The removal of four Wells Fargo directors, in connection with other sanctions imposed on the bank by the Federal Reserve, has far reaching implications for the corporate governance of large, sophisticated health care systems and other health industry companies.
Announced on February 2, the Fed's enforcement action has been widely interpreted as a powerful regulatory message of governance accountability for failures of board oversight. The sanctions prevent the bank from increasing its total assets, thus severely limiting its ability to grow. They also mandate several corporate governance and risk management actions, including the required replacement of board members. The Fed publicly censured the bank's board, its former CEO and a past lead independent director. It also identified areas in which the bank failed to comply with its own published corporate governance guidelines. Prior board members were criticized for their lack of inquiry and lack of demand for additional information after they had left the board.
Many of the Fed's sanctions speak to compliance and risk issues that can, of course, arise in other regulated industries, such as health care. These include the need for (i) business development strategies to manage key identified risks, e.g., performance pressures prompted by certain types of compensation incentives, and the potential that business goals could prompt improper business practices; (ii) management assurances on how known misconduct is being addressed, to be supplemented by "detailed and concrete plans"; and (iii) corporate governance practices to be aligned with the company's business plans and accepted risk tolerance policies.
The Wells Fargo sanctions reflect a prominent federal regulatory agency's conclusion that the compliance failures suffered by the company were due in large part to the breakdown of established corporate governance oversight practices. The severity of its criticism of past and present corporate directors is extraordinary. Obviously, the Federal Reserve has no jurisdiction over health care systems. Nevertheless, system audit and compliance committees should acknowledge the potential that the Fed's strict message of director accountability could be adopted by state and federal agencies with enforcement authority over health care companies.
LESSONS TO HEALTH SYSTEM BOARDS FROM THE FEDERAL RESERVE'S ACTION AGAINST WELLS FARGO
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