Before Your Nonprofit Health System Considers a Merger – Three Important Board Preps

By Jay Hughes

The Governing Board of every nonprofit health system considering a merger, change in control, sale or significant affiliation has a key role in the process and needs to be engaged throughout the planning, research, evaluation, negotiation, finalization and implementation of any transaction. Good planning at the beginning of this process will better inform your system’s directors and contribute to the likelihood of a successful affiliation that meets the organization’s goals. The first three steps you should take with your Governing Board are:

1. Educate your Board of Directors about the process. The affiliation or sale of a nonprofit health system is often the most important and difficult decision that the Board will make. The Board members (usually uncompensated community members) need to be educated about the process and their role and duty in the process. That should occur at the outset in a session with special counsel and other advisors. Among the topics to be discussed early in the process are: directors’ responsibilities and standard of care, expected timelines, key governmental approvals, engagement of outside experts, costs, and impact on employees, physicians and community, among others. Reinforce to the Board members the duty to maintain information regarding the possible affiliation in a confidential manner.

2. Revisit your conflict of interest policy and update conflict of interest questionnaires from Board members and executives. Physicians, employed executives (who may have change-in-control agreements) and vendors or contractors of the health system may serve as Directors. Clarify with the Board and executives when a conflict exists and just as importantly, when a conflict does not exist. Be transparent and document the manner in which possible conflicts are identified, evaluated and resolved.

3. Plan for Board participation through a committee. In addition, a committee or work group of Directors should be formed to receive reports from Health System executives and advisors (the “Team”) and to provide high level input and guidance to the Team. The smaller committee provides for a more candid discussion and for more meaningful feedback to the Team than would occur if the entire Board sat as a committee-of-the-whole. This group should expect to meet between Board meetings. There is a fine line between providing advice and becoming too involved in the negotiations. The special committee needs to respect the role of the Team and should be discouraged from micro-managing the process. The full Board should be regularly informed (in general terms) about the status of the affiliation process in its regular meetings. Eventually the Board may be asked to approve a transaction. In order for that approval to proceed more smoothly, it will be helpful if the Board has been educated about the process and their duties and has been regularly informed about the status of negotiations with the affiliation partner.