An Ode to Good Governance
For many years, I’ve been asked the same question: “Does good corporate governance really matter?” And for years I’ve replied, “Yes.” Now I have more to add. After nearly two decades of service, I recently retired from the Encompass Health board as our term limits required. Four other directors who joined the board at roughly the same time also departed. It has been an interesting and rewarding experience in many ways and makes the point that I have long advocated: good governance does matter.
When I became involved with Encompass (then Healthsouth) in the early 2000s, the company found itself in dire condition. Its CEO had been arrested for bribery (and later convicted). Its financials had been muddled in one of the largest financial scandals of the decade. Federal investigations, executive indictments, shareholder lawsuits, delisting and a collapsed share price were crippling. The company, which once had been in the Fortune 500, had an equity valuation of less than $75 million. The business was carrying major debt. Bankruptcy loomed. No annual shareholder meeting could be called, as the company had no audited financials to present to its investors. In short, it was a terrific mess.
When I was first asked to join the board, I declined. I had no appetite to swim in such a treacherous stream. But I was impressed by the acumen and integrity of independent directors Jon Hanson and Bob May, who were determined to right the ship. I also believed in the long-term viability of the business. I signed on.
Among the first things Hanson and May pursued was recruitment of a new board composed of talented and experienced independent individuals and creation of a model governance structure that would aid in the company’s resurrection. When we five new directors retired this May, the company was healthy, with a market valuation of over $6 billion and paying a regular and significant dividend. Primary responsibility for the company’s reconstruction and recovery rests with a superb management team whose eﬀorts ultimately bore fruit. But I also must give credit to our board. The directors’ efforts in providing management with independent oversight and guidance ensured a happy conclusion to a painful corporate collapse and recovery, resulting in substantial shareholder value.
Among the reasons for this success, first was composition. In addition to our CEO, the new Healthsouth board consisted of a diverse group of individuals with experience in the various areas of our business that required focus in the turnaround. Directors with expertise in finance, accounting, health care, operational management, compliance and corporate governance were recruited. None had any connection with prior or current management. All accumulated significant equity holdings in the company to align our interests with those of our fellow shareholders.
Second was function. We were chaired by an independent director whose primary responsibility was to run the aﬀairs of the board, setting board agendas and presiding over meetings. I cannot overemphasize the importance of this approach to board leadership.
We had five oversight committees: audit, compensation, nominating and governance, compliance and finance, each composed entirely of independent directors and chaired by experienced individuals. The committee chairs rotated every five years. For years, we began and ended each board meeting with an executive session where directors could candidly exchange concerns without fear of oﬀending management or facing reprisal.
Third was investor relationships. Our chairman and our governance chair met periodically with our largest investors to listen to their concerns. We were the first U.S. public company to adopt a proxy reimbursement scheme that would, in certain circumstances, reimburse those shareholders mounting management challenges for reasonable expenses. We all were subject to a yearly shareholder vote for reelection and bound to term limits to encourage board refreshment. New directors were chosen for their varying skill sets and located and vetted by an independent search firm. Independent, equity-holding directors are the investors’ best hope for a fair return. That was our guiding principle.
Fourth was the board’s relationships with each other and management. We had widely diﬀering viewpoints — but our interactions with one another and management were based on trust, transparency and candor.
Things turned out well. My two proudest moments were when we were relisted for trading on the NYSE after a long absence and the declaration of our first regular dividend. I was reluctant to cash the check — I thought about framing it.
Good governance was not the primary reason for the Encompass Health resurrection, but it played a vital part. Our shareholders profited, and so did our employees, our patients and the communities in which we operate. Some bad stories have happy conclusions — it was good corporate governance that helped make this one so positive.
Charles Elson is executive editor-at-large of Directors & Boards.