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Philanthropy Journal of North Carolina – Foundations emerge as watchdogs

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By Todd Cohen

With financial wrongdoing infecting the corporate world, charitable foundations face big questions about the role they should play in the companies in which they invest their assets.

Those questions are critical in talks involving the proposal by Blue Cross and Blue Shield of North Carolina to become a for-profit company and place all its stock initially in a new charitable foundation expected to be worth at least $1 billion.

The proposed conversion has bogged down in a dispute over the clout the foundation would have in the for-profit insurer’s big corporate decisions.

State regulators and consumer advocates say the foundation should get a bigger voice than proposed by Blue Cross, which says the foundation would have a bigger voice than any other foundation created through Blue Cross conversions in other states.

The conversion and foundation should not fall victim to a dispute over details of a plan that already would tie the insurer and foundation to one another at birth, giving them big incentives to work closely with one another.

The details of the dispute are rooted in complex legal and financial issues addressed in a 251-page conversion proposal Blue Cross submitted to the state Department of Insurance on July 26.

Those issues involve the conflict that would be created by initially giving the foundation all of Blue Cross’ stock and some say in the insurer’s decisions, while requiring the foundation to sell big chunks of the stock in intervals over 10 years.

The foundation thus might not reap short-term benefit from Blue Cross moves made with an eye on their long-term impact, and could lose the extra price per share that buyers buying all of a company’s stock typically pay.

To help the foundation protect the value of its stock, regulators and consumer advocates want the foundation to have greater say in decisions by Blue Cross involving sale of the company, approval of stock-option plans, removal of corporate directors and amendment of articles of incorporation or corporate bylaws.

A possible “deal-breaker” among those issues is whether the foundation, which by mutual agreement with Blue Cross would name a member of the insurer’s board of directors, should be able to communicate with potential buyers of Blue Cross’ stock.

Blue Cross says the Blue Cross and Blue Shield Association, which owns the valuable “Blue Cross” and “Blue Shield” names and marks, would oppose any conversion that would let the foundation “shop” Blue Cross by talking freely with potential buyers.

Consumer advocate Martin Eakes says, however, that the foundation should be able to talk to possible buyers to ensure that the company is sold for a fair price.

But as the sole stockholder initially, and as a major stockholder during the 10 years during which it would be required to reduce its shares in intervals, the foundation would be a key corporate player even without the other roles carved out for it in Blue Cross’ plan, however limited or broad.

In trying to resolve remaining differences in their negotiations, regulators and Blue Cross, along with consumer advocates, should keep their eyes on the prize – and focus on the potential benefits of a conversion, and on the mechanism Blue Cross is proposing to try to balance its interests with those of the foundation.

The conversion would give Blue Cross a business structure it says it needs to compete in a fiercely competitive health-care industry, while also giving North Carolinians a huge new charitable resource focused on health-care.

And the Blue Cross plan, while needing fine-tuning to resolve differences over the degree of the foundation’s clout on particular corporate decisions, creates an umbilical cord that would force Blue Cross to keep the foundation informed and on board for big moves the insurer wants to make that require shareholder approval.

As shareholders, foundations can and should play a critical watchdog role, and corporations can best serve shareholders by keeping them informed.

By focusing on ensuring a steady flow of information between Blue Cross and the new Health Foundation for North Carolina, state regulators and Blue Cross can produce a conversion plan that benefits all North Carolinians – and serves as a model other foundations can use to exercise their responsibility as active and responsible shareholders and philanthropic stewards.

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