It's not just Tenet Healthcare Corp.'s hospital portfolio that's getting trimmed. Tenet's top executive is having his job portfolio cut in half, as part of an overhaul of the company's corporate governance that Tenet hopes will win back investors' confidence.
Chief Executive Officer Jeffrey Barbakow will relinquish his title as chairman and leave the Santa Barbara, Calif.-based company's board after the firm's next annual meeting, expected to be no later than October. Three other directors will step down with Barbakow; all four will be replaced by independent directors.
The message of change came as Tenet reported financial results that indicate the devastating effects that changes in its Medicare outlier reimbursements are having on earnings, leading to the company's first quarterly loss since the fourth quarter of its fiscal 1999. For the three months ended Feb. 28, Tenet lost $55 million, or 12 cents per share, compared with profits of $280 million, or 56 cents per share, in fiscal 2002's third quarter. Tenet said its Medicare outlier payments fell to $40 million for the quarter, vs. $191 million in the year-ago quarter.
The corporate governance changes are "in response to our shareholder concerns," Barbakow told investors and analysts during a conference call last week. "Our shareholders voiced the need to change the makeup of our board of directors." He added, "I'm not aware of any public companies in which the CEO is not a member of the board."
It's not clear if Barbakow's situation will be unique, but it is definitely rare for a CEO to be excluded from his company's board, said Cheryl Gustitus, vice president of communications for Institutional Shareholder Services, Rockville, Md., which provides advice on proxy statements and corporate governance.
ISS strongly supports splitting the jobs of chairman and CEO, Gustitus said. "We want to see the chairman run the board and the CEO run the company," she said. Allowing one person to serve as chairman and CEO diminishes the board's ability to oversee management and gives the CEO too much control of the board's deliberations, she added. Estimates of the percentage of U.S. companies that combine the chairman and CEO posts run as high as 80%.
Tenet's series of corporate governance changes follows a string of other restructuring moves that Tenet has announced in recent months as the company has sought to deal with the fallout from its high Medicare outlier payments. Since the uproar about the size of its outlier payments, Tenet has become the target of investigations regarding the outlier payments, antitrust issues and physician matters at two of its California hospitals. The restructuring moves include overhauling management, cutting its divisions to two from three and announcing plans to sell or close 14 hospitals.
Darren Lehrich, a healthcare stock analyst with SunTrust Robinson Humphrey, said Tenet is listening to "strong, passionate input from shareholders" that the company's board needs to be more independent of management. The message is especially resonant because of the serious turmoil at HealthSouth Corp., Birmingham, Ala., which last week also announced measures to make its board more independent , he said. (See related story, p. 6)
As for Tenet's earnings, Lehrich said the dramatic reversal of fortune was no surprise. What will be important to watch is how the company fares as it renegotiates managed-care contracts this year, he added.
Not all of Tenet's major shareholders have been placated. Tom Tirney, an analyst with American Century Investments, Kansas City, Mo., opened the question-and-answer session of the conference call by caustically congratulating Barbakow for keeping his job, saying it was "a remarkable achievement" for the CEO.
Another shareholder, M. Lee Pearce, also stepped up his criticism of management last week. Pearce has had several dust-ups with Tenet and its predecessor companies. In a news release, he alleged that Tenet could face a liability of up to $6 billion from investigations into its Medicare outlier payments. Also, posted on the Web site for Pearce's self-appointed Tenet Shareholder Committee is an April 7 letter to Tom Scully, administrator of the Centers for Medicare and Medicaid Services, in which Pearce called on the federal government to prosecute Tenet under the False Claims Act, and other civil fraud and criminal laws.
Tenet isn't taking Pearce's criticism lying down. The company filed a securities lawsuit against him in U.S. District Court in Los Angeles last week, accusing him of waging a proxy fight to change the company's board without making the proper filings to do so with the Securities and Exchange Commission. Tenet's complaint said that Pearce's news release fails to disclose "the lack of a reasonable basis" for Pearce's liability claims. Tenet asked the court to issue a preliminary injunction ordering him to follow the proxy provisions of federal securities laws and "to cease making false and misleading statements regarding Tenet."
Gary Cripe, a lawyer for Pearce and the committee, said through a spokesman that he is reviewing the suit, but after an initial reading, "it appears to be without merit."
Despite the furor, Barbakow tried to remain upbeat during last week's conference call. "The core business is solid," he said. "The right management is in place, and we're committed to doing whatever it takes."