A recent column by Chicago attorney Michael Peregrine on Forbes.com (January 9, 2024) warned boards of directors that it is “rarely (if ever) too late … in a process to reverse an initiative that proves to carry exceptional legal or ethical risks.”

Peregrine discussed a recent case where a healthcare company was accused of violating physician self-referral laws. After having put the structure in place, the board was advised by external experts that the arrangement was problematic. The board then sought formal advice from an outside expert but chose not to follow the recommendations it received. Later, explaining the board’s action, one board member was quoted in the board minutes as saying: “We were too far down the road to stop.”

Peregrine attributes the board’s failure to make the right decision to “momentum,” which creates a “twisted optimism” that things will all work out. 

Are any Board actions irreversible?

Reversing positions, particularly in healthcare, can be costly.  Usually, it involves moving to a less profitable alternative and writing off sunk costs.  It also may force a company to undertake “corrective actions” that might include disclosing the “error” to governmental authorities, repaying large sums of money and potentially opening the company to crippling investigations and outside oversight.

Regardless of the industry, mistakes can be costly – repaying overcharges, abandoning projects, and compensating aggrieved patients and employees can all take a substantial slice out of the bottom line.  To the CEO, the reversal can be a personal embarrassment. Even more significant damage can be done to the board’s confidence in the CEO, which can directly impact his longevity and compensation.

Must Boards act?

But a director might ask, “Why not just let it go?  Our original decision was reasonable at the time it was made.  We had experts then who said it was fine.  At this late date, we are told there is a problem even though no regulatory agency has ever, or probably will ever, challenge what we did.” 

There are two significant problems with that approach.  First, directors are fiduciaries bound by the Duty of Obedience.  Directors must obey ALL organizational documents, all corporate policies, and all laws governing their activities.  Directors cannot choose to ignore the requirements of law, even when they believe their error will never be discovered.  A second powerful reason not to ignore the clear dictates of the law is a concept called “reverse false claims.”    When providers hold on to money they know should be returned to the government, they have engaged in fraud and are subject to civil liability and potentially criminal prosecution.

Ignoring professional advice can substantially compound a bad decision.  Board members have a powerful defense when they can say their actions came at the recommendations of experts.  This defense works under two conditions: first, that the “expert” is genuinely a well-qualified expert, and second, that the board adopts the expert’s recommendation.  On the other hand, ignoring the expert’s advice, particularly on a regulatory matter, can create a highly problematic record.  Explaining the board’s thought process in the minutes can make the record infinitely worse.

Can we get a second opinion?

As a General Counsel it never bothered me if my CEO or board asked to have a matter reviewed by outside counsel. I was for it on one condition – so long as whatever the expert recommended would be the course the organization would take.  That approach protected the organization and prevented forum shopping – i.e., seeking multiple opinions and taking the one you like best.

Another factor that can be at work here is something I call “executive infallibility.”

Nobody likes to admit a mistake, and often, to a CEO, admitting mistakes to the board of directors is anathema.  Boards have high and sometimes unrealistic standards for their CEO, frequently expecting flawless performance, regardless of the internal or external environment.

Without a clear understanding of the challenges facing the organization, boards can adopt an attitude best articulated in a line from The Wiz: “Don’t nobody bring me any bad news.”  Any major controversy or a significant “change of plans” can knock a board out of complacency and force them into a decision-making role they are reluctant to assume.

Rather than seeing these instances as times when the board needs to step up and lead, conversations can evolve into fault findings, scapegoat seeking, and a loss of support for the CEO.

Nonprofit boards make the best decisions when they have a commitment to two central principles, a focus on quality and an uncompromised commitment to compliance.  Using these two guiding principles can be instrumental in discerning the “best” course of action in difficult situations.

Five questions to help assess your board’s ability to make good decisions:

To help your board assess its ability to change course in response to adversity, here are a few questions for discussion by your Governance Committee, Executive Committee, or the entire board:

Q: Does the board take a genuine interest in compliance and quality, or are they an afterthought?

Q.  Does corporate culture accept or even promote “living in legal grey zones”? 

Q. Do you expect your CEO to be error-free?

Q: Does your executive compensation plan reward bottom-line year-end economic results or the achievement of long-range strategic goals?

Q: When problems occur, does your board’s conversation focus on identifying who was at fault or asking what systems will be implemented to ensure this and similar issues don’t happen again?

Read Michael Peregrine’s article in Forbes.com.