Bryant: Inside general counsel is generally deemed to be a member of the management team, and therefore sometimes has a conflict of interest internally. Let's say the issue is senior management's incentive plan. Even if all the proper procedures have been followed, in-house counsel is still a beneficiary of that incentive plan, so when he or she looks at it, it's not really with an objective eye. Being a member of the management team sometimes skews the way you look at things.
Chresand: Given the relationship between the in-house general counsel and the CEO, there are occasions when it's appropriate for us to retain outside counsel to avoid any appearance of conflict. Board members do view outside counsel as having more independence because they're not employees of the organization. Outside counsel also often represent more than one health system or hospital, so sometimes they have a perspective that we might not have from the inside.
Wilson: The internal and external auditors' roles are quite different. The external auditor focuses on financial statements rather than on the daily inner workings of the various hospital departments. That's the purview of the internal auditor.
LeMoine: Never. In Enron's case, Arthur Andersen served as both internal and external auditor.
Adelman: Inside lawyers get involved with everything, and generally much earlier in the process. Outside counsel don't get involved in an issue until after a lot of discussion has taken place. Sometimes that can be a significant disadvantage for outside counsel.
Chresand: In-house counsel is more apt to be involved with the board and the issues on a regular basis and notice trends or issues that come up. We can be proactive rather than reactive with the board in dealing with issues. We're also a fixed expense, while outside counsel typically charges by the hour.
What constitutes a conflict of interest?
A board member of a corporation owes a duty of loyalty to act in good faith in the best interests of the corporation. A conflict of interest exists whenever a board member has a “duality of interest” and could benefit privately, or appear to benefit, from decisions of the corporation or one of its competitors. In such cases, boards should follow the “3 D’s”:
Should individuals with a conflict of interest be barred from serving on a board?
Not necessarily. Each board should determine an appropriate policy toward conflicts of interest. Although some boards have a "no conflicts allowed" policy, most not-for-profits do not. Bankers, investment professionals, business owners, attorneys and other individuals who do business with the organization can be valuable trustees because of their familiarity with healthcare issues and a commitment that’s grown out of their business association. Recruiting talented members becomes more difficult if the board bars anyone with economic ties to the organization, especially in smaller communities.
If a duality of interest does exist, how does the board determines if it violates the duty of loyalty?
It is important to examine two things in particular:
What are the key elements of an effective board conflict of interest policy?
Adelman: It's a huge mistake. It totally distorts the attorney/hospital relationship. I'm being asked for my unbiased advice of the pros, cons, risks, benefits and alternatives for a particular transaction. If I give that to the board, and then I turn around and vote on the decision, I've colored my advice. I'm biased. I'm saying you ought to vote how I vote.
Chresand: I would frown on that. I think it creates potential conflicts; it puts them in a less-than-objective position.
Iseman: It's a bad idea for the general counsel to sit as a member of the board. It's a conflict of interest. The general counsel needs to remain independent and to not be a part of the final decision-making process.
This practice, common on corporate boards, is rare among not-for-profit organizations but is growing slowly because of the increased responsibilities and time demands placed on directors. According to the 2003 survey of boards by The Governance Institute, 88% of hospital and health system boards do not compensate board members. Compensation is most common among boards of Catholic health systems (27%), other systems (15%), County hospitals (37%) and District hospitals (24%). Among Catholic health systems, another 9% compensate selected board members, such as the Board Chair.
A follow-up survey published in November by The Governance Institute and Clark Consulting found little change. Of the 439 organizations that responded (22% response rate), just 12% offer boards cash compensation, with an annual retainer of $8,572 and an average per meeting fee of $528.
If your board is thinking about compensation, consider these questions:
An opinion from legal counsel on the implications for directors’ liability is essential. In addition, how will the community and public regulators, such as the State Attorney General, view compensation for directors? Draft guidelines from IRS (Feb. 2007) say boards generally should not be compensated, and if they are, compensation must be approved by a committee of independent directors.
Adelman: If there's something going on that is illegal or not in the best interest of the corporation, and the CEO isn't reporting it to the board, then counsel has an obligation to go to the board and report it. That's extremely rare. It's sort of the bottom line, the end point on your relationship that defines everything in front of it.
A general counsel is the Swiss Army knife of lawyers, reviewing and negotiating contracts, verifying compliance with federal and state regulations, advising on business deals, drafting bylaws and resolutions for board consideration, working on employment agreements and physician disciplinary actions and generally weighing in on any discussion that involves legal rights and responsibilities. The general counsel is especially busy before board meetings, reviewing agenda items to determine whether they involve legal issues or require the adoption of formal resolutions. Most important, perhaps, is the general counsel's role in making sure the system is meeting its fiduciary responsibilities.
In August 2002, Great Boards invited four attorneys who specialize in working with health systems to weigh in on the general counsel's place at the boardroom table. The panel included:
S. Allen Adelman, of Adelman, Sheff & Smith in Rockville, Md., who serves as outside counsel to four Maryland hospitals. aadelman@hospitallaw.com
L. Edward Bryant, a partner with Gardner, Carton & Douglas in Chicago. Bryant serves as outside counsel for 25 health systems, and is chairman of the board at the Sisters of Charity of Leavenworth. ebryant@gcd.com
George Chresand, who is employed full-time by Fairview Health Services in Minneapolis, Minn., as legal counsel and chief compliance officer. Gchresa1@fairview.org
Robert Iseman, a partner with Iseman Cunningham Riester & Hyde in Albany, N.Y. riseman@icrh.com
Robert Iseman has held seats on two sides of the boardroom: as a member of Eastern Mercy Health System's Board of Trustees and as outside counsel for a number of other health care systems. He says the role of a lawyer who also is a trustee is much different from that of outside counsel.
"As a board member, I've been very careful not to inject my role as lawyer into my board role because there's already a counsel for the organization," notes Iseman, whose Albany, N.Y., firm serves as general counsel to a number of hospitals and health systems.
Lawyers who serve on boards have a lot of influence with the other trustees, Iseman notes. Trustees might believe they will run afoul of the law if they don't vote the same way as the lawyer-members, he says. "I don't feel they ought to feel that way," he says.
As legal counsel and chief compliance officer for Fairview Health Services, George Chresand works with a number of trustees who are lawyers but are not employed as such by the system.
"Those who have been effective board members have always recognized that their role is as a community member who happens to be a lawyer," says Chresand. "They've realized they're not the corporation's counsel, and they defer to the general counsel to provide the legal advice."
Still, Chresand says he appreciates hearing the opinions of lawyer-trustees because they are intimately familiar with hospital business. "We always include them on task forces, where they can give us their helpful advice," he says. "We've always recognized that the lawyers who are on our board are good lawyers."
Still, he says, there can only be one general counsel. "If they're lawyers but they're not the lawyer for the company, they need to realize they're wearing a different hat while they're serving as a trustee," he says