In a new Governing Health vidcast, McDermott partner Michael Peregrine breaks down why you may need to revamp your conflicts of interest procedures, and how the general counsel and the compliance officer can work together to protect the health system from conflicts-related risks.
Many health systems’ conflict of interest policies and protocols haven’t been updated since the 1990s. While these approaches—based on duty of loyalty and simple concepts of financial interests—may have fit the bill in the past, today’s rapidly shifting environment poses new governance-related challenges that have direct implications for the process by which conflicts of interest are identified, disclosed and addressed. These challenges include:
- Diversification of health system portfolios, featuring investments in a broadening scope of products, services and enterprises, particularly in the case of innovative technology and delivery of care platforms
- Growing officer and director interest in investing alongside their health system
- Swift consolidation of the inpatient health care provider market and increasing ambiguity in identifying competitors
- Sharpening focus on material bias arising from personal relationships (intra-board or external)
- Non-traditional market participants, including high-tech market disrupters and powerful new organizations formed by vertical or horizontal combination
- State regulators’ attention and reaction to media reports regarding high-profile instances of conflicts of interest
- The presence of constituent directors on corporate and joint venture boards
- New case law focusing on how personal interests may affect leadership decisions
Given the many pressing issues already on the board’s plate, a conflicts of interest check-up may seem like a low priority. But there are many solid business reasons why implementation of a robust and up-to-date conflicts procedure should make it to the top of the agenda:
- The ability to sustain major board decisions is dependent in large part on the absence of unresolved conflict or bias in the decision-making process. Nobody needs a post-closing deal challenge based on concerns that it was the byproduct of a conflict.
- It is a seller’s market with respect to director recruitment and retention. Effective, up-to-date conflicts protocols help protect directors from unnecessary reputational challenges or harm arising from conflicts.
- Courts historically take a very dim view of breaches of the duty of loyalty, especially in the context of nonprofit organizations.
- Unattended or unresolved conflicts can create significant intra-board disharmony and dysfunction.
- Evidence of conflicts of interest in the decision-making process can suggest to regulators the presence of more egregious governance concerns.
The good news for health system boards is that the fix for outdated conflicts protocols is relatively simple. It involves a modest amendment of board policy, a reasonable expansion of disclosure obligations, and an understandable increase in governance committee workload. The general counsel, teaming with the compliance officer, is ideally situated to shepherd this change through the board. Experienced outside counsel is a valuable resource to support the general counsel and compliance officer as they balance a conflicts of interest check-up with other pressing board responsibilities. Acting as neutral third party, outside counsel can offer guidance on developing up-to-date protocols from an industry-wide best practices perspective, ensuring that your board’s conflicts of interest protocols don’t lag behind others in the space.