There's the old adage, "Don't sweat the small stuff." But when it comes to corporate governance, we do indeed need to sweat it — sometimes profusely. And especially now in the time of pandemic, when new and unique governance issues pop up daily.
These new governance concerns aren't the traditional issues we're used to dealing with, such as approvals for major transactions, restructuring the board, dealing with difficult conflicts of interest, board appointments, etc. Rather, these are the nuts and bolts of governance, "the small stuff" that in normal times present themselves as mundane, ministerial and "check the box."
These traditional governance issues are procedural, and that's the rub of it — they're the kinds of things that can understandably fall through the cracks in times of administrative pandemonium when management is overwhelmed by crisis upon crisis. But when it comes to governance, procedure often counts—a lot. So, if they do fall through the cracks, problems can arise about the sustainability of decisions, about the prudence of judgments and about the stewardship of assets.
And that "small stuff" includes the following:
1. The board's role: The tendency of the conscientious director is to not get in management's way, especially in times of crisis. That's especially true when the crisis involves matters of public health, the central purpose of the organization. Wouldn't a board member naturally defer to the expertise of management and the medical staff? But these constituencies need to recognize that the law sees an important role for the board in a crisis: making certain decisions, providing oversight and supporting management. The board has a big role to play and management needs to be told about it.
2. Who makes the call: Sure, there are basic rules about what duties are the responsibility of management and what duties are the responsibility of the board. But those rules don't hold up well in extraordinary crises, when directors and executives both are held to higher standards of care. Healthcare companies can't have their leaders stepping on each other's toes trying to do the right thing. There should be some serious conversations between the board and management about internal lines of authority and decision-making. Because you always want critical decisions to be made by the right persons.
3. Board meeting options: We've quickly become a "Zoom Meeting Nation." At a time when it is virtually impossible to gather directors for in-person meetings, video and other forms of telecommunications offer efficient alternatives when timing and topic are critical. But state law is not uniform on what constitutes an acceptable means of "tele-meeting." It's key to check the statute before committing to a particular process and adhere to its requirements. Bylaws requirements regarding meeting notice and quorum frequency must be noted. Privacy and privilege questions are also raised. And action by unanimous written consent isn't as easy to pull off as it may seem, either.
4. Executive committee: The executive committee is tailor-made for extraordinary crises and the pressures they can place on the duties and processes of the board. But there are some important legal considerations to note before tossing the keys to that committee. First, make sure that the executive committee's authority is consistent with state law. Second, try to form it with a majority of truly independent directors. Third, make an informed decision on the committee participation of the CEO and the CLO. Fourth, confirm the process by which decisions are reported back to the full board. And finally, consider the length of the committee's term. And in all things, protect the ultimate role of the board.
5. Succession planning: If there isn't a succession plan in place for both officers (including key executives) and directors, now's the time to do so. Key legal considerations include in which board committee does the responsibility for succession planning sit and what is the extent of its authority. Other concerns include establishing the vertical reporting protocol, the criteria for candidates and identification of a preferred search firm. For emergency succession, it is particularly important to focus on the independence of the process to assure oversight and avoid concerns with crony-governance.
6. Upstream reporting: A crisis is just about the worst time to have to worry about the management-to-board reporting process, but the law suggests that it is also just about the most important time to worry about it. The same goes for crisis-related board education. Board and executive leadership should have a discussion about the level, frequency and context of upstream reporting. It should be resolved with the understanding that the board must be put in a situation where it is sufficiently informed for purposes of exercising its decision-making and oversight duties.
7. Public voice: Both the chair and the CEO have justifiable claims under the law to be the chief spokesperson for the organization in times of crisis. Indeed, all crisis management plans should be the byproduct of board/management cooperation (as should be plan implementation). These senior leaders should develop an understanding as to who will speak for the organization on what issues, and how they will both sign off on the messages to be sent. A coherent, cooperative approach is critical for multiple reasons.
The concerns: When things are moving at warp speed, and leaders are drinking from an informational "fire hose," things can get missed, forgotten or ignored. And as to the functions of the board, that can result in board meetings that aren't recognized as such; leadership decisions that aren't made by the right persons; and board oversight that's not the byproduct of an informed process.
A public health crisis doesn't allow much free time for the board and management to worry about all of the little legal issues that are woven through administrative processes. That's all frictional cost, right?
But the law doesn't excuse certain conduct or compliance with certain requirements just because it is a really hairy time for the company. That's why it makes a difference for leadership to sweat the small stuff. To pay attention to the ministerial items. To do the checklists. To involve the general counsel. Because it might make a difference in the long run in sustaining their actions and decisions.
Michael W. Peregrine, a partner at the law firm of McDermott Will & Emery, advises corporations, officers, and directors on matters relating to corporate governance, fiduciary duties, and officer and director liability issues. He is outside governance counsel to many prominent hospitals and health systems, voluntary health organizations, social service agencies and health insurance companies. His views do not necessarily reflect the views of the firm or its clients.