That said, it didn't take long after shareholders sued HCA and its directors over the IPO that the company began reforming the board, including some that the company alluded to in its IPO registration statement. Former HCA CEO Richard Bracken is the first named defendant in the derivative lawsuit.
On Feb. 1, 2013, and again on Jan. 29, 2015, HCA amended the charter for directors on the board's audit and compliance committee to preclude them from directly or indirectly accepting any consulting, advisory or other compensation from HCA or any of its subsidiaries. Committee members previously were not “precluded from receiving remuneration from any of HCA's dozens of subsidiary hospitals or treatment centers,” according to settlement documents.
The amended charter also required the audit and compliance committee to review and OK material transactions by parties related to HCA and discuss those proposed transactions with management and HCA's independent auditor before approving any transaction.
On June 28, 2013, and again on Jan. 29, 2015, HCA revised the charter of the board's compensation committee to require the committee be composed of at least three independent board members, the settlement shows. Before those reforms, the committee could be any size and senior managers were not precluded from serving on it.
Among other board reforms made before December's settlement agreement, HCA strengthened language in its code of conduct with detailed financial reporting requirements and whistle-blower language requiring employees to report real or perceived financial or operational violations.
Michelson, through a KKR spokeswoman, declined to comment for this story. As of Dec. 31, affiliates of KKR and the Frist family still owned 84.1 million common shares of HCA, or 20.6% of the company through Hercules Holding II, according to recent SEC filings.
An HCA spokesman responded to media inquiries to the Frist brothers with the following statement: “Our board regularly reviews the company's corporate governance policies and procedures to ensure their appropriateness and effectiveness. We believe our governance structure will continue to serve the best interests of our shareholders.”
The Frist brothers are the sons of Thomas Frist Jr., the man who took the hospital company his father started and built it into the world's largest investor-owned hospital chain. Forbes pegs the net worth of the elder Frist and his family at $7.4 billion.
Additional HCA board reforms lie ahead. Within 18 months of finalizing the derivative settlement, HCA must add an independent director to a board that today has 11 members, seven of whom are independent. In addition, the settlement limits to five the number of boards that an HCA director may sit on at other public companies.
Several shareholder-friendly reforms also must be put in place as part of the settlement. Specifically, the board's nominating and corporate governance committee charter will have to be amended to require the committee to evaluate all properly submitted shareholder proposals.
The committee also must develop a process to determine whether the proposals are in the company's best interests and recommend, with reasons, whether the board should support or oppose each shareholder proposal.
For five years, HCA will be required to publish on its website its insider trading policy and its disclosure committee charter. The company currently does not do so. It also will be required to post on the website the company's corporate governance policies, guidelines and committee charters.
The settlement also includes mechanisms for various committees to become checks on each other. For example, the board's disclosure committee, which assists senior management with regulatory filings and other financials, will come under the supervision of the board's audit and compliance committee.
The audit and compliance committee, meanwhile, will have to include at least one member who is an “audit committee financial expert” under SEC rules.
Hospital governance expert Lawrence Prybil said all healthcare boards have room for improvement, and the best are constantly and systematically looking for ways to bolster their structures, processes and cultures.
“All hospital boards do some things well and all can do some things better,” said Prybil, who is Norton professor in healthcare leadership at the University of Kentucky and author of numerous studies on hospital governance.
“The hallmark of the best boards are that they look objectively at themselves, sometimes with outside help, to get better.”