The mounting legal problems facing Columbia/HCA Healthcare Corp. are raising questions about the company's 10-member board of directors.
Some quarters are praising the board for acting decisively by cutting loose Columbia's top two executives and promising to cooperate fully with the government's ongoing investigation of the company.
Others, however, are suggesting the board members' financial stakes in the company swayed them to look the other way as former Chairman and Chief Executive Officer Richard Scott and former President and Chief Operating Officer David Vandewater took the company further out on a dangerous limb.
For example, the latest shareholder suit against the company accuses executives and directors of the firm of engaging in illegal insider trading.
The suit, filed July 21 in U.S. District Court in Nashville, contains the typical fodder of shareholder actions. It accuses Columbia's board and management of injuring shareholders by breaching their fiduciary duties and grossly mismanaging the company.
But it also claims six Columbia executives and directors engaged in insider trading by dumping some of their stock in the company before the full extent of the government's investigation of the company became public knowledge.
"If Rick Scott, for example, authorized and approved . . . deals with various physician groups and knew they were in violation of the Medicare regulations and sold stock, he should know the truth of that coming out would harm the price of the stock," said Joseph Lipofsky, a New York attorney for the plaintiff in the suit, shareholder Moise Katz. "It's nothing more complex than that."
The lawsuit alleges the six executives and directors engaged in 13 such illegal stock sales between September 1996 and March 1997 that netted them $26.5 million.
Three transactions by Scott, Vandewater and director Frank S. Royal, M.D., which netted $8.2 million, occurred less than four weeks before the first raid by federal agents of Columbia's hospitals in El Paso, Texas, on March 19.
"It clearly raises some red flags that that amount of stock was sold in that period of time," Lipofsky said. "It's a remarkable coincidence."
Columbia spokesman Jeff Prescott declined to comment on the specific allegations in the lawsuit.
"We've had a number of shareholder suits filed, and all of them are similar in their allegations. We expect that all of them will (eventually) be dealt with in one action," he said.
As for the stock sales in the weeks before the El Paso raids, Prescott said Scott, Vandewater and Royal were exercising stock options that were due to expire.
Meanwhile, governance experts agree the company's board gave Scott so much leeway that it had little choice but to seek his resignation on July 25.
"This was a situation in which the board was so dominated by the CEO that when the time came, nothing short of a resignation would do," said James Orlikoff, a Chicago-based governance consultant.
"It was clearly a time for change at the top at Columbia," said Barry Bader, a Rockville, Md.-based consultant. "I don't think there is any question that the style of leadership at the top set the culture for the entire organization."
Bader also was critical of the board's executive oversight. "No board sanctions illegality, but when leadership demands 15% to 20% annual growth, accepts no excuses and is silent on corporate values, you will see some managers push the envelope on the law and ethics," he said. "The board was aware of it and should have done something about it."
Orlikoff and other experts said they believe that combining the chairman and CEO titles in one individual concentrates too much power, a trend they observed many companies are moving away from.
One of the most curious factors related to how the board may have failed to rein in Scott could lie in the fact that, as individuals, they owned a sizable amount of stock: As of last May, eight of the 10 directors owned more than 100,000 shares apiece (See chart).
On one hand, such a large stake can result in a board keeping a close eye on operations. But it also could keep a board from acting while it enjoys the financial fruits of the company's suspect business activities.
"When a CEO is producing good, healthy shareholder wealth, it can cover a multitude of sins," said Charles Ewell, president of the La Jolla, Calif.-based Governance Institute.
However, the observers have praised several recent actions by the Columbia board. They include the hiring of outside financial and legal counsel to review the company's practices and the promise of new Chairman and CEO Thomas F. Frist Jr., M.D., to develop a corrective action plan to right Columbia's ship (See story, p. 2).
"To carefully look at the business activities from an ethical and legal standpoint is exactly what a good, objective independent board should be doing in a situation like this," Bader said.
Ewell said he believes there is a blunt lesson other boards can learn from the Columbia experience:
"The question the critics always ask is, `Where is the board?' It should never be lulled into a false sense of security because things are going so well," he said. "The board is where the buck stops."