The latest episode of the Governing Health podcast gets back to basics: the board’s responsibility for monitoring the impact of key economic trends and indicators. McDermott partner Michael Peregrine welcomes special guest John Challenger, CEO of executive outplacement firm Challenger, Gray & Christmas, who recently appeared on the Today Show and is one of the foremost thought leaders on the US economy and workforce. Together, John and Michael delve into today’s top economic issues and their significance for health system board governance.
Today’s “million dollar question:” How long is the economy expected to grow, and when should the finance committee look for signs of a recession?
Like canaries in a coal mine, the early warning signs of a slow-down are already present—if you know where to look. The current job creation statistics and record low unemployment numbers signal a tight job market for skilled workers. Companies may start to put expansion plans on hold for fear of being unable to recruit enough skilled workers to staff new plants or operations. “You can’t get to this full of an employment situation without the risks of a recession starting to grow,” John said. “Two years from now, it seems inevitable we’re going to be in some kind of recession.”
What are the governance ramifications of the most recent unemployment and job creation statistics?
Despite low unemployment and competition for skilled workers, wages are not going up. The board should engage with HR executives and recruiters to analyze how best to allocate capital toward growth-oriented plans. Retention of high-performing and high-skilled employees should be at the top of the board’s agenda. “Look at your talent inside your organization and understand who your key leaders are—the people you need most to stay at the organization and not be recruited away,” John said. “Fighting to keep them and making sure there are plans in place to hold them is really critical, because replacing them means you have to find new people with those same skills.” Even if you can find the right skillset in this tight job market, the new hires will not have the corporate memory or know-how that makes your current employees so valuable, he said.
Recent employment statistics also indicate that ambulatory jobs are at the forefront of job creation in the health sector. “This suggests that we’re beginning to see direct manifestations of health systems moving their focus to ambulatory care and away from the inpatient facility,” Michael said. Does John Flannery’s departure from GE after just over a year as CEO indicate a new phase of “short termism” in board oversight of the CEO?
More than 150 CEOs were discharged in September 2018, a sharp uptick from the previous month. “That may be an anomalous situation, but it’s interesting that it happened at the same time that John Flannery left GE,” John said. “Usually when you see CEOs leave within less than a year, or just over a year in this case, there are communication problems inside the board and the C-suite. There was a sense from the news reports that the board expected much quicker decisive action on the new CEO’s part that wasn’t being taken.”
Today’s boards are quick to act in response to perceived CEO performance issues. If an organization’s share price is dropping, it often means that the CEO’s days are numbered, John said. To combat potential communication problems, a close relationship between the board and the CEO in his or her first year—and particularly the first 100 days—is helpful. “Alignment in terms of what’s expected and what the objectives are is crucial,” John said. “It shouldn’t be the kind of situation where the CEO is acting on his or her own with a board that’s not engaged in the strategic decisions being made.”
How much longer will the current trend of “older CEOs keeping their jobs longer” continue?
Recent statistics suggest that boards are more willing to retain senior CEOs longer than they did previously. This is likely due to the economy, John said. Because so many companies are posting excellent results, there is no immediate impetus to move a long-tenured CEO out.
What are the broader implications of recent “organizational justice” developments, such as Amazon’s decision to raise wages?
“It’s always the most successful companies that can make these kinds of decisions,” John said. “Sometimes they lead the way and others follow.” Because Amazon is a market leader, the real question is whether less successful competitors will be able to follow suit. That will determine whether Amazon’s minimum wage increase is the beginning of a broader trend.
In a similar development, Harvard University (John’s alma mater) recently increased its employee wages as a means of corporate social responsibility. In John’s view, the move was an ethical rather than a business decision. At the same time, the economic implications of large-scale wage increases is a significant matter that boards should monitor. “We’ve seen minimum wage laws in places like Seattle and other cities get enacted that would move wages up for people in the low-skilled or semi-skilled area of the workforce,” he said. “There’s always the question, if that were instituted on a wider basis, whether that would depress job creation, as companies could afford fewer workers. It’s an open issue and it’s going to become even more important.”
Listen to the audio here.