Tackling the "evils" of Interlocking Directorates in Healthcare Nonprofits

• Publication year: 2021

85 Nebraska L. Rev. 681. Tackling the "Evils" of Interlocking Directorates in Healthcare Nonprofits

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Nicole Huberfeld(fn*)

Tackling the "Evils" of Interlocking Directorates in Healthcare Nonprofits

TABLE OF CONTENTS

I. Introduction .......................................... 682 R
II. Understanding Board Overlap in Healthcare ........... 687 R
A. The Story of Allina Health System ................. 690 R
B. The Hospital Chain ............................... 696 R
C. The Small Town Joint Venture .................... 698 R
III. Fiduciary Duties--Traditional Doctrine, Modern
Shortcomings ......................................... 699 R
A. The Duties Reviewed .............................. 700 R
1. The Duty of Care .............................. 700 R
2. The Duty of Loyalty ........................... 701 R
3. The Duty of Obedience ......................... 703 R
a. Charter Mission ........................... 704 R
b. Licensure Mission .......................... 705 R
c. Mission Interpretation ..................... 706 R
B. The Void of Guidance ............................. 709 R
1. Case Law, by Example ......................... 709 R
2. The Revised Model Nonprofit Corporation Act . . 711 R
IV. The For-Profit Corporate Approach is Insufficient for
the Nonprofit Healthcare Organization ................ 713 R
V. Proposals for Proactive Boards ........................ 716 R
A. Procedural Shifts .................................. 718 R
1. Multiplicity of Interest--Documentation and
Disclosure ..................................... 719 R
2. Charter Documentation ........................ 720 R
3. No Safe Harbor ................................ 722 R
4. Revise the RMNCA ............................ 724 R

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B. Substantive Shifts ................................. 725 R
1. Elevating and Parsing the Duty of Obedience:
Charter Mission and Licensure Mission ........ 726 R
2. Duty of Loyalty Viewed Through Duty of
Obedience ..................................... 727 R
3. Duty of Care Informed by the Other Two
Fiduciary Duties ............................... 728 R
C. Reevaluating Multiple Board Memberships ........ 729 R
1. Vertically Integrated Systems .................. 729 R
2. Horizontally Integrated Systems ............... 730 R
3. Smaller Alliances .............................. 732 R
VI. Conclusion ............................................ 733 R

The practice of interlocking directorates is the root of many evils.(fn1)

I. INTRODUCTION

The nonprofit(fn2) sector and matters of nonprofit governance have been in the national spotlight much of late.(fn3) One area of heightened

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interest is directors of healthcare entities regularly serving on the board of more than one healthcare organization. Even when board membership of related entities is relatively independent, one corpora-tion's business plan frequently is affected (or even controlled) by the business needs of a separately incorporated parent, affiliate, or other related organization. Very little case law addresses "interlocking" directorates for nonprofit board members, and the case law that does exist tends to address narrow, fact-based state law interpretive issues rather than elucidating the nature and scope of fiduciary duties. The result is that the doctrine in this area is severely underdeveloped.(fn4) State statutes and supplementary guidance documents such as the Revised Model Nonprofit Corporation Act provide little insight as well. Within this vacuum, considerable tension exists between the modern reality of overlapping boards, which often occur due to integration of healthcare entities into "delivery systems," and the traditional doc

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trine of fiduciary duties, which contemplates that directors will serve only one corporation.(fn5)

It is a long-standing principle of corporate law that directors owe fiduciary duties to the corporation(s) on whose boards they sit.(fn6) Nonprofit directors' fiduciary duties are threefold: the duty of care, the duty of loyalty, and the duty of obedience.(fn7) The duty of care requires directors to act in an informed, careful manner in their decisionmaking.(fn8) The duty of loyalty commands directors to act without self-inter-est, in good faith, and in the best interests of the corporation at all times.(fn9) The duty of obedience obliges directors to ensure that the charitable mission of the corporation is carried out and to obey laws relevant to the organization.(fn10) While the duty of care and the duty of loyalty are well established, the duty of obedience is a more recent development and not fully incorporated into the canon of nonprofit fiduciary duties.(fn11)

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Three examples will help to illustrate the strains and conflicts that are endemic in modern nonprofit governance. The first relates to integration of the finance and service aspects of healthcare and the conflicts that may be predestined to arise in healthcare systems that have integrated these functions (known as vertically integrated delivery systems). The break-up of Allina Health System by the Minnesota Attorney General serves as a parable, as it illuminates the critical issue of whether the duty of loyalty and the duty of obedience can be honored while serving on more than one board of directors when the corporations are related but have conflicting licensure mandates. The second example hypothesizes an urban-suburban hospital system and the typical conflicts of interest that arise when multiple healthcare entities that provide essentially the same services join forces by contract and agree to be governed by one umbrella board of directors or by boards of directors with overlapping members (called horizontal integration). The third example is a smaller, community-based hospital and home health agency that share board members; this model exists in many communities across the country and highlights the idea that even when integration has not occurred, business plans can affect close entities. Each of the three examples raises questions about overlapping directors' duties, particularly the duties of loyalty and obedience.

The current reality of the healthcare industry and corporations in general is that directors sit on multiple boards.(fn12) Some would argue (as did Justice Brandeis in another context) that this practice should be halted entirely because it is nothing but a grab at power and control by individuals attempting to avoid certain constraints of the corporate form. While the argument has merit, this Article will focus on the extant problem, as the complete cessation of such interlocking boards does not appear to be immediately attainable. Board members are entitled to more certain guidance, and the communities they serve are entitled to socially responsible nonprofit institutions.(fn13) Therefore,

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the time is ripe to modify the doctrine of fiduciary duties so that it encompasses this reality of overlapping boards; recognizes the trend toward more global, comprehensive, and proactive governance in the healthcare sector; and enables directors to decipher, document, and resolve conflicts at a more meaningful point in their decisionmaking processes. If we want high-level stewardship to steer board members faced with conflicts, then we must provide a substantive doctrine that guides and that can be employed easily by the largest and smallest, most and least sophisticated institutions.(fn14)

This Article first discusses the three examples of overlap in nonprofit boards of directors to create a frame of reference for analyzing this feature of nonprofit boards. Next, the Article describes and analyzes the deficiencies in the doctrine of fiduciary duties as they are traditionally defined, why fiduciary duties must better guide directors in serving multiple boards, and how the duty of obedience can become doctrinally more potent by bifurcating the defined and guiding mission of the organization into what I have dubbed "charter mission" (meaning the nonprofit corporate mission as suggested by the state's nonprofit act) and "licensure mission" (meaning the healthcare mission as dictated by state licensure statutes and regulations). The Article then briefly addresses the reasons why the usual approach to conflicts by for-profit corporations--inform and recuse--is insufficient for healthcare nonprofits. Finally, the Article sets forth a proposal that includes the procedural and substantive modifications necessary to catalyze a shift in understanding and to achieve the level of guidance that directors and their organizations so clearly need.

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II. UNDERSTANDING BOARD OVERLAP IN HEALTHCARE

Historically, the overlap in nonprofits' boards of directors has not been accidental, nor has it been a necessarily bad thing. In fact, the creation of connections for business purposes and for development of resources has been important for all nonprofits, not just those within the healthcare industry.(fn15) This was particularly true when nonprofits were generally small businesses that relied on volunteer community leaders to complete their boards of directors, who in turn created opportunities and obtained benefits for their nonprofits.(fn16) Healthcare has become an industry of large, sophisticated, and interconnected businesses, and boards of directors continue to overlap between healthcare entities. This occurs for a variety of reasons, ranging from the economic sensibilities of alignment (as with vertically integrated delivery systems) to the business strategy of connecting entities to capture markets (as with horizontally integrated healthcare sys-tems).(fn17) In smaller communities, the reasons for board overlap appear not to have changed over time; small communities still rely on limited pools of volunteers.

Each of the three examples discussed below involves affiliation and/or integration of healthcare entities...