SCENARIO: CARENETWEST COMPANIES, INC.
CareNetWest Companies, Inc., began as a five-site, 100-bed hospital network in San Francisco. By
2002, it was a provider of eighty 100- to 500-bed, full-service, acute and general care hospitals in
California, Oregon and Washington. The driving force behind the company’s growth was its dynamic
Chairman and CEO, Dr. Tad Smith. A licensed medical doctor and cardiovascular surgeon, Tad garnered
worldwide recognition and financial success through the development of a groundbreaking surgical
technique involving valve disorders. Subsequently, Tad took on two partners—neurologist Dr. Brady
Simms and anesthesiologist Dr. Bonnie Gold—and, in 1998, purchased the San Francisco network from
a national hospital provider looking to exit most of the western market.
By 2001, the partners were looking to expand, so they incorporated in Delaware and raised $500 million
in IPO capital. Tad was nominated by the company's Board of Directors to act as both Chairman and
CEO, while Brady and Bonnie, deeming their business skills insufficient to manage a corporation,
returned to private practice. Using its newfound capital and marketable shares, CareNetWest ultimately
acquired six smaller networks along the Interstate Highway 5 corridor stretching from San Francisco to
In 2002, with 80 locations, CareNetWest was the third largest hospital chain west of the Mississippi and
traded on the New York Stock Exchange. The company's five-person Board of Directors was made up
entirely of medical professionals, including four doctors and one clinical social worker with a doctorate.
The Board sat no Audit, Governance, or Compensation committees, relying almost exclusively on Tad's
direction in addressing corporate matters.
Board of Directors
Dr. Tad Smith
Chairman of the Board
Dr. David Wells
Dr. Judith Moore
Dr. Benjamin Wright
Dr. Laura Culpepper
Industry analysts had been both impressed by and guarded about CareNetWest’s level of growth in just
under two years as a public company. While the company's return on equity remained above the industry
norm of 15 percent, questions had been raised about the company's infrastructure and its ability to
leverage current infrastructure and internal expertise to support its growth. Furthermore, at the end of
2002, corporate America headed into its first period of Sarbanes-Oxley compliance.