We’ve seen the perils of board passivity, and we’ve insisted on the need for board members to ask tough questions and hold senior managers to account. Sometimes, though, even that’s not enough. When scandal engulfs tops managers, board members must, in essence, prepare to direct and transform the company for as long as it takes to resolve bet-the-farm issues and stabilize the organization.
Edward A. Kangas, who serves on the boards of several prominent companies, faced just such a situation when he was asked in 2003 to serve as chairman of Tenet Healthcare amid a Medicare payment scandal threatening the company. Tenet, one of the largest private hospital companies in the United States, had been taking advantage of a loophole in the Medicare payment system, to maximize “outlier payments,” which are what Medicare pays to treat the most seriously ill patients.
The following commentary is excerpted from the book, The Communicators: Leadership in the Age of Crisis, by Richard S. Levick and Charles Slack (Watershed Press, 2010).
The company ultimately paid $900 million to the U.S. government to settle the matter. More serious, potentially, was the damage to the company’s reputation and its ability to continue functioning, as most of its top managers, including the CEO, had to be replaced. Kangas was recruited to the board and asked to be non-executive chairman to lead the board through the crisis.
Among his first steps as chairman was to visit some of Tenet’s hospitals, to speak individually with front-line doctors, nurses and administrators. He was struck mainly by their professionalism and their deep commitment to the patients under their care. “I had to assess whether this company was corrupt. It was not, it was made up of very good people,” Kangas recalls. “This was a wonderful company with a lot of excellent people. The task at hand was a worthy endeavor.
“Management wasn’t corrupt, either, but they had been affected by what I’ll call ‘Wall Street Medicine.’ For-profit hospital companies do have a responsibility to shareholders for maximum performance, but the constituencies are a little broader. There are other stakeholders. It has to do with the quality of medicine and the care that’s provided, regulatory compliance and doing what’s right.”
Convinced of the underlying strength and soundness of the company, Kangas quickly set about helping the board install a new management team, starting with the CEO. After a broad search, the board settled upon Trevor Fetter, a former Tenet executive who had recently returned to the company to help during the crisis.
Ultimately, the board also replaced nine of its 11 directors. Burned by the scandal, many members had become cynical about the company. “They hadn’t done such a bad job. But if the company was going to have the opportunity for a new day, it had to have a clean sweep,” Kangas says.
Kangas is careful to note that directing and transforming a company should never be the board’s long-term goal or responsibility. As quickly as possible, the CEO must be appointed and his or her managers must re-assume that role. “When things are difficult or fast-moving, employees need to be swift and laser-like, and they need a CEO who’s empowered, to whom people respond,” Kangas says. To underscore that point, Kangas is careful to refer to himself as a “non-executive chairman.”
“I am not chairman of Tenet Healthcare, I’m chairman of the board of directors,” he adds. “It’s important for people to know who the leader is. Trevor Fetter is the leader of Tenet Healthcare inside and out. He is a great CEO, and he saved the company.”
Yet there’s no denying the crucial role that board members play during that brief-as-possible period when they must shoulder outsized responsibilities. “It doesn’t take being tough, or being all that brilliant,” Kangas says. “But it does take a certain courage. Courage sometimes means simply doing what’s right even if it’s difficult…. You’ll have some opposition, or receive disparaging comments. You just have to have the courage to do what’s right.”
In 2004, Computer Associates (now called CA), one of the nation’s leading IT companies, faced a similar situation. The company was engulfed in scandals involving accounting procedures, questionable compensation practices, and obstruction of justice. The company’s directors, some newly appointed in the wake of the scandals, were thrust into a new role as they found themselves making critical decisions on personnel and operations.
One of the board’s first moves was to hire Kenneth V. Handal as executive vice president, a highly experienced corporate risk and compliance attorney, to advise as they navigated the crisis. “I came into Computer Associates after almost the entire senior echelon had gotten fired,” says Handal, who previously had served as compliance counsel for Altria, which was then the parent company of Kraft Foods and Philip Morris. “There were virtually no other senior officers…. I was hired by the then-chairman of the board, Lew Ranieri. Lew, his successor Bill McCracken, and the entire board were very active from that point forward in guiding the company through the troubles…and basically transformed the company.”
Fortunately, the core business remained sound as enough customers were still satisfied with the company’s products and services. Not surprisingly, given the scandal, the main need was to resurrect its reputation for ethical compliance. “There was a lot to do in terms of culture and integrity within the company,” says Handal.
Not only were senior managers prosecuted as individuals (several went to jail), but the company itself faced possible charges stemming from the actions of management. Working closely with the board, Handal negotiated an agreement with prosecutors not to pursue charges against the company as long as it implemented sweeping reforms of its practices.
One early step the board took was to find and hire as CEO a leader of impeccable reputation, IBM veteran John A. Swainson, who would implement and reinforce ethical standards throughout the company. Among many changes to the board’s own practices, directors decided to look much more closely than in the past at risk management, through a newly established compliance and risk committee.
Risk doesn’t just refer to potential scandals. “You might have financial risks involving customers, or concerns about whether you’re staying ahead of the game in terms of innovation,” says Handal. “As with any company, you might have compliance risks. Or there could be political risks in going into certain countries overseas, or risk posed by competition or industry consolidation. Risk is everywhere.”
Betsy Atkins, an entrepreneur and CEO of a venture capital investment company called Baja Corp., offers an even more dramatic example of how boards must sometimes assume 24/7 responsibility for corporate operations. Atkins has served on a number of boards over the years but, listening to her, we can safely surmise that her tenure as a director of HealthSouth – during a protracted crisis that made front-page headlines nationwide – stands out as a definitive experience even though she was only on the board for a little over two weeks in 2003.
Atkins knew when she joined that HealthSouth, a major healthcare company based in Birmingham, Ala., faced problems. In fact, she was appointed specifically as an independent director charged with investigating allegations of insider trading. The stakes increased exponentially when, just as Atkins took her seat, charges of criminal fraud against the company surfaced.
“Criminal fraud is a whole different matter from an allegation of insider trading,” Atkins says. She led the board on daily calls. “It was more than a full-time job. It was a 16-hour-a-day job,” Atkins recalls. “Every single day, we made a major decision, and we kept the company from going out of business. The company was “in-the-zone-of-insolvency,” as trading had been suspended on the New York Stock Exchange for four days. This was a company with 55,000 employees, a million patients, and about 3,000 hospitals. So it was really important that the customers – the patients – be cared for.”
Atkins ultimately left the board after just 16 days when Chubb insurance terminated HealthSouth’s D&O (directors and officers) insurance. By then, she says, the worst of it was over. “The overall outcome was positive because the company was able to keep functioning, service was provided to patients and the company avoided bankruptcy,” she adds.
While most boards will never have to face such problems, it’s safe to say that the directors who accepted their positions at Tenet Healthcare, Computer Associates and HealthSouth also never expected or had any intention to take day-to-day control of the company. As their experience shows, accepting the role of director means offering more than just vigilant oversight and wise counsel. It means that, on any given day, you might even have to take charge, and direct and transform the company.
Richard S. Levick, Esq., is the president and chief executive officer of Levick Strategic Communications, a crisis and public affairs communications firm. He is the co-author of The Communicators: Leadership in the Age of Crisis and Stop the Presses: The Crisis & Litigation PR Desk Reference, and writes for Bulletproofblog. Levick is on the prestigious list of “The 100 Most Influential People in the Boardroom,” which is compiled by NACD Directorship magazine. Reach him at rlevick@levick.com.