Rob Gerberry, Senior Vice President and Chief Legal Officer, Summa Health, speaks with Michael Peregrine, Partner, McDermott Will & Emery, about how health care corporate boards can effectively exercise oversight of the corporate legal function. They discuss the general counsel’s dual reporting relationship, the history of the corporate responsibility movement, effective monitoring practices, and the significance of the recent Association of Corporate Counsel survey of general counsel.
To learn more about AHLA and the educational resources available to the health law community, visit americanhealthlaw.org.
Rob Gerberry, Senior Vice President and Chief Legal Officer, Summa Health, speaks with Michael Peregrine, Partner, McDermott Will & Emery, about how health care corporate boards can effectively exercise oversight of the corporate legal function. They discuss the general counsel’s dual reporting relationship, the history of the corporate responsibility movement, effective monitoring practices, and the significance of the recent Association of Corporate Counsel survey of general counsel.
To learn more about AHLA and the educational resources available to the health law community, visit americanhealthlaw.org.
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Speaker 2:This episode of A HLA speaking of health law is brought to you by a HLA members and donors like you. For more information, visit American health law.org.
Speaker 3:Welcome everyone to our continuing series of corporate Healthcare governance podcasts. I'm Rob Berry, I'm the Chief Legal Officer at Summa Health, and a member of the American Health Law Board, and I'm pleased to welcome , uh, my colleague Michael Peregrine , who's a partner at McDermott, will and Emory. Michael , thanks again for joining us.
Speaker 4:Thank you, Rob.
Speaker 3:So, we're excited to bring you a series of podcasts here in 2024 to address a bunch of evolving , uh, corporate governance issues. We're gonna start with the board's obligation around oversight of its legal function. So, Michael, let's start maybe with some of the basics. The general counsel is a member of the management team and an employee of the corporation, and typically reports to the CEO . How does the board get involved in that reporting relationship , uh, based upon , uh, some of the legal obligations that we see , uh, with the fiduciaries on our board?
Speaker 4:Well, it's , it's a hot and sensitive issue, Rob . I think the board , uh, has a right to get involved with this, because the truth of the matter is that governance principles have long recognized that the General Counsel has a dual reporting relationship, not only to the chief executive officer, but also to the board of directors. Uh, and it's an important exercise of the board's oversight responsibility to manage the , uh, effectiveness of the legal affairs function of the organization.
Speaker 3:So, Michael, that may put the general counsel or chief legal officer in a tough spot with that dual reporting relationship. Um, we know, like other members of management, they're expected to report out to the CEO on all matters, but their board may ask them , uh, in confidence , uh, to work on things with them. How do you see a Chief legal officer best straddling those dual responsibilities?
Speaker 4:Well, it's a tough sell to a lot of CEOs I recognize, and, and , uh, I get my rear end burned on this issue more often than I want. But it , and I understand why , uh, but the general principle, Rob , is that the board's responsible for the oversight of the effectiveness of the legal affairs function of the organization. It's just very simple that there has to be an exercise of oversight here to make sure that that , uh, all is working well in terms of not only how effective the legal department is , uh, uh, but the, the, the, the source, the strength, the hierarchical prominence of the general counsel is part of the board's overarching duty of care. It needs to know that there's adequate structure in place to direct , uh, you know, to , to address the legal affairs affecting the company, and that the general counsel in charge of that legal affairs function , um, is the right person for the job. Is it being adequately compensated , um, and has the resources necessary to do the job? Those are all reasons why, again, the board has a right to get involved.
Speaker 3:So, Michael, as you examine how this principle arose, is there something we can arm our legal officers with to share with their CEOs?
Speaker 4:Yeah, and of course, I'm gonna tip my age here , uh, because it , it all of this is an outgrowth of the corporate responsibility movement that arose par post Sarbanes. And , and I recognize that a lot of our fellow members work with CEOs that , uh, were not in positions of management , uh, or close to it during Sarbanes Oxley. So they might not remember. But if , uh, for those of who do, you know, there was a general sense that in many of the Enron type scandals, the role of inside counsel and the Legal Affairs Department had been marginalized by the CEO . That was, you know , a central concern in many of those scandals. And the concern also was that the checks and balances, balances that are, you know, normally provided by inside counsel were just lacking in many of those scandals. The sense was that had the board monitored those checks and balances and assured themselves that they had been in place, a lot of the scandal and harm could have been avoided. Now, to be fair , uh, inside council and the inside council relationships were not the only legal relationships challenged in the corporate responsibility movement. Uh , outside counsel got plenty of blame as well. And that's again, why the question is the board is there just to make sure, does our legal affairs , uh, function work? Uh , is it sidelined? Is it marginalized? You know, I think if you were interested in doing some reading on this, and , and I actually think it's fascinating reading, but I may be a manu , a majority of one here. Uh, you go back to the Bernie Evers case, the WorldCom case, which some may remember , uh, the development of the giant telecom business that ultimately collapsed. And there's a lengthy description and a lot of the literature around that, about how he purposely kept the legal department on the sidelines, didn't involve them , kept them. And, and that was where a lot of, it's a perfect example. So if you're looking to do a little homework on why this is important, I would start with World Cup .
Speaker 3:Great. Thanks, Michael. So we'll share your reading list with our membership as well, it sounds like. Um, so in addition to the monitoring practices that you mentioned, how do you see that best being executed just from common governance practices?
Speaker 4:It's not very difficult. I think the steps are, are , are pretty simple. The , the biggest challenge is always making sure that the c and CEO gets it. So I think you start first with the expectation that the, the board recognizes that the general counsel's client is to the company, not the CEO . I mean , that's a challenge for all of us that we, we, we don't represent the CEO , we don't represent the management team. We represent the organization as a whole, manifested through it , its , uh, corporate leadership. The board needs to understand that the general counsel is really on what they call a balance beam . Uh, for those of you , uh, gymnasts and the , and the audience between the interest of the CEO on one hand and the interest of the corporation, and to recognize that sometimes they can be outta sync. The board needs to understand also the professional obligations of the general counsel that we can, you know , we can lose our ticket to practice law if , if we , uh, don't re keep recognizing our responsibilities under the professional code , uh, to , to serve the organization and not, you know, to, to essentially be a yes man to the CEO . All of this, I think, manifests itself in a couple specific areas of board focus. Um , I typically advise the board and it's, is it the audit committee? Is it the governance committee? What c committee is the proper one? It it may depend. Uh, but so take a look at a couple things. Number one is the , the size and mission of the legal affairs function, it's resources and how it's operated. Uh, a second one , uh, is , uh, a very important one. Uh, the issue of the hiring and termination and compensation of the general counsel, it's so important, but as you can imagine, it's a super hot button with the CEO . Uh, and so it's, I think that of all the situations, that's the trickiest where the board needs to make sure that the CEO understands that , sure, this is your employee. Sure, you get to make the hiring decision. But absolutely, the board needs to be able to ratify that decision , uh, and also to , uh, make sure that he , he or she is compensated effectively and particularly, and I think that the chief legal officer and the chief financial officer are often , uh, tied in this one. If that officer, if the CLO is terminated, the board has an absolute obligation to get in and find out what happened, just like they do with the CEO . I also think, Rob, that it's important that, and this is real , uh, ground level stuff that the general council or a member of a staff attends all board meetings , uh, staffs the key committees, and certainly participates in executive sessions on a periodic basis. All of these are the key ones. There . There are more ways to manifest the board's oversight, but I think those are the biggies .
Speaker 3:Great . Well, given this landscape, Michael, what do you see the significance being of the recent Association of Corporate Counsel survey , uh, that they did to their Chief legal officers?
Speaker 4:I think it , you know, it's an , it's important evidence to show that the , that the lawyers are not being , uh, going overboard in describing , uh, their role within the organization. And I think it's also vitally important for the board because they can say, yeah, we get it. 'cause the A CC , uh, uh, I think really, and , and it's , uh, its analysis and it's been doing this for a number of years, really zeroes in on the increasing importance of the general counsel with respect to their duties and the scope of their responsibilities. It also flags a number of areas of concern , uh, which , uh, should be of interest to the board. Now I get it, you know, as, as with all the surveys that the consulting firms , uh, put out , and they're so very helpful. The results of , uh, something from the Association of Corporate Counsel , uh, doesn't in and of itself constitute a best practice, but if the survey is thoughtful and there's a broad based response, like the a CC survey, again, it can tell us quite a bit about what the peer group is doing. And in my mind, the a CC survey, you know, comes out in what January of every year, does that in a very meaningful way, year after year. And it's, you know, you can kind of track the statistics , uh, and the trends, and I think that's important for the board or , or the audit committee to do so. So I always recommend that the committee , uh, get a copy of that survey and review it and be advised on it in terms of what its significance are.
Speaker 3:So from this year's survey, were there specific items that you , uh, saw that maybe of value to our membership?
Speaker 4:Yeah, I think that there, there are a couple of of conclusions that , that I zeroed in on. Uh, one are the survey results that talk that , that suggest that corporate counsel , and again, this goes beyond the health industry, Rob, as you know, but the corporate counselors saying they , they're being asked to do more with less. Well, aren't we all? Um, but I think it's nevertheless important , uh, for the board because they're responsible for monitoring the budget. Uh, you know, is, is the compliance function properly resourced? Is the legal , uh, uh, component properly resourced? So if you have almost 60% of the people saying that, that things are much tighter , uh, that should prompt a question on behalf of the board saying, why is that? Now it may well be, for example, especially in our industry, everybody's belt tightening, and we just don't, you know, it's not realistic to, to think that a , any department within a large health system is gonna be functioning at anywhere near the same budget level it has been in the past , but the question needs to be asked. So I think number one, the , the do more than with less phenomenon is , is a little bit of a prompt for boards. I think what's really interesting though, and you know, we talk a lot about the importance of the Chief Compliance Officer having a important hierarchical position within the organization. Uh, I always find that the survey results interesting to talk about how the responsibility of this, of the general counsel or chief legal officer continued to expand. Um , it , it was so interesting to me to note, you know , the arrows trending up on this. More than 58% of the respondents are , are serving as the direct manager of at least three additional company functions. Now, again, not to make our compliance officer colleagues upset, or certainly not to upset the HCCA, but most common among these was corporate compliance. I , I , I think you , the numbers are over 60% of surveys say that they are responsible for oversight of the corporate compliance function. The other big ones , uh, uh, in declining order are privacy, ethics, and risk . So I think that, again , uh, the analysis of what your peers are doing is important not only for the general counsel , but especially important for the board and management as they evaluate what their general counsel was capable of doing and, and the importance of integration of the pure legal affairs function with things like compliance, privacy, ethics, and risk . Uh , the third thing that jumped out at me from this year's survey was that , um, was what the, the respondent said that they're focusing on this year in terms of risk mitigation. Uh, we as lawyers are, are very focused on risk and, and, and reducing it. So it was interesting to me that the CLOs reported , uh, their top concerns in terms of risk is , uh, data related threats, and we can certainly understand that closely followed by privacy and regulatory enforcement , uh, and other security based threats. Uh, I would note though that this was , uh, the , the survey results were posted before , uh, we had the , uh, lovely missives from the , uh, department of Justice and the FTC on antitrust enforcement and before , uh, a number of the announcements from the Department of Justice on other corporate fraud enforcement actions. So again, it's, it's interesting where the CLL CLS line up on risk mitigation efforts.
Speaker 3:So Michael, you mentioned a lot of my peers are having their roles expanded, they're becoming more involved in different operational areas. Do you find that being substantiated in the data?
Speaker 4:Uh, it , I wish it was substantiated more, Rob. Uh, I think there's some good in the bad in the data, and again, this is why I think the board, it's valuable to the board be aware of what the data says , uh, and how the general councils is being integrated into the regular operational activity of corporate leadership. And , and before I go into the survey obligations, I would just say as a general matter , um, I , I , I am a , a , a strong believer in the , uh, per , in the view of the well-known , uh, former general counsel of General Electric, when General Electric was General Electric, Ben Heinemann , uh, about the role of the lawyer being that not only a technical expert, but wise counselor and valued partner to management from a business perspective, the , the , the, the three big aspects of what the general counsel does. So when I look at the question of the general counsel's interaction of business, I look first at what the survey has to say about attendance at board meetings. Now, I'll bet if you poll most general counsel , they'd be rather be doing other things than attendings. Lots of board meetings, especially when they're early in the morning or late in the day, and they , you know, the general council will be busy doing other things, but it's just absolutely critical. I think they have the general council of board meetings, so , uh, the , the board can turn to their council right then and there in the meeting and say, what do you think, Rob? Uh, unfortunately, the , the percentage of responding CLOs who regularly attend board meetings in dropped in the survey for the first time in several years, from 82% to 76% year over year . Now, I , I'm not the analytics guy , uh, especially when it comes to baseball, but also when it comes to reading surveys, is this a, is this a significant drop? Well , 6% is 6%, I wanna see it next year. I think it's a , the decline is a yellow warning flag given the importance generally attributed to having the CLO attend board meetings. Um, and , and furthermore, the suggestion that almost 25% of the CLOs who respond to the survey don't regularly attend board meetings. I is, in my mind, particularly worrisome , uh, if you're going to be an effective board, you wanna be able to have your legal questions answered, at least preliminary right then and there in a meeting, rather than say, we'll come back and advise you later on. I just think that's critical. Um, a another survey fa , uh, area Rob, which, which I look at closely is , uh, the extent to which the survey , uh, actions , uh, reflect the CLOs interaction with executives. Again, this is that Ben Heinemann concept of a valued business partner to management, or just the , basically the access question. How often do you have a chance to get in and con connect with the CEO or , uh, chief administrative officer? So , uh, a disturbing indicator to me is, again, the decreasing percentage of CLOs who responded that , yeah, we regularly meet with the business leaders to discuss operational issues and issues of risk. Like in the pa we , we've had in prior surveys, this has been almost over 75% of responding CLOs say , yeah , we do have this on a regular basis. Now that's dropped down to 64%. Okay, that's, you know, that's 13 points. If I'm a board member, I want to know what's going on there. The suggestion is that the interest of CEOs in involving the CLO early in the development of operational tactics and the evaluation of risks is declining, and that's gonna be worrisome to the board. It's another reason why, again, the board really needs to have its finger on the pulse of this stuff. And then finally , uh, I looked to see, and I was, I noticed in this year's survey that there was a sharp decline in the percentage of CLOs indicating that they're regularly sought out by their executive groups for in on strategic business opportunities. That's really worrisome to me. Uh , it , it's even more so , uh, given , um, the results from the recent a VA spring meeting where the antitrust enforcers were laying out their broad agenda and we're talking about strategy and your development strategy, and you've, you've got the percentage of CLOs participating going from 73% in 2020 to 48% in 2024. That's a huge drop . Uh , I , you know, is that a statistical anomaly? I don't know. But if you look at it from just the numbers, it suggests that 62% of the responding CLOs aren't regularly consulted by their leadership on strategic business issues. And that's nuts. Uh, and if I'm a board member, I want to know if that's happening in my organization. And , and I would be concerned if strategy was being developed outside of , uh, the involvement on a regular basis of the CLO . Uh , I , I know there , there are people out there who are saying, would you get real peregrine? I , I, you're , you're, you're creating problems for me because I can't be expected reasonably in my organization to have that kind of , uh, participation. And I'm just saying, you know, after 45 years of doing it , uh, the board has , uh, every bit of a expectation that you are that involved. And if you are not, they're gonna wanna know why.
Speaker 3:Michael, with the level of emerging , uh, business and organizational risks, I think you've highlighted a key issue for us here. So as we think about our , uh, CLOs and our general counsels, and knowing the value of being able to have that direct reporting relationship to the CEO on board versus other maybe corporate officers, does the survey suggest there's any broad practices , uh, related to those reporting relationships?
Speaker 4:Well, you know, one , one positive note, Rob from the survey is that , um, the percentage of CLOs with the direct reporting relationship to , to the CEO has remained pretty constant over the last five or six years with results ranging from, you know, like 81 to to 84%. That's terrific because as you know , uh, better than I, the ability of the CLO to have a formal reporting and communication relationship with the CEO is a strong indicator of corporate responsibility. I'll note as an aside that especially in the years after Enron, there was a lot of professional writing, including from the bar associations about , uh, alternative reporting relationships , uh, the CEO to the CFO or the CEO to the chief administrative officer. Uh, and , and those are, are absolutely frowned upon , uh, for, for a variety of conflicts and compliance perspectives. So this was a good number. It looks like most general counsel directly report let's this way, if, if you are not reporting, have a direct reporting relationship to the CEO , uh, you are way out of line with the norm. And that would be a concern for the board. They'd wanna know, again, why is that happening?
Speaker 3:And how about with a separate reporting relationship to the board?
Speaker 4:Well, that , that's a , a less , uh, positive statistic. The percentage of CLOs that have a separate reporting relationship to the board has remained flat over the last three years for , you know, kind of from 51 to 53%. And again, that's disappointing. There's , because there , there's been so much out there, you know, o over the last three years, a as the arrow has pointed up in terms of an awareness of the boards fiduciary responsibilities and expectations on engagement and involvement with risk management strategy , one would think that , uh, they would demand that their, their CLO is going to be at every meeting and report to them , uh, especially that they'd want to hear from the , the , uh, CLO and on a direct report basis. You know, why is this happening? Um , you know, your, your guess is as good as mine. Uh , the , the board , uh, board might say, go to the CEO . Why is this not happening? Why are we not , uh, having the chance to have the general counsel report to us? It's just contrary to the core governance principle that the CLO also serves. The board is its primary legal advisor. The only exception is when there's conflict, when there's diversion of interest between the board and the CEO . Um, and that happens from time to time. Uh , it happens in situations where the board is exposed to liability and all the, all the members of the board or , um, again , need to get their own counsel or where the board is in direct conflict with the CEO . Um, as I get involved with from time to time, you know, then I can understand. But generally speaking, I , I think it presents a challenge to, to the board and to council to make sure that the CEO understands that it should not be a threat to the CEO's in , uh, leadership and management authority. But the board has a right to look to the general counsel with a reporting relationship and to be advised by the general counsel , if not you , you want them to turn to outside council , uh, unless there's a divergence of interest. I, I , that's, that's a problem to me, and I'm, I'm disappointed with those numbers.
Speaker 3:Well, Michael, thank you very much for your thoughts today. They really validate the importance of the general council's role and their reporting relationships and support their profiles. A key member of the executive leadership team and the importance for the board of monitoring , uh, their profile. It also sounds like the a CC survey, which you referenced today, is a really valuable resource document that our membership can take a look at and also share with their CEO on board as they look at issues arising this area. Michael, thanks again for joining us and for kicking off our , uh, new series.
Speaker 4:My pleasure, Rob , thanks so much.
Speaker 3:Thank you .
Speaker 2:Thank you for listening. If you enjoy this episode, be sure to subscribe to a HLA speaking of health law wherever you get your podcasts . To learn more about a HLA and the educational resources available to the health law community, visit American health law.org .