“This is where they earn their keep,” said Steve Kaplan, a finance professor at the University of Chicago Booth School of Business, who has studied CEO turnover and abilities. Kaplan said one major responsibility for any governing board is the hiring and firing of an organization's chief executive.
Kaplan said the board may have been unwilling to draw from its management as they wrestled with questions concerning Melani's conduct, but the company nonetheless needed an interim chief executive and turned to the only other viable option available: the governing board, Kaplan said.
Benjamin Hermalin, a finance and economics professor at the University of California at Berkeley, who has studied governance, said the board may believe other executives are too close to the ousted chief executive to fill his shoes. Or they simply lack a strong internal candidate to succeed him, which could suggest a lack of planning for executive turnover, he said. Melani was named Highmark's top executive in 2003.
The board member selected to fill the top executive spot, if diligent about his governance duties, will know something of the company's operations, Hermalin said. But that understanding will be nonetheless limited when board members come from outside the industry, he said, which makes the appointment questionable as a long-term option. “In the short term, you may just have to make do with what you have available to you,” he said.
Highmark has begun a search for Melani's successor, according to a company statement.
The board's priority for its interim and eventual successor to Melani will be someone who can assure employees and the public of the organization's stability and integrity, said Don Seymour, president of Don Seymour & Associates and an adviser to the Governance Institute.
“The overarching principle here for any board in a crisis situation that results in dismissal of the CEO is: What's the most effective way to provide stability to the organization in this time of crisis and transition,” Seymour said.
Highmark announced plans to acquire West Penn Allegheny Health System in June 2011. The deal is under review by the Pennsylvania Department of Insurance, and a hearing is scheduled for April 17. The U.S. Justice Department's antitrust division also is closely scrutinizing the plans, according to published reports.
For West Penn Allegheny—a five-hospital system that has seen persistent losses, including $32 million in the final three months of 2011—a change in the top at its prospective savior could raise worries about the insurers' commitment to previously articulated plans, said Anthony D'Eredita, executive vice president of Southwind, the Advisory Board's merger and acquisition consulting division.
But a new CEO could also allow the board to hire someone with skills to manage Highmark as it seeks to expand as a healthcare provider, D'Eredita said. West Penn Allegheny declined to comment on whether the system will play a role in selecting a new Highmark CEO.
Highmark moved quickly to stanch any damage to its reputation, according to a company statement explaining its decision regarding Melani: “Dr. Melani's agreements define cause as, among other things, willful or gross misconduct which materially injures the company,” the insurer said, listing misconduct that included the alleged fight; an admitted relationship with a junior employee; and repeated denials about the relationship to senior management. “The injuries resulting from Dr. Melani's gross and willful misconduct include injuries to the Blue Cross Blue Shield brand, the company's reputation, risk to business partners and financial harm.”
Sam Cordes, an employment attorney hired by Melani, said he has begun evaluating the executive's termination. Melani accepted an agreement under which the assault and trespass charges will be dropped if he receives sufficient counseling, according to the Allegheny County district attorney's office.