Sorry to tell you, but the work is just beginning.
For health system boards completing a merger or acquisition, there's a justifiable sense of relief. The months of strategic focus, evaluation of options, scrutiny of proposals, hard negotiations and the decision to actually close are over. Board members, operating at a higher level of attention, are looking forward to dialing it back. But the complexity of most mergers and evolving concepts of fiduciary duty suggest a different scenario. Indeed, closing serves to mark the beginning of an equally important role for the board — ensuring that the deal is implemented as intended. And that's no easy task.
The board's post-closing tasks are significant, numerous, and both legal and operational.
Before the ink on the term sheet dries, the new organization must elect the new leader, populate the board, determine how the proposed efficiencies in the merger will be achieved, and set forth new operating policies and procedures so that neither partner in the deal feels "taken-over," which can fuel resistance. Sustaining morale, future focus and strong operating performance are fundamental. Too often, the love of the deal distracts from the hard work that fueled the search for a potential partner. Slippage can happen in many ways. The leadership team focuses almost exclusively on the terms, and people who have options outside the merged entity may be wondering if they still have a job. The board and the management team's performance monitoring is easily pre-empted by some deal term or surprise in the due diligence.
Once the closing occurs, everybody wants to regroup from the deal-fatigue. Slippage also can happen with employee and board morale. It may not be so obvious to employees and board members where this is headed. Leadership needs a rapid action plan to focus attention on the emerging vision of the combined entity, what functions need to be consolidated rapidly, and what culture and behaviors will characterize the future. This is not easy work. The board and senior leaders need to agree on the strategic objectives, align the organization design to the financial and operating assumptions and select leaders from either side or outside who truly can carry the organization forward. Boards and leaders often are frustrated when, after the deal closes, the courage dissolves, hard choices about leadership cannot be made, and dilution of value happens quickly. Many mergers never achieve their promise.
How can you prevent this from happening? Take these eight steps.
Select the leader most qualified to achieve the vision. Mergers often happen because those leading organizations can imagine their combined strength. Those same leaders presume that they likely will be the anointed one to lead the new enterprise. And, despite what is usually much conversation about leadership, boards and the leaders themselves fail to address this early. As a result, a deal can be torpedoed.
More organizations, however, watch the head count on either side to ensure fairness, and the new leader is expected to distribute jobs equitably to both sides regardless of performance. This is a silly proposition. Mergers occur because there is a business case for doing so: Perhaps one organization is failing, bankrupt, or needing shelter in a larger enterprise. By definition, the institution likely is not performing well or is in a highly competitive market. Why should the larger and more successful organization have to yield to parity in placement if, in fact, its own people are better qualified? This plan warrants very careful consideration.
- Design the organization to optimize the goals of the merger and avoid equivalent placement from both sides. More than likely the new organization will be structured to produce new and different results than either of the predecessor entities. After determining the top leader, the next level of organizational design needs to occur promptly. If one goal of the merger is efficiency, departments and functions need to be given careful consideration for restructuring. This requires careful analysis, competency assessment of leaders, improvement strategies and process redesign. This is where political pressures for parity in job placement can be most significant, and lobbying for particular candidates can be intense. Therefore, a process designed and facilitated thoughtfully will produce the conditions for success. The board's role is to make sure it occurs in a principled fashion, not to do it themselves. Without a thoughtful process, the board will be the first in line to receive complaints.
- Give the new entity a new name if it needs to change from the predecessor organizations. We know — sometimes new health system names sound more like telecom companies than health care providers. But creativity aside, there's much to be said in choosing a new name when creating a merger of equals. A new name, image and branding strategy can be an important way to bring together employees, staff, management and the board with a sense of shared identity and an acknowledgment that neither organization "won" the merger. But spend some money. The process of re-branding a large health system should be as sophisticated as is the system's financial and operational foundation. Bring in a professional, and do it right.
- Articulate the values and behaviors that will characterize the culture. There's much to be said about the bonding effect of an organizational task force charged with the responsibility of articulating the specific components of organizational culture. This is both necessary and in many ways recuperative from the charged environment of the negotiation process. Bring in a facilitator, assemble a good cross section of the organizational constituency and start with these questions: How, specifically, should we describe the culture of this new entity? What were the positive attributes of the cultures of the predecessor systems? Do we need to address different faith-based cultures? What behaviors will be expected in the new operating environment? Requiring people to adhere to an organizational culture requires a thoughtful statement of that culture.
Orient the new board to its new work and make it clear that everyone — not just the merged organization — must change. This involves much more than holding a post-closing retreat for the members of the combined board of the new system. It is a new, larger organization; it is a more influential marketplace competitor; it has a broader geographic and service line scope; and its charitable mission likely has been adjusted to reflect the goals and objectives of the merger. Even for carry-over board members, it's a whole new ballgame in terms of fiduciary focus. Additionally, the contributions of new members who came from the merged system need to be integrated. The usual "them vs. us" conflicts will die hard. It's almost delusional to think that this disparate group will start functioning as a cohesive fiduciary unit right away.
To coalesce the group around a shared sense of mission and understanding of the expected standard of conduct will require a significant and dedicated effort. This may take the form of an orientation, a retreat, an initiation to the vision, values and framework by which the new organization will operate and an explanation of the new board's role. Falling into the old way of governing is predictable and fraught with challenge, not the least of which is that the old ways are not sufficient to a sizably larger enterprise.
- Focus on the strategic plan to gain momentum across the combined enterprise. Most merger agreements contain a lengthy discussion of the expected strategic focus that the combined organization is expected to pursue after closing. It may include the process by which the system will expand geographically; new strategies like population health management or accountable care initiatives; or new partnerships with medical groups, insurance companies and academic institutions. Whatever the case, it is likely that the vision motivated many board members to pursue the proposed merger, and convinced regulatory agencies to approve the transaction. From a fiduciary duty perspective, there is an expectation — if not an actual obligation — that the combined board will closely monitor management's pursuit and implementation of the specific strategic plan that seeks to implement that vision. While much of the heavy lifting will fall upon management, the board has a serious role to play in making sure that the ultimate plan stays true to the original merger vision.
- Take post-closing covenants seriously. You may remember them — that stuff way in the back of the merger agreement that contains all of those commitments your organization promises to implement once the merger is completed. They may be operational (for example, the development of a new service line); financial (admittance into the obligated group); capital (agreement to fund specific capital plan expenditures); technical (support in conversion to a unified IT system); or faith-based (organizational adherence to specific faith-based tenets). There also may be separate commitments and ongoing reporting obligations extended to governmental entities as part of the regulatory approval process. Whatever the case, they were part of the deal, and they were relied on by the merged entity in deciding to approve the transaction. Indeed, the board needs to take these commitments very seriously, because if they don't, others will through enforcement actions. Add to this the emerging idea that the parent organization in a nonprofit health system may actually owe fiduciary duties to its affiliated hospital subsidiaries, and you can see how post-closing disputes can arise over whether promises were fulfilled. Those disputes can become expensive. So, it's incumbent on the board, in connection with merger implementation oversight, to keep a fairly tight leash on management with respect to satisfaction of these covenants.
- Communicate three times more often than you anticipated. The board of a merged health care system is often a "yours, mine and ours" configuration with the potential for multiple, and potentially confusing, backgrounds, loyalties, orientation and perspective. The process of building a cohesive, efficient and smoothly functioning board following the merger is likely to be a longer, more painstaking process than may have seemed to be the case at that pre-closing cocktail mixer between the boards of the merging parties.
To a certain degree, board leaders need to push the reset button and, step-by-step, build the relationships within the board room and with the C-suite. The natural inclination of the board after closing is to move rapidly toward the implementation of the merger vision, but it's likely an unrealistic expectation. The bid, negotiation and closing processes, as long and painstaking as they may have been, rarely focus on reorienting the board and executive leadership team to their new, unified roles. And it can be a rude awakening to find that barriers to productivity and advancement remain. So plan your post-closing board interaction on that basis.
The closing of a health system merger is almost always a reason for a collective boardroom exhale. The heavy lifting is done, and it's time to sit back and watch the merged system coalesce around the joint vision. But it usually doesn't work quite that way, not when you're combining multimillion-dollar corporate systems with multiple constituencies. The board has an obligation to monitor the effectiveness of implementation. Specify the benchmarks, measure performance, set targets and watch key measures. Don't be surprised to see slippage before acceleration toward the vision.
The smart play for board members may be to set aside that post-closing vacation and keep the evening schedule open, at least in the near term. Anticipate problems and prepare for a heavy concentration of board training and interaction early on. And, by the way, keep the phone number of the merger facilitator. His job might not be over either.
Michael W. Peregrine (mperegrine@ mwe.com) is a partner in the law firm of McDermott Will & Emery LLP, Chicago. David Nygren, Ph.D. (firstname.lastname@example.org), is the founder of Nygren Consulting LLC, Santa Barbara, Calif.