Increasing media stories describing conflicts arising from “angel” and similar types of startup investments take on more relevance as health systems add sophisticated investors to their various system governing boards, and those investors/directors pursue broadly diverse direct and indirect investment portfolios. This has the potential for both conflicts of interest and appropriation of corporate opportunity issues.
Two governance issues are in play here, and they are not easily reconciled. One is the recognized need for health systems to recruit as board members individuals who are financially sophisticated, to help assure effective oversight and decision making with respect to financial matters. This is especially the case with respect to service on board investment committees, as many large health systems maintain suitably sophisticated and broad based portfolios that reflect a diverse investment philosophy. Financially sophisticated directors provide an enormous service by assisting the CFO in developing the philosophy and monitoring the performance of the portfolio and of the various investment managers. At the same time, such financially sophisticated directors may also pursue a broadly diverse philosophy in terms of their personal investment portfolio or may serve in investment advisor roles with venture capital firms. This may lead these directors or the venture capital firms that they serve to make investments in startup companies that are developing products or services to serve the health care industry.
Conflict issues can arise if and when the health system pursues a research or vendor relationship with such a company, or seeks to make a similar investment in, or acquisition of, such a startup enterprise. The advance identification of such a conflict can often be difficult due to the breadth of the financially sophisticated director’s personal investment portfolio and how it is managed. It is also conceivable that corporate opportunity issues could arise if the financially sophisticated director (unintentionally, no doubt) directs, approves or otherwise ratifies an investment in such a start-up that is a strategic acquisition target or collaborator of the health system.
The system general counsel can provide value in these and similar circumstances by monitoring the board appointment process at all levels of system governance, and working with the system’s conflicts or governance committee, and individual directors, to provide guidance to all parties on how best to reduce the potential for duty of loyalty issues associated with diverse investment interests.