Blues' directors ceded their power to Sardegna

November 01, 1992|By Ann LoLordo and Patricia Meisol | Ann LoLordo and Patricia Meisol,Staff Writers

When directors of Blue Cross and Blue Shield of Marylan met at the Owings Mills headquarters Oct. 1, they confronted a series of revelations that had embarrassed the board and kept the company and its embattled president in the news.

But many of the revelations -- disclosed days earlier by a U.S. Senate subcommittee investigating the Blues -- should have come as no surprise to the insurer's influential and civic-minded board.

Exorbitant executive salaries? The board approved them while management proposed raises for the board members themselves.

Financially draining subsidiaries? The board received monthly reports on most of the struggling ventures and signed off on loans to them.

Even the poor customer service detailed by the Senate's Permanent Subcommittee on Investigations was discussed by Blues directors, according to the minutes of the board's monthly meetings included in the Senate record.

By and large, minutes of meetings from January 1986 to April 1992 depict a board of directors that often acted as a rubber stamp for Chief Executive Officer Carl J. Sardegna. From the birthday gift directors gave Mr. Sardegna to the special projects they approved at his request, they showed not only admiration for the company president, but a willingness to follow his lead.

Rarely did they say "no," and more rarely did they initiate change to curb the non-profit's losses, even in the face of questions from state regulators and criticism from external auditors.

Instead, the board removed several independent auditors. Three accounting firms were hired by the Blues within four years -- years in which company finances were in terrible shape and in which top managers changed the way the company valued assets to bolster its bottom line.

Now, in the wake of September's Senate hearings, the board has turned its attention inward. The 17 board members -- business executives, community leaders and health care experts -- are asking questions about their oversight of Maryland's largest health insurer and their responsibility to 1.4 million customers.

Hoping to restore public confidence in Blue Cross as "the name to trust," the board recently removed Mr. Sardegna as chairman and announced a special committee to review the Senate investigators' findings. It canceled annual bonuses for executives, dropped its golf club membership and put its skybox at the Orioles' new stadium up for sale.

The board's self-examination may answer questions raised by the Senate subcommittee: Was this a policy-making board that leads or one that follows? Was the board misled by a savvy chief executive officer who anticipated potential problems and offered expedient solutions? Or did the board acquiesce to a management incapable of carrying out its vision for the insurer?

"To come in and say we're going to take this back and eliminate that doesn't solve the problem [that] the board approved all of this," said state Sen. James C. Simpson, D-Charles, a member of a committee that oversees insurance matters. "It appears to me the board was asleep at the wheel . . . I firmly believe the board needs some new life in it."

Veteran directors

The Blues' board certainly didn't lack experience. At least half of the board has been in place since late 1985, when Mr. Sardegna, an insurance executive from Maine, was named to lead the newly merged Blue Cross and Blue Shield company.

Veteran directors represent corporate and civic Maryland. They include Richard E. Hug, president of Environmental Elements Corp.; retired businessman Frank A. Gunther Jr., and William A. Beasman Jr., chairman emeritus of the Bank of Baltimore. Newer members, such as former federal health secretary Joseph A. Califano Jr. and Washington economist Barry Bosworth, have expanded the board's intellectual and influential reach.

And the board -- potentially -- had plenty of power. Unlike commercial health insurers that answer to stockholders, the management of Blue Cross answers only to the directors. Board members also appoint their own successors.

But the board may have ceded a good chunk of that power in 1987, when it took the unusual step of electing Mr. Sardegna as its chair.

Directors of non-profit agencies are ultimately responsible for "every element" of an organization and its overall performance, says Peter L. Szanton, a Washington consultant who does strategic planning for non-profit organizations. The board chooses senior executives, establishes performance standards and monitors their actions.

But "the chief executive officer should not be chairman of the board . . . it's a bad practice," Mr. Szanton added. "The underlying principle is a board must not let itself be put in a position where everything it knows comes from the CEO. The fallout [if it does] is you are incapable of doing your job because you can't exercise independent judgment on the performance of your CEO and the organization as a whole."

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