Serving on a Board of Directors for a company is an important role that allows Board members to bring their leadership and experience to the organization to assist it with developing strategy and policy. Board members have a personal fiduciary duty to the organization they serve. Accordingly, Board members must be prepared and engaged and understand the key strategic operational and business issues affecting the company.
When a Board contemplates taking action on behalf of a company, it should act in a reasonable manner which includes being prepared for meetings, reading materials provided by management, asking questions of management and outside advisors, and documenting all such efforts in applicable minutes. As a part of this process, Board members are allowed to rely on the expertise and experience of internal executives and outside consultants and advisors when making decisions related to the company.
For life science companies, Board members have to understand and appreciate the dynamic and highly regulated aspects of the industry. In addition to monitoring the financial performance of the company, Board members should also evaluate other issues that affect companies in the life sciences industry. This article will address some of these key issues that are currently impacting life sciences companies.
Because life sciences companies often produce and sell products that have the potential to harm consumers if the products are manufactured or used improperly, the life sciences industry is very highly regulated by both state and federal governments. This regulation can impact how life sciences companies manufacture, market, and deliver various goods and services. Because of this high level of regulation and potential risk to customers and the public, it is important for life sciences companies to have robust compliance plans with written policies and procedures. The Board should be aware of, and ultimately approve, these policies and procedures and receive periodic updates from compliance executives. The Board should also participate in periodic educational sessions on various compliance issues offered by the company.
If companies experience a significant compliance problem that results in large fines or harm to the public, the Boards of these companies may face questions as to whether the fiduciary duty of care owed to the company was met. Courts have held that Board members can be held liable for failure to implement and follow a system for overseeing corporate compliance but these courts have set a high bar for “failure of duty of oversight” claims. In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996). More recent cases have held that Boards should make sure corporate compliance plans are in place that identify and track compliance and safety risks and they must do so “rigorously” for “mission-critical” risks, and have held Boards liable for failing to provide meaningful oversight over the financial and other controls within the company. Marchand v. Barnhill, 212 A.3d 805 (Del. Ch. 1996); Hughes v. Hu, 2020 WL 1987029 (Del. Ch. Apr. 27, 2020).
The following are examples of some of the compliance risks that Boards of life sciences companies should be aware of and take steps to avoid through adoption of various policies and procedures:
- For companies that manufacture or sell products that are regulated by the FDA, the Board should have a general awareness of the key FDA requirements applicable to their company and have a plan in place to remain in compliance with these FDA requirements.
- For companies that manufacture products used by the public, the Board should be aware of and be briefed on key issues related to the safety of the products and any bad outcomes or injuries associated with such products.
- For companies that offer any pricing support or support for patients, Boards should be aware of any state or federal rules on inducements to patients and how to maintain ongoing compliance with state and federal anti-kickback laws.
- For companies that have financial relationships with physicians who make referrals of Medicare, Medicaid, or other governmental patients, the Board should be generally aware of company policies on compliance with the federal Stark and Anti-kickback laws as well as the Sunshine Act laws.
- For companies that submit claims to federal or state governments, the Board should be generally aware of policies used to avoid federal False Claim Act violations. Over the past several years, federal fraud and abuse enforcement in the health care and life sciences industry has remained very strong. In 2020 alone, investigations conducted by HHS’s Office of Inspector General resulted in 578 criminal actions against individuals or entities involved in crimes related to Medicare and Medicaid fraud, and 781 civil actions, which include false claims and unjust enrichment lawsuits, civil monetary penalties settlements, and administrative recoveries related to provider self-disclosure matters. U.S. Department of Justice and U.S. Department of Health and Human Services, Annual Report of the Departments of Health and Human Services and Justice, Health Care Fraud and Abuse Control Program FY 2020 (available at https://oig.hhs.gov/publications/docs/hcfac/FY2020-hcfac.pdf). In 2021, the Department of Justice recovered $5.6 billion from False Claims Act cases.
- For companies who interact with competitors in terms of joint venture acquisitions or other collaborations, companies shall have policies dealing with antitrust compliance.
Protection of Assets
Boards of life sciences companies should be aware of and engaged in developing and implementing policies designed to protect the valuable assets of the companies. For life sciences companies, data, proprietary technology, and know-how are often the companies’ most valuable assets.
One of the most important areas of asset protection in the life sciences industry is cybersecurity. The data of life sciences companies is becoming increasingly more important and valuable and Boards need to ensure this data is adequately protected through periodic software updates and other strategies. Cyber attacks are on the rise in the life sciences industry. According to a report by the research firm, SonicWall, ransomware attack attempts in the healthcare sector rose by a staggering 594% in the first half of 2021. Record 304.7 Million Ransomware Attacks Eclipse 2020 Global Total in Just 6 Months, SonicWall, Jul. 29, 2021 (available at https://www.sonicwall.com/news/sonicwall-record-304-7-million-ransomware-attacks-eclipse-2020-global-total-in-just-6-months/).
Intellectual property is often the most valuable asset owned by life sciences companies. These assets include patents, copyrights, trademarks and other business know-how. Boards of these companies should adopt rigorous policies and procedures to protect this intellectual property. Life sciences companies, even startups, must have intellectual property strategies and policies put in place by the Board to protect these valuable assets or suffer the risk of losing a key portion of the company’s value.
Another valuable asset possessed by life sciences companies are their trade secrets. Trade secrets are information not generally known by the public that is maintained by a company as a secret that provides a competitive advantage or economic benefit to the holder of the trade secret. Trade secrets can be worth large amounts of money and often are a key lynchpin in the assets of a life sciences company. It is critical that life sciences companies take steps to identify and protect trade secrets and take action if their trade secrets are stolen or if they are challenged with taking another company’s trade secrets. If a company does not take active steps to designate and protect trade secrets, a company’s ability to protect its trade secrets or enforce trade secret rights may be weakened. Boards must adopt policies and procedures to protect trade secrets from competitors, the public and disgruntled employees. Boards must also establish policies to address new employees who may have potential trade secrets from their former employers. This defensive strategy can help mitigate risk of trade secret claims against the company.
Protecting Brand / Reputation of Company
Another critical asset of a life sciences company which the Board is responsible for is the brand or reputation of the company. With the globalization of the life sciences industry and explosion of social media, reputation and brand is more important than ever and every life science company needs to pay attention to maintaining and protecting its reputation and brand through thoughtful policies, procedures, and internal and external messaging.
A company may have a very good product or service that it is offering the public but it is also critically important how life sciences companies present the company and its image to the public. The importance of this has resulted in the development of a specific environmental, social, and governance (ESG) strategy by many life science companies. Many life sciences companies have developed environmental policies that improve their sustainability strategy and applicable carbon footprint and incorporate ways to reduce climate change caused by certain industrial activity. In addition, life sciences companies have become more involved in social issues such as improving health equity and access to health care services and products. This has also been evident in the way that certain companies conduct clinical research and including more diverse trial participants. Life sciences companies have also focused on more ethical business practices and policies as a part of their governance strategies.
This concept of ESG has been evident in various aspects of life sciences companies as Boards have adopted new hiring practices, taken high profile positions on social issues or reduced or eliminated businesses with individuals, companies, or governments who have engaged in controversial behaviors. This trend will likely continue with life sciences companies so it is important for Boards to be aware of these issues.
Life sciences companies face a diverse set of challenges and opportunities while operating in a highly regulated environment. It is important for Board members to be aware of the issues discussed herein in addition to monitoring the financial performance of the company. Board education and engagement are truly issues that will benefit the Board, management team, and company.