Patricia See InSert Bickel Providing effective Compliance and - PDF document

Volume Nine Number Four April 2007 Published Monthly earn CeU credit Patricia See InSert Bickel Providing effective Compliance and Privacy Officer, Director, Professional Integrity health care in your Program for University of patients’ languages Southern Florida health PAge 14 PAge 4 Special Focus: Also: Dollars and SAve the DAte! Proposed changes sense of to the clinical trial executive national Coverage compensation Determination PAge 11 April 2007 Health Care Compliance Association • 888-580-8373 • www.hcca-info.org 1

feature focus The dollars and sense of executive compensation By Gerald M. Griffith, JD and James R. King, JD duties with the same degree of diligence, care, and skill as an ordinar- ily prudent person would exhibit in like circumstances, and that they Editor’s note: Mr. Griffith is a partner in the Chicago office of act in a manner that they believe to be in the best interests of the Jones Day. He can be reached at 312/269-1507 or by e-mail at corporation. The duty of loyalty dictates that the director or officer act ggriffith@jonesday.com. Mr. King is a partner in the Columbus, in faithful pursuit of the interests of the corporation rather than their Ohio office of Jones Day. He can be reached at 614/281-3928 or own financial or other interests or those of any other person or entity. by e-mail at jrking@jonesday.com. Mr. Griffith and Mr. King Finally, the duty of obedience obligates a director or officer to act with practice as members of the Health Care and Tax Practice Groups of fidelity to the mission and purposes of the corporation within the Jones Day. bounds of the law generally. This article discusses current and proposed legal parameters appli- Directors and officers are also generally required to act in good faith cable to executive compensation packages generally, as well as current in discharging their duties. 2 Any unjust enrichment or fraud on the key focus areas for legislation and regulatory oversight of executive corporation may violate the good faith requirement and the duty compensation and recommendations for strengthening the defensibil- of loyalty to the corporation. Where a director or officer engages in ity of executive compensation programs. Our concern here is with self-dealing to gain approval of his or her own compensation without the appropriate process for establishing executive compensation and disclosure of relevant potential conflicts, such action is arguably incon- challenges to the total value of compensation packages. It is not our sistent with these fiduciary duties. In one illustrative case, a federal ap- intent to outline the technical requirements for particular elements of pellate court found that a health care CEO breached his fiduciary duty a compensation package, such as the strict limitations that may apply by setting his own salary without disclosing substantial outside income to various deferred compensation arrangements, limits on deductibility from another organization or the use of corporate funds to purchase a of executive compensation, or the detailed record keeping necessary to $6 million life insurance policy. He also bifurcated the presentation of support certain expense reimbursements for federal tax purposes. Our a severance plan, allegedly to mislead the board as to the magnitude of discussion focuses on the nonprofit, tax-exempt health care sector, be- severance benefits he would receive. 3 cause it is the largest segment of the health care industry and generally subject to more extensive regulation of their contracts and transactions Such cases highlight the importance of transparency and full disclosure with insiders. 1 of potential conflicts in any compensation arrangement review, as well as the need to insist on appropriate documentation of reasonableness. Fiduciary duties As indicated in Section 8.30(b) of the Model Act and in many state Directors and officers of nonprofit corporations have at least three statues, directors and officers are entitled to rely on “information, commonly recognized fiduciary duties – the duty of care, the duty opinions, reports, or statements, including financial statements and of loyalty, and the duty of obedience (though some would argue for other financial data, if prepared or presented by … legal counsel, pub- a higher fiduciary standard for charitable organizations). The duty lic accountants or other persons as to matters the director reasonably of care relates to the director or officer’s competence in performing believes are within the person’s professional or expert competence.” those functions and requires that the director or officer carry out those April 2007 Health Care Compliance Association • 888-580-8373 • www.hcca-info.org 20