Knowledge Center: Article
Healthcare and Life Sciences
Why more boards will seek directors with healthcare experience11/1/2016 Richard N. Eidinger M.D. and John Mitchell
For the past seven years, the Heidrick & Struggles Board Monitor has tracked and analyzed trends in non-executive director appointments to Fortune 500 boards. The data reveal key attributes of new appointees, including their demographics, industry backgrounds, and functional roles. For the past two years, we have used a novel method to track the flow of experience onto boards, examining all of the substantial career experiences of new appointees. We believe this provides a better picture of the expertise that Fortune 500 boards value most. In 2015, about 6% of new directors had substantial experience in healthcare (including life sciences, medical devices, and healthcare services providers such as large hospital systems). While that’s a relatively small percentage of the total, these skills were well distributed across industries of all kinds.
We believe that a number of converging trends—and the formidable competencies that healthcare leaders possess—could turn that trickle of healthcare experience onto boards into a tide. Here’s why:
- A growing number of retailers, tech companies, consumer goods makers, and even industrial companies are entering the healthcare space. In 2013, 24 of the Fortune 50—including 7 retailers, 8 technology and telecommunications companies, and 2 automakers—had recently entered healthcare.1 Nontraditional players in industries once thought to be far removed from healthcare will be offering a broad array of products and services aimed at maintaining and improving health, such as monitoring systems, mobile apps, nutraceuticals, health advice, care delivery, and more. Most of these products and services will be offered directly to consumers, outside of the insurer/payer system. For companies of all kinds, opportunities are opening up to offer more affordable healthcare alternatives.
- The opportunities are significant. In the United States alone, healthcare is a $3.2 trillion industry. And with the graying of America and rise in the incidence of chronic diseases, it is also one of the fastest growing. Not surprisingly, many nontraditional players are eager to enter the market. Tim Cook, CEO of Apple, recently told Fast Company that Apple will enter the health arena, pointing out that the opportunities in the $9 trillion global health industry have the potential to “make the smartphone market look small.”2
- Healthcare sectors such as pharma have long practiced strategic models that are increasingly coming to all industries. Perhaps more than at any time in the history of capitalism, companies are changing their shape and structures—and doing so faster and more nimbly than ever. As a result of shareholder activism, every day seems to bring news of another corporate spin-off, split-off, or equity carve-out. Driven by the constant needs to innovate and avoid disruption, many companies are acquiring start-ups whose intellectual property might help them leapfrog the competition. Pharma leaders have been engaging in this kind of activity for decades, constantly scouring the horizon for promising new therapies and technologies to acquire, and entering into complex arrangements with numerous other companies. As we move into an era of economic collaboration—where companies buy, divest, and swap assets; in-license and out-license products and technology; and merge—such experience will be increasingly valuable to boards of all kinds.
- Healthcare leaders also have extensive experience in traditional, large-scale M&A. From 1995 through 2015, a period of just 20 years, 60 leading pharma companies have morphed into just 10 big firms through mergers and acquisitions. In 2015 alone, 166 M&A deals in the industry were announced, 30 of which exceeded $1 billion.3 In 2014, there were 26 such billion-dollar deals, and 20 in 2013. As a result, many leaders in the healthcare sector are adept at addressing critical pre- and post-M&A issues. These issues include due diligence, valuation, post-merger integration, recognition and retention of top talent, organization design, selection of the top management team, communication with stakeholders, cultural alignment, and a host of other complex matters that can undermine a merger if not adequately overseen by the board. Over the past decade, there has also been significant M&A activity in healthcare sectors such as physician medical groups, hospitals, labs and imaging, and home healthcare services providers.
- A number of healthcare organizations are pursuing the operating model emerging across industries. A number of leading hospital systems and other healthcare providers are developing data-driven, patient-centered models of care delivery. Enterprise-wide and system-driven data analytics are enabling these organizations to customize care, treat the whole patient throughout the care cycle, improve patient outcomes, drive down costs, and transform independently run facilities into single integrated health systems. Many non-healthcare companies today are building similar customer-centric models, using advanced analytics to drive operations that reach customers most effectively at each point in their customer experience journey. (Many technology and consumer companies have already done so, and the boards of healthcare companies have themselves increasingly pursued director candidates from those industries.) Healthcare leaders, coming from an environment where the operating model can literally be a matter of life and death, bring a unique perspective to organizations that aspire to be genuinely customer centered, and to build that aspiration on a solid base of analytics.
- Healthcare leaders today pursue innovation in the face of enormous challenges. Life sciences and healthcare are driven by innovation, new product development, the discovery of new uses for existing products, and the development of new means of care delivery. The pharma sector, for example, long ago conquered most of the “easy” diseases—conditions with well-understood central mechanisms that could be addressed with an antibiotic or some other “magic bullet.” And pharma companies continued to innovate with products that help manage chronic conditions like high blood pressure and elevated cholesterol, and improve the quality of life for people who suffer from diseases like diabetes and Parkinson’s. In addition, pharma companies have developed treatments for problems that are not life-threatening but that can greatly affect subjective well-being, such as baldness, wrinkles, and erectile dysfunction.
- As we enter an era of increasing trade protectionism around the world, healthcare leaders offer deep experience in market access. In the first 10 months of 2015, governments introduced 539 protectionist measures, up from 407 in the same period of 2014.4 This rising tide of protectionism threatens to make access to markets, especially emerging markets, increasingly difficult for many companies, limiting their potential for growth. Many healthcare leaders, especially in the pharma and medical devices sectors, have extensive experience dealing with national and local decision makers, policymakers, and governments. Further, in our experience, many companies in both of these sectors do an excellent job of providing their leaders with global exposure.
- As companies enter the healthcare field, they may find themselves subject to increasing regulation. For non-healthcare companies, a great part of the appeal of the convergence of technology, analytics, and healthcare is the ability to market directly to consumers relatively free of regulation. But the scope of authority for the U.S. Food and Drug Administration, the Federal Trade Commission, and the Consumer Product Safety Commission is very broad. As innovative products and services become more sophisticated and involve greater and more explicit claims of effectiveness, they will likely come under increasing scrutiny from regulators, not unlike that routinely faced by leaders of life sciences and healthcare companies.
- Given the rising expense of employee healthcare, boards increasingly need to understand trends and dynamics in the field. After years of double-digit growth in healthcare costs, employee coverage has become a significant expenditure for almost every enterprise. Having a director at the table who can help the board understand how developments in healthcare are likely to affect the company’s benefit systems can greatly improve an often neglected area of board oversight.
Life sciences and healthcare leaders bring a wide range of expertise in other fundamental areas, including global operations, marketing, and brand building. They are accustomed to making substantial long-term bets on products with lengthy development cycles; they are steeped in evidence-based approaches to decision making; and they are comfortable working across cultures. And in our experience, the pool of board-ready healthcare leaders is exceedingly deep.
Given current and future trends, the demand for that rich supply of talent is likely to rise significantly in the coming years.
About the authors
Richard Eidinger, MD (firstname.lastname@example.org) is a partner in Heidrick & Struggles’ Los Angeles office; he is a member of the Healthcare and Life Sciences Practice and the CEO & Board Practice.
John Mitchell (email@example.com) is the global managing partner of the Healthcare and Life Sciences Practice and a member of the CEO & Board Practice; he is based in the New York office.
A version of this article previously appeared in Directors & Boards magazine.
1 Health Research Institute, “Healthcare’s new entrants: Who will be the industry’s Amazon.com?” PricewaterhouseCoopers, April 2014.
3 The Pharma Letter, “An all-time record year for pharma/biotech M&A in 2015,” July 21, 2016.
4 Steve Johnson, “Rising tide of protectionism imperils global trade,” Financial Times, February 18, 2016.