Does Your Board Have A Culture Where Honest Debate Takes Place?

Corporate directors at Cano Health recently had a dispute that prompted three directors to resign from the board and vow to wage a campaign to potentially oust the company CEO and management. While this level of public feuding between directors may be rare, it raises the question: What should corporate board members do when there are stark differences of opinion about management’s business strategy? Does your board have a culture where healthy, honest debate can take place? Is it better to resign quietly or debate with other directors and management publicly? Are we likely to see more public disagreements between directors at a time when boards are scrutinized more heavily than ever before?

Most of the time, directors resign discreetly if they feel very strongly that their company is going in a direction they cannot endorse. However, even when directors do resign quietly, intense discussions about governance issues and business strategy may have taken place behind closed doors. Unfortunately, as more boards are being sued for oversight violations and breaches of fiduciary duty, a greater number of directors may decide to resign their positions or take the more serious step of publicly clashing with the CEO and other board members to highlight governance lapses. These directors may hope that such actions could help the company avoid disaster and help them avoid personal liability if the company is ever sued.

In the case of Cano Health, board members Barry Sternlicht, CEO of Starwood Capital Group, Elliot Cooperstone, founder and managing partner of private equity firm InTandem Capital Partners, and Lewis Gold co-founder and chairman of the board at behavioral health company Advanced Recovery Systems, resigned their positions and banded together “to pursue change” at the company. In an SEC 13-D filing,they claimed they would seek changes “including, but not limited to, the replacement of the CEO, sale of non-core assets and enhancement of shareholder value.”

In a press release announcing his resignation, Sternlicht, who personally invested $50 million in the company in 2021, stated that he was “extremely troubled by the poor operating decisions and performance, by what I consider the opacity and obfuscation of information furnished to the Board, and by the inability to forecast the Company’s financial performance over which [CEO Marlow Hernandez] and his management team have presided. These factors have caused the Company’s stock price to be decimated, dropping over 90% from its debut, and the Company is now saddled with a crippling debt burden.”

Cano health issued a statement of its own addressing the resignation of the three directors, stating, “We are disappointed that three directors chose to resign due to what we believe is their focus solely on the short term. We strongly disagree with their representations about the Company and their assessment of Dr. Hernandez’s performance.”

The statement went on to say, “Boards must have healthy debate about how best to drive shareholder value, including in difficult circumstances. It is irresponsible to air those debates in ways that are meant to undermine healthy Board debate and harm the Company and shareholders.”

No matter which side you agree with, Cano Health now has an unfortunate public situation that must be cleaned up. The challenge for boards is to create an environment where healthy debate can honestly take place. Board members must feel that what’s best for investors and the company is decided on the merits of actual ideas, not personal alliances to the CEO or other directors. Sometimes that’s more difficult than it might appear. If an environment for honest and safe debate doesn’t exist on a board and multiple board members leave at the same time, the public disclosure of the defections will create a statement that alerts the financial markets. Investors and regulators may want answers. It is important for companies to periodically re-evaluate how their board deals with honest, healthy debate in the boardroom.

As recession fears loom, and ESG issues become a higher priority for boards, directors will be under tremendous pressure to make operating decisions that keep companies profitable in turbulent times. Board members will have various opinions on what companies should do based on ever-changing economic and political environments. Companies that make bad decisions will likely see directors leave and CEOs replaced. Expect to see more directors speak out publicly about executive decisions they believe place companies at major risk – especially if those decisions can’t be debated internally.

The bad news is that publicly raising issues about conflicts between the board and management over governance policies can hurt a company’s stock price and raise cause for concern among regulators and shareholders. However, the good news is that once the governance issues are illuminated, the company will be forced to address the problems and the company should be better for it, and ultimately the shareholders will benefit too.