Developing boards for a new healthcare economy

Transcription

1 Developing boards for a new healthcare economy by Dr Niren Thanky and Chris Seabourne, Global Life Sciences Practice There are many public and private healthcare company boards providing necessary strategic counsel and guidance to their management teams. However, many boards lack the diversified skills and experience required to tackle the political and economic changes affecting the healthcare industry in the US, Europe and emerging markets.

2 Executive summary There are many public and private healthcare company boards providing necessary strategic counsel and guidance to their management teams. However, many boards lack the diversified skills and experience required to tackle the political and economic changes affecting the healthcare industry in the US, Europe and emerging markets. Tomorrow s boards, public and private, should consider a range of non-executive candidates beyond their immediate social networks to improve board effectiveness. Five questions for you to consider when evaluating your board s performance: 1 How well equipped is your board to navigate the regulatory, R&D and commercial changes occurring in the healthcare industry? 2 How well does the leadership style of the chairman foster excellent board dynamics? Healthcare specific issues The global healthcare sector differs from other sectors on several levels including: glacial product development timelines, supremely strict regulatory hurdles and the need for non-executives with deep domain expertise, experience of managing high burn-rates, knowledge of regulatory hurdles and awareness of the political pressures on pricing. Intriguingly, demand for healthcare has never been higher, precipitated by an aging population with chronic care needs, growth in emerging markets and potentially expanded health insurance coverage in the US. Yet payers are exploring all possible avenues to cap healthcare expenditure. On the surface, increased demand appears to be a positive driver of growth for the industry, except that there is an accompanying decline in the development of new medicines the life blood of the industry. Consequently, we see a significant decline in the profit margins of innovation-focused businesses and a change of leadership as companies diversify to explore new markets. Healthcare boards need to appreciate how fragmentation of the healthcare value chain will impact their business and then how best to guide their executive management teams through this new landscape. Through our research, structured interviews and conversations with a range of chairmen, non-executive directors and CEOs in European biopharma, medical device and healthcare service companies, we have identified several consistent themes that trouble healthcare non-executive directors at this time including: 3 How well equipped is your board to constructively challenge management? 4 How regularly does your board evaluate talent and C-level succession plans? 5 How much time does the board dedicate to identifying its own improvement opportunities? 2 Developing boards for a new healthcare economy

3 General concerns Financial crisis The global financial crisis and climate of austerity is catalysing change in the global healthcare economy. In Europe the continued banking crisis and uncertainty around the Euro results in increased volatility in transactions and financing. Budgets The continuing downward pressure on healthcare budgets as payers come under increased pressure to make cuts and the subsequent domino effect on business margins and decreasing investment into R&D. Going forward, the healthcare industry should focus on improving efficiency across the whole healthcare value chain. Regulation Significant concern around how government authorities are evaluating the reimbursement potential of new drugs and medical devices. While strong regulation is important for safety, increased demands by regulatory authorities places additional burden on businesses. Liability A board director s personal liability and reputational risk, especially if the company is involved in early stage clinical trials. Non-sector hiring The evolving paradox around hiring independent board directors from other sectors, who are increasingly reliant on management teams to provide them with sectorspecific information to understand healthcare market dynamics and business complexities. Pharma, biotech and medical device R&D Board members question how well equipped they are to help their management teams deal with decisions around pursuing different R&D and open innovation models for discovering and developing new medicines. During periods of austerity, companies tend to reduce spend on external collaboration, when actually this is exactly what is required to advance the R&D agenda. Product to service Should pharmaceutical companies be involved in the delivery and administration of healthcare at home? If so, then how should companies adopting such strategies successfully change their cultures from a product to service mentality? mhealth Is mobile health (mhealth) being championed at a sufficiently senior level within the organization? In the pharmaceutical industry for example, there are examples of sporadic experiments conducted with new mhealthrelated technologies but these are often not championed by senior executives. Consequently, pharmaceutical companies have been slower adopters of this new technology than the medical devices industry for example. Some believe that the deployment of mhealth solutions is inevitable and will simply become the accepted norm for disseminating information and services amongst a more fragmented customer and patient community. Heidrick & Struggles 3

4 Healthcare Services NHS In the UK, there is general uncertainty about how the National Health Service (NHS) changes surrounding the development of Clinical Commissioning Groups will impact the private sector. Amongst the UK PE community we interviewed, there was a consistent sentiment suggesting a shortage of talented CFOs and finance directors in the healthcare services landscape. Personalized medicine The realization of personalized medicine requires a greater degree of collaboration amongst a diverse group of healthcare providers. Unfortunately, current organisational structures are not well suited for collaboration and continue to develop executives in siloed talent pools. Going forward, we expect to see a greater degree of role diversity and breadth in the resumes of senior leaders. The role of a healthcare board The board should provide strategic direction around what it takes to get a drug or device to the market or the provision of health services to patients. For biopharma and device companies, this is more than just deep scientific thinking around a particular molecule, pathway or device; this is about thinking through strategic acquisitions, alliances, all the way through to the market potential of new therapies and devices that optimally balance efficacy, cost and safety. For healthcare service companies, boards provide strategic guidance when thinking through the financial, clinical, regulatory and operational challenges of running fixed or multisite businesses. Regardless of the stage of company development, boards need to clarify their purpose by defining rules, processes and accountabilities, especially for less-experienced directors. Boards are unique organic entities and there is no right or wrong culture. Furthermore, it would be inappropriate to try and define an optimal culture in this article, as this is specific and dependent on the geography, nature of the healthcare segment, operating model and stage of development. However, in our opinion, there are several universal constants that a chairman should consider: Encouragement of equal and balanced contributions from board members. Containment of dominating personalities and the ability to elicit participation from withdrawn board members; although boards should consider replacing these individuals if such behaviour persists. An aligned vision and culture for the board and company. A blend of informal and formal interactions. Crystal clear agenda and allocation of follow-up responsibilities. Excellent meeting management skills. Boards provide financial oversight so that investors (public or private) are comfortable about governance. In an ideal world, the board should review the strategic choices available to the company and challenge the CEO constructively. Healthcare Services CEO & Board Director While the board and the executive management are united in their mission to advance the company cause, they can become divided when it comes to major strategic questions, such as potential change of ownership or an appetite for the financial risks associated with a large scale investment. Managing these relationships is critical to the success of the company. What does not work is having board members and investors breathing down necks of the executive team; they need to have space to get on with the job once a strategic direction is agreed. Biotech CEO & Board Member 4 Developing boards for a new healthcare economy

5 Managing board relationships The board s duty to interrogate and challenge senior management s plans can easily, albeit unintentionally, generate frustration and distrust. Indeed, it is the ability to minimize the potential for distrust between the board and its senior management team, which is one of the hallmarks of a skilled chairman. Creating stronger engagement and rapport between the board and its senior management team can be achieved by a combination of increased formal contact and regular invitations to the executives to attend and participate in board meetings. However, less formal contacts need to be organized and treated responsibly, with due recognition of the chain of command and with the blessing of the CEO. in my mind, a good and strong CEO has an open relationship with the board and is not afraid of allowing the board to access the executive team Healthcare PE Investor The board is here to help and support the executive team; however, non-executive directors should not get involved in running the business. There should be clear guidelines delineating roles and responsibilities of the board and executive management. Healthcare Chief Executive Officer In my view, the CHRO/HRD should have access to the chairman. We all talk about human capital but pay no attention to this at the board level... Biotech Chairman However, it is important to note that levels of engagement differ according to board structure. In countries where the two-tier structure dominates, supervisory boards are monitoring entities, as opposed to fully engaged and challenging boards. The board s oversight role prohibits interfering with day-to-day management and directors must be careful when interacting with the executive committee in-between board meetings. The role of the chairman Typically, the role of the chairman has been seen as a prestigious and often gentle way to complete a distinguished career. The chairman is a respected name who oversees board meetings and reassures shareholders while the executive team focuses on executing the company strategy. This has changed. Today, there is the growing view that chairmanship is a distinctly different brand of leadership, and the relationship between the chairman and CEO is critical to the success of any company. Importantly, there needs to be a clear definition of the CEO s territory. When executive directors have access to the board, there is a danger of bypassing the CEO. While some board directors think it is important to keep the CEO on the reservation, others feel this is bad practice, as it may encourage political games, reduce the efficiency of the management team, decrease the CEO s credibility and create non-controlled reporting. A clear definition of rights is required by each party to avoid ambiguity and minimise the chance of conflicts. The relationship between the CEO and chairman is very important indeed. There must be mutual trust and respect between the two. The chairman has a critical role in managing the rest of the board and investors. Excellent communication between them is desirable but how often will be down to individual styles. Biotech CEO Heidrick & Struggles 5

6 The Company should hear from the chairman from time to time. It is important for the broader business to be able to put a real face to the chairman. It is important for the CEO to help facilitate this interaction. Biotech CEO A good chairman will manage expectations of investors, as well as setting realistic targets and strategy for the executive team. Biotech CEO The chairman sets the tone and orchestrates the interactions and workings of the board s individual members. Building trust is the key challenge within the modern board. Trust is often based on personal relationships, directors often know each other and recruit from their own social networks and have common values by default. However, investors clearly see the value of selecting directors outside the founders and existing board directors networks to foster a culture of professional trust. Culture of the board is very important; the chairman needs to establish an open and collaborative culture that is supportive of management. If you don t have a chairman like this, then the board tends to become dysfunctional. Biotech Non-Executive Director I don t think every private board needs a chairman; a chairman makes sense when you have a distributed shareholder base and the relationship between the board and CEO are sub-optimal. You don t want a situation where the chairman exists to justify their role. Private Equity Investor Developing board capabilities Decisions early in a company s lifecycle can play a significant role in determining long term success. Having experienced non-executive directors to provide input into strategy is critical. Board composition can get harder to change as time goes on and people get more entrenched. However, as boards look to recruit new members, it is important to recruit independent directors who bring a complimentary skill or perspective that will help advance the corporate agenda. Diversity on boards is essential to their health and effectiveness. We view diversity in a broader context, which is about having a stronger mix of skills, points of view and experience as driven by the company strategy and leadership style. The key functions and sectors that are important to the company strategy should be represented. However, beyond a certain size, boards tend to become difficult to manage. Therefore an understanding of the critical skills and competencies required for the business today and those required for medium and long-term strategy are required. 6 Developing boards for a new healthcare economy

7 Founders can suffer from arrogance and insecurity. They are generally not receptive to external help from experts in the same field. Founders often fear loss of control and don t want therapy area experts to show them up; they don t want to be challenged. Therefore, founders tend to hire people from their own social network or they don t hire anyone. A skilled chairman is required to manage the dynamics of these boards. Biotech Chairman & Founder Many early-stage life science companies are staffed by inexperienced young people. Boards play a vital role in providing a broad enough skill set from technology development, IP, finance, HR, legal and all the other functions that are important for a company to operate. It is important to form a board with complementary skills and characteristics. Group thinking is not optimal. Biopharma CEO Spending time recruiting the right nonexecutive directors is important because you only have these directors for a small percentage of their time. So developing them is not really an option but spending more time on developing board relationships is important. Healthcare PE Investor Traditionally, most board directors have been drawn from the ranks of the CEOs, CFOs and VC / PE investors and these remain core talent pools. However, as the healthcare industry evolves geographically and functionally, the demands placed on the board increase and the range of skills required becomes more complex and diverse. Yet there is still a tendency for boards to recruit from their own social networks. Depending on company strategy, healthcare boards should also consider hiring non-executive directors with industry experience who understand the realities of working in the relevant healthcare sub-sector, especially for those companies focused on drug or device development given the cost, timescales, regulatory hurdles and often the need for partnering to launch a new product. For healthcare service businesses in the UK, there is a growing focus to have nonexecutive directors who have experience of working with the NHS and relevant commissioning authorities. VC-backed companies tend to hire similar people from small pools of networks. Consequently, these people tend to think alike and adopt similar approaches; does this really give anyone a competitive edge? Biotech CEO / investor We always start with understanding what skillset is required for the business today and tomorrow. We use a professional search firm and work to a predefined specification. We stick to the specification, even when considering referrals from our own board members. We use the search firm to assess these referrals. Biotech CEO To me, attracting the right non-executive director requires the board to be clear about the contribution they want from them. Healthcare Services Non-Executive Director Heidrick & Struggles 7

8 If possible, a board should identify issues likely to arise in the next year where additional help will be needed. Smaller companies may need to bolster skill gaps in the executive team. This could be as specific as HR, or experience with China or anticipated new lines of business. Healthcare Services Non-Executive Director UK healthcare service boards tend to lack domain expertise; board directors have generic backgrounds and often do not fully understand the business. However, private equity backed boards tend to be well honed and generally have people who understand the detail and have thought about the strategy, especially in the buy and build space. There are some very smart people in the UK PE space. Healthcare Services CEO & Board Director Conclusion In our opinion, tomorrow s healthcare non-executive directors will need to combine a range of skills including deep financial and relevant operational experience, with high-level diplomatic and interpersonal skills. Non-executive directors and especially chairmen will be recruited from a wider range of backgrounds, as chairmanship comes to be seen as a distinctive form of senior leadership rather than a gentle end to a distinguished CEO career. While innovation-driven, drugdiscovery and development companies will always have a greater need for specific domain expertise; there is a genuine gap on many biopharma boards for people with knowledge and experience of payer strategy and how this will continue to evolve. Conversely, many healthcare service boards are staffed with people from diverse sectors and may require non-executives with greater experience of the political landscape relevant to their key markets of operation. Healthcare boards now more than ever need to guide their executive management teams through difficult strategic choices around adapting and potentially re-engineering their businesses to succeed in this new healthcare economy. 8 Developing boards for a new healthcare economy

9 Suggested best practices Define roles The chairman and CEO should formally define and clarify the roles, accountabilities and deliverables of the chairman, non-executive directors and CEO. External experts Utilize external experts to assist with the recruitment, assessment and selection of non-executive directors and for the assessment of remuneration. Executive team input Chairmen should invite members of the executive team to the board from time-totime to make presentations and take part in agreed discussions. Strategic plan The board should discuss the company s strategic plan with executives through early stage discussions; this reduces the risk of executives thinking they re presenting the finished article to the board and becoming defensive when challenged. Board dynamics Work with external experts to objectively understand your board dynamics and understand what it takes for a new director to integrate into your culture. If you re hiring a non-executive director to change your culture, then understand what adaptations and allowances you and your board will have to make. Benchmark Benchmark remuneration against comparable boards to ensure fair compensation. Board development Allocate more time to board development. As diversity increases, so does the time and resource required to work together effectively. Diversity Diversity should not be forced at the expense of competence. Heidrick & Struggles 9

10 Global Life Sciences Practice The global Life Sciences Practice encompasses medical devices, diagnostics, pharmaceuticals and biotechnology. Each of these business sectors is intellectual propertyintensive, with rigorous regulatory and reimbursement oversight. Our clients operate in dual spheres science and business and we have shaped our leadership services around common challenges facing these segments. Industry specialists are located in all major markets worldwide, and possess first-hand knowledge of the criteria for effective leadership in the life sciences industry: innovation, a deep understanding of science and the ability to manage complex projects while maintaining a competitive edge. Dr Niren Thanky Principal, Global Life Sciences Practice nthanky@heidrick.com Chris Seabourne Partner, Global Life Sciences Practice cseabourne@heidrick.com Dr Christine Stimpel Regional Practice Managing Partner, Global Life Sciences Practice cstimpel@heidrick.com Peter Lever Managing Partner, Board & CEO Practice, EMEA plever@heidrick.com 10 Developing boards for a new healthcare economy

11 Heidrick & Struggles is the leadership advisory firm providing senior-level executive search and leadership consulting services, including succession planning, executive assessment and development, talent retention management, transition consulting for newly appointed executives, and M&A human capital integration consulting. For almost 60 years, we have focused on quality service and built strong leadership teams through our relationships with clients and individuals worldwide. Today, Heidrick & Struggles leadership experts operate from principal business centres globally. For more information about Heidrick & Struggles, please visit: Copyright 2012 Heidrick & Struggles International, Inc. All rights reserved. Reproduction without permission is prohibited. Trademarks and logos are copyrights of their respective owners JNTSDG84