Fiduciary duties 101.

Anne M. Murphy is a partner in the health care group of Chicago-based Vedder, Price, Kaufman & Kammholz.

Directors and officers have never been at greater risk

THANKS TO INCREASINGLY AGGRESSIVE ENFORCEMENT OF ANTIFRAUD laws and the emergence of joint ventures and networks, which can create conflicts, it has never been more important for company directors and officers to properly exercise their fiduciary obligations.

Most states follow the "business judgment rule," which acknowledges that directors and officers will not be liable for honest mistakes if a rational business purpose exists for a decision made in good faith and in the absence of a conflict of interest. Directors and officers of not-for-profit organizations often receive enhanced legal protection against liability. None of these protections, however, are absolute, and none prevent a lawsuit from being filed against a director or officer alleging breach of fiduciary duty.

Directors and officers have a fiduciary duty to act in the interest of the organization. This duty is comprised of two parts: duty of care and duty of loyalty.

The duty of care requires that directors and officers discharge their responsibilities in good faith, and with reasonable care, honesty, and due diligence. Generally, this requires directors to participate in board decisions, to be informed regarding information relevant to these decisions, and to use the care an "ordinarily prudent person" would use under similar circumstances.

In exercising their duty of care, directors and officers should regularly attend board and committee meetings, exercise independent judgment rather than representing a constituency, insist on receiving adequate and reliable information (from outside services if necessary), and delegate operations to management, subject to policies and board oversight.

To assure due care by directors and officers, your organization should:

* Conduct a periodic review of key organization documents.

* Monitor board attendance, along with any corrective action.

* Establish policies requiring that the board be informed of key contracts, government funding decisions, legal issues, and financial reports.

* Establish dissent procedures for directors and officers.

* Establish a committee to monitor director and officer compliance with obligations.

* Properly inform and orient new directors and officers.

The duty of loyalty requires directors and officers to discharge their responsibilities with fidelity to the organization, and to make decisions in good faith that such action is in the best interest of the organization. Areas of liability include conflicts of interest or "self-dealing," such as if a party or spouse has a significant relationship with a supplier or managed care organization. Other potential trouble spots are incompetent financial management, failure to act according to bylaws and policies, breach of confidentiality, and inappropriate public comments about the organization.

To assure adherence to the duty of loyalty, your organization should:

* Implement a conflict of interest policy requiring disclosure by directors and officers of actual and potential conflicts, and addressing to what extent the individual can continue to participate in a board meeting.

* Require regular completion of conflicts disclosure forms.

* Keep detailed minutes of meetings at which conflicts issues arise.

* Promptly reevaluate any decision made prior to a conflicts disclosure.

In any highly regulated industry, directors and officers must stay informed of, and monitor compliance with, federal and state laws and regulations. This includes liability and risk management, antitrust laws, tax-exempt status requirements, Medicare/Medicaid certification, and anti-fraud laws.

Potential consequences of a fraud action include not only significant civil and criminal penalties but exclusion from the Medicare and Medicaid programs. In addition, federal authorities have pursued actions against individual directors and officers, and even outside consultants. Given this environment, directors and officers should make sure procedures are in place to detect and prevent activities that could be deemed fraudulent, such as upcoding, lack of documentation for services rendered, and inappropriate referral arrangements.

As a precautionary measure, your organization should establish a corporate compliance program consistent with federal guidelines; use mechanisms to detect improper coding; and require board members and officers to learn about anti-fraud laws, legal obligations to the government, attorney-client privilege issues, and related civil and criminal exposure issues.

Provider networks, joint ventures, and managed care organizations must also be scrutinized from a fiduciary perspective. Do actual or potential conflicts exist for any directors or officers?

You may also want to mitigate risk by providing directors and officers with legally appropriate indemnifications or by obtaining the D&O or E&O coverage and insurance to cover fraud exposure.