a separation of
from certain directors and theboard without prompting
(10:10):
controversy, or ill will. Inother words, you're kind of,
it's a process that greases theskids for a director and the ,
uh, the board to kind of partways it's intended to allow the
board to achieve the necessaryturnover more quickly and
expansively than through termlimits or mandatory retirement
(10:32):
ages. And more gently thanthrough removal doesn't always
work, but it's, it'sincreasingly popular as a kind
of environmental process toapproach turnover.
Speaker 3 (10:46):
So, Michael, as we think about the concept of
offboarding, could you expandon that concept a little more?
Speaker 4 (10:50):
Yeah. As we talked about a second ago, offboarding
is , is all about facilitatinga director's departure from the
board in , in a, I guess, quasifriendly manner. You know,
OVERBOARDING is all aboutaddressing director
attentiveness. Onboarding isall about facilitating a
director's entrance to theboard. Uh, NACD, for example,
has been a strong advocate ofoffboarding. And , and it's, if
(11:14):
you, and in some of thismaterial, it says that the
concept of directorship isn'tto serve as long as you want
to, is to serve as long asyou're needed. And I think
that's the essence of, ofoffboarding. It , it's a
process that's grounded in ashared understanding amongst
all directors of why someonewas appointed as a director and
(11:35):
of the board's expectations ofperformance. So from the
beginning of board servicedirectors are ideally made
aware of the potential thatthey may be asked to leave the
board before their term isformally concluded. It's a
performance based concept, Rob. It's not part of the
traditional, voluntary,not-for-profit board
(11:57):
experience, for example. It'smuch more part of the
for-profit board experience.
Uh, but I think you're seeingoff-boarding becoming more
popular because as we, youmentioned before , uh, uh,
healthcare boards just can'tafford to carry people who are
not performing their jobs well.
Speaker 3 (12:16):
So Michael, the concept of fitness to serve,
can you expand upon that?
Speaker 4 (12:20):
Well, that's a , uh, it really, it's, it's one of my
favorites from one sense,because, you know, we always
see in , in newspaper storiesabout people who get into
controversial situations and ,um, uh, have moved on from the
board to pursue other interestsor something like that. And
that really, in , in my mind,that suggests that there's been
a fitness to serve trigger .
(12:40):
Uh, I have been involved in toomany situations with clients
where something unfortunate hasoccurred with the director's
personal or professional life.
Uh, in the, in the question is,hmm , is this person, do we
still, from a reputationalperspective , uh, uh, from a,
from an immediate attentionperspective, is it still a good
thing for this person to sit onthe board? Um, it's a tough
(13:03):
policy to draft, but it canalso be brutally effective. And
it works kind of like anadvanced resignation that the
chair will just keep in his orher drawer. Uh, the, the
triggers can range fromsomething basic, like a change
in job status, where the oldposition was advantageous in
terms of exposure or experienceor prominence. You know, kinda
(13:25):
like we as a company alwayswant a representative of X
serving on our board, and ifyou're not on X, then we don't
need you. Then there's theextreme, A director's indicted
, uh, is an officer, a directorof a company, then there's
bankruptcy is accused of someform of moral turpitude. You
know, there's a whole list ofsituations that if they occur,
(13:46):
allow the chair to accept thepreviously signed resignation
letter that he holds in hisdesk drawer. Uh , now the , the
problem is, I shouldn't sayit's a problem, but the
challenge is that there are alot of boards who wanna be in a
position to move quickly beyonda director who sudden notoriety
is probably the best word,becomes a reputational concern
(14:06):
for the board. But a lot ofboards, you know, decent
people, they also wanna be fairand loyal to a director who
served the company well. Andyou get into the whole presumed
innocent , uh, argument. Andthat can make for a pretty
contentious boardroom meeting.
All , all I'm saying, Rob, is Ithink that that needs to be
considered at the nominatinggovernance committee level.
(14:28):
When you're talking aboutrefreshment options, again, is
it pretty much out there? Youbet. Is it easy to draft? No.
Uh, are , are you happy it'sthere when you need it? Yeah.
Uh, so again, fitness to serve, uh, deserves to be in , in
the tool , uh, box ofrefreshment options.
Speaker 3 (14:49):
So these concepts seem severe, this , uh, fitness
to serve , uh, the offboardingconcept, just how do you see
those practically playing out?
Are are boards adverse to themor embracing them?
Speaker 4 (15:00):
Oh , I think that boards are becoming
increasingly aware that , uh,that that performance has to be
a such a level that they needto have something policy-wise
in writing to affect turnover.
Uh, we're in an environment nowwhere, you know, we're talking
about health systems in thenine, 10 , uh, 11 figure , uh,
(15:25):
annual revenue numbers. Andthere's just simply , uh, you,
you can't have a low performeron the board for very long.
Everybody has to hold their ownweight, especially in
situations where you don't havea large board. You , you need
to have a more formal processfor removing board members. And
(15:46):
again, as I said before, Ithink that we're , uh, we're,
we're seeing situations whereboard members don't want to
leave the board, or theycomplain that they have some
type of legal right, or equityand board service, which is
crazy, but it just, you know,they hire some , uh, uh, an
(16:06):
attorney who's willing to takeit on. And all of a sudden you
just have a terrificcontroversy , uh, books and
records requests and things of, you know, you , you just
simply don't want a battle overmoving somebody off the board.
So that's a long way of saying,yeah, I think boards are
looking much more closely to ,uh, how effective their
refreshment policies arebecause they just can't afford
to have a controversy. Uh , youknow, and the controversy, Rob,
(16:30):
could be a situation you'regonna have a little battle of,
of , and we may talk about thisin a few minutes, more about
when's the when, if you'regonna have a mandatory
retirement, when does thatoccur ? 72, 75, 80? You know ,
I don't
70-year-old barrier , boy, boy, uh, that's, that's , uh,
that's kind of frightening.
(16:50):
And, and so I think there needsto be conversations about,
within the board, about whatworks best if we're gonna have
a mandatory term, if we'regonna have a mandatory
retirement age, what isappropriate under the
circumstances.
Speaker 3 (17:04):
So it sounds like you're advocating to our
membership that we should havea written board refreshment
policy with standards andreally making this more
objective , uh, as we look atpotential challenges versus
subjective at the governance ornominations committee level as
far as , uh, board memberscontinuing. Am I hearing you
correct on that?
Speaker 4 (17:20):
Yeah, and I think you see that , uh, a lot of the
, uh, statements of governanceprinciples, Rob will say, well
, for example , uh, we're notadvocating , uh, best practices
or retirement , uh, limit , uh,levels as mandatory. We're not
saying that they're bestpractice that you should have
them or that you shouldn't havethem, but we're saying is that
(17:41):
you should have a policy thatdiscusses your approach to
refreshment, which is , I thinkis interesting. Uh , in other
words, they're , they're ,they're not safe . Whether ,
let's just take for example ,uh, the business roundtable or
common sense principles ofcorporate governance. They're
not saying you need to have oneor the other, or both. They're
saying whatever you do, youshould have a policy that
describes your approach toturnover. Because I think,
(18:03):
again, more than the , the realkey we keep coming back to and
refreshment is , uh, do we havea process that's effective
enough to pursue directorturnover without causing great
damage to the fiber of theboard? And a policy will lay
that out.
Speaker 3 (18:20):
So as we think about potential exceptions in that
policy, how do you feel aboutboards , uh, adopting
exceptions to those policiesand putting those in place?
Speaker 4 (18:29):
Yeah, I, I , I'm not the most flexible person in
the, the world, simple people,you know, like rules and no
exceptions and things of thatnature. But I, I do believe
that we're, we're seeing moreand more , uh, uh, situations
where exceptions are beingrecognized , uh, for , in
unusual circumstances forexceptions from mandatory
(18:50):
policies. The , the most oftenI am seeing is , uh, for term
limits where you say it is justcritical to our company that we
retain the chair of the auditcommittee for another couple of
years because of the nat , youknow, the str strategic
situation we're in as acorporation, we, we just, it
would be disabling to us tolose a , this person at , at
(19:12):
this time. Same would go, forexample, if someone's the , the
head of a strategic or m and acommittee or something like
that, and you're in the middleof a transaction where it's
just really clear that , uh,losing this person from the
board because of some mandatoryprovision , uh, could be , uh,
critical. So I think that's,those are situations where
acceptions work in the sameway. Uh, you know, the , the ,
(19:33):
uh, age limitation, agemandatory retirement thing,
it's just so subjective. But ,uh, you know, that we see , uh,
you know , uh, when , whenpeople are performing at , at a
very high level , uh, uh, wellinto their seventies, it , it
is very, you , you can say,look, we're, we're gonna lift
the requirement because thisperson has, you know, more
(19:54):
years to go into it withoutbefore terming out, and they're
just an extremely effectiveboard member. At the same time,
we see examples of, of peoplein the public world where , uh,
their ability to function at ahigh level dramatically
declines after a certain age.
So that has to be handled, Ithink, with the real
discretion. But policies thatsay, we'll consider exceptions
(20:15):
to the general rule, I thinkare just smart. People are
different experiences ordifferent circumstances are
different. You don't wanna belocked into a black and white
situation.
Speaker 3 (20:25):
How about exceptions, Michael, for board
leadership? If you become aboard officer, does that grant
you an exception to , uh,
Speaker 4 (20:31):
think many , uh, of our, myclients Rob , uh, do have a
situ , an exception or carveout if, for example, the vice
chair would otherwise term outif you didn't give an
extension. So I think that'sincreasingly normal practice.
Speaker 3 (20:47):
Great. Well, Michael, thanks as always for
adding another level ofcomplexity to the world of
healthcare corporategovernance. Refreshment seems a
little complicated and a lotmore sensitive as it relates to
board members than maybe ourmembership or I initially
would've thought. Uh, but inall seriousness, thanks as
always for sharing yourthoughts with us. We'll look
forward to being back nextmonth for our next governance
podcast discussion, where we'lldig into the distinction
(21:09):
between recusal and abstentionwhen they're appropriately
applied and when they'remisapplied. So, Michael, as we
begin baseball season, all thebest of your socks, and I look
forward to being with you nextmonth.
Speaker 4 (21:20):
Thank you, Rob .
Worst team in baseball. Let'snot forget that.
Speaker 2 (21:25):
Thank you for listening to ALA's Health Law
Daily, your digest of the mostimportant health and legal news
selected from thousands ofsources by the editors of
Bulletin Healthcare . Forbulletin healthcare's privacy
policy. Visit bulletinhealth.com/privacy-policy.
Neither bulletin healthcare norA HLA is liable for the use of
(21:46):
or reliance on any informationcontained in this briefing. And
bulletin healthcare is notaffiliated with ALA's ai
companion.
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