Recent news coverage and editorials in Modern Healthcare and elsewhere have questioned the presence of healthcare executives on the boards of directors of companies that sell goods and services to the healthcare community. These criticisms revolve around possible conflicts of interest or a reluctance to deprive healthcare institutions of the full attention of their senior executives, among other factors. Certainly any potential conflicts of interest must be avoided, and the directors employer must be comfortable with the necessary time commitment.
But focusing solely on these issues misses the big picture and does not take into account the significant contributions to corporate governance that an independent director can make. Having an experienced healthcare executive on a for-profit board can dramatically help that company better serve its stakeholders.
Todays corporate governance standards require boards of for-profit firms to be largely composed of outside executives rather than members of the companys own executive team. Independent directors ideally bring a mix of good judgment, relevant experience and the ability to fulfill the fiduciary duty of decisionmaking that is in the shareholders best interests. Because of the competitive nature of director recruitment today, many companies are considering individuals from diverse industries for board seats.
Although industry outsiders can clearly bring a fresh, unique perspective, it is challenging to represent the interests of shareholders if one lacks a deep understanding of the complexities and nuances of the healthcare business. For instance, one of any boards key responsibilities is reviewing and approving strategic and operating plans. Doing this effectively without the relevant healthcare knowledge and experience is just not possible.
Consequently, healthcare industry experts, executives in closely related industries and potential customers are increasingly finding themselves tapped for board openings. These appointments are not, as it may seem, simply beneficial to shareholders so that the firm can sell more productsrather, it is the industry experience these board members bring to the table that is so valuable, as they are in a unique position to provide a reality check on managements plans, strategies and business judgments.
For instance, directors with broad experience in healthcare will be able to answer the tough, multifaceted questions that will inevitably arise: Will customers want the products in which management is heavily investing? Are there macro industry trends that should drive the companys strategy? Its always possible that managements presentation, consciously or unconsciously, is filtering out all data contrary to its opinions. An outside director with solid ethics and relevant experience in the industry can ask the right questions and provide the reality check that shareholders want and need to keep their investments safe.
With industry experts and potential customers as desirable board members, managing and mitigating conflicts of interest can be challenging, but it is possible. These issues can be avoided by full disclosure of the board members situation to both the company and his or her employer.
Most employers have policies governing and defining potential conflicts of interest. Direct conflicts are generally not allowed, meaning that most companies do not allow their executives to sit on any boards of vendors with which they have commercial relationships. Other approaches, including relinquishing ones board compensation to an employer, are also taken to deal with these situations.
As for the criticism that the directors employer is deprived of the employees time, an increasing number of companies are beginning to understand the invaluable perspective and enhanced leadership skills that their senior managers gain by serving on outside boards. Understandably, given the time commitment, most companies limit the number of for-profit boards on which their executives can serve.
Some critics of healthcare executives serving on vendors boards suggest these directors act as paid salesmen for the vendors products. Were this true, it would certainly be a risky, expensive and inefficient way to accomplish that purpose. Companies often have advisory boards, user committees or simple customer testimonials that provide the high-profile and credible advocacy for products, without the expense of highly paid board members.
Moreover, with the passage of the Sarbanes-Oxley Act of 2002 and the substantial legal liabilities it imposes on board members, it is hard to imagine any reasonable person would assume a board position just to endorse a companys products.
Corporate boards are responsible for looking after shareholders interests. Shareholders benefit directly and the public benefits indirectly when experienced healthcare leaders serve on for-profit boards where their experience and perspective result in better products and services for all of us.